March 13, 2024

Watts What You Say? SEC Brings a Battery of Charges Against EV Startup Company

Audit Firm Also Charged for Allegedly Violating Independence Standards
Holland & Knight SECond Opinions Blog
Jasmine S. Chean | Amir Alimehri | Jessica B. Magee
Gavel and scale resting on desk

The SEC on Feb. 29, 2024, announced settled charges against Lordstown Motors Corp. (Lordstown) for allegedly misleading investors about sales prospects for the Endurance, Lordstown's flagship pickup truck for the electric vehicle (EV) market.

As alleged by the SEC, Lordstown was founded in April 2019 for the purpose of developing and manufacturing light-duty electric trucks designed for the commercial fleet market. In August 2020, Lordstown became a public company by merging with a special purpose acquisition company (SPAC) and became listed on the Nasdaq under the ticker symbol "RIDE." In March 2021, a short seller published a report claiming that Lordstown had "no revenue and no sellable product" and touted preorder numbers that were "largely fictitious and used as a prop to raise capital and confer legitimacy." Lordstown's board of directors formed a special committee to investigate the allegations. Eventually, Lordstown's CEO resigned and the company filed for bankruptcy in 2023. The SEC filed proofs of claim in Lordstown's pending bankruptcy proceeding.

According to the settled order, Lordstown allegedly misled investors about demand for the Endurance, as well as the company's ability to deliver the vehicle as the first-to-market viable electric pickup truck for the commercial fleet market. Allegedly, Lordstown reported fictitious and nonbinding preorders for the Endurance to drive up demand, concealed delays in the supply chain and falsely claimed that deliveries would begin in September 2021.

The SEC charged Lordstown with violating:

  • Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (Securities Act), both of which prohibit the offer and sale of securities based on material misrepresentations but notably do not require scienter but rather only proof of negligence
  • Exchange Act Section 13(a) and Rules 13a-1, 13a-11 and 12b-20, thereunder based on the same alleged misrepresentations about demand, delays and deliveries, plus failing to include financial statements audited by independent auditors required in current and periodic reports
  • Exchange Act Section 14(a) and Rules 14a-3 and 14a-9 in connection with misleading statements in proxy statements

Without admitting or denying the SEC's allegations, Lordstown agreed to cease and desist and disgorge $25.5 million in the form of payments the company agreed to make to settle two shareholder class actions alleging similar conduct as the SEC charged. The SEC agreed to withdraw its proof of claim in the bankruptcy proceeding upon satisfaction of the disgorgement. The SEC did not impose a civil monetary penalty, likely in consideration of the company's bankruptcy filing.

In a related settled administrative proceeding filed the same day, Lordstown's former auditor, Clark Schaefer Hackett and Co. (CSH), agreed to settle charges of alleged violations of the auditor independence standards by providing non-audit services to Lordstown during CSH's audit of the company's financials. The SEC charged CSH for violating:

  • Rule 2-02(b) of Reg S-X by falsely certifying that an audit report was conducted in accordance with PCAOB standards
  • PCAOB Rule 3520 for failure to comply with the auditor independence requirements
  • Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the SEC's Rules of Practice for improper professional conduct
  • Section 13(a) and Rule 13a-1 and Section 14(a) and Rules 14a-3 for causing Lordstown's violations

Without admitting or denying the findings, CSH agreed to cease and desist, be censured and pay more than $80,000 in civil penalties, disgorgement and interest, as well as retain an independent consultant to review its audit, review and quality control policies and procedures as to their sufficiency, adequacy, design, implementation and effectiveness and issue a written report to improve CSH's policies and procedures.

Key Takeaways

  • SEC staff will closely scrutinize issuer claims to be first or fast to accomplish a stated goal, which may have contributed to the SEC's interest in Lordstown. As Associate Director of the SEC's Division of Enforcement Mark Cave noted, "in a fiercely competitive race to introduce the first mass-produced electric pickup truck to the U.S. market, Lordstown oversold the true demand for the Endurance."
  • The SEC and other government agencies can continue investigations and enforcement actions when a company enters bankruptcy. Although most legal proceedings against a debtor are stayed automatically and immediately upon the filing of a bankruptcy petition, (see 11 U.S.C. 362(a)), there is an exemption for actions or proceedings brought by a "governmental unit" to enforce its "police and regulatory power." See 11 U.S.C. § 362(b)(4).
  • This settled action highlights that public companies should be as vigilant in social media posts and traditionally less formal communications channels as they are in formal SEC reporting. Failure to do so can be risky.
  • Enforcement's interest in SPACs remains unabated. As noted by this blog previously, the SEC's "SPAC crackdown" continues to target SPAC sponsors and de-SPAC companies and executives.
  • It is worth noting that the settlement with CSH, Lordstown's auditor, included a violation of Rule 2-01 of Regulation S-X for lack of independence, among other charges, for allegedly providing prohibited non-audit services to Lordstown while also engaged in auditing Lordstown's financial statements, which were then used in connection with Lordstown's registration statements and periodic reports filed with the SEC. This charge is a reminder that Enforcement remains focused on auditors and the post-SOX independence rules and regulations.

The Holland & Knight SECond Opinions Blog will continue to monitor these and other developments and provide updates. If you need further information on this topic – or anything related to SEC enforcement or internal investigations – please contact the authors or another member of Holland & Knight's Securities Enforcement Defense Team.

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