A Rogues Gallery of the Second Gilded Age
If it sounds too good to be true, it’s probably neither good nor true. In America, fraud has always been a key feature of business, and the national worship of entrepreneurial freedom complicates the task of distinguishing salesmanship from deceit. Business fraud consists of dishonest and illegal activities perpetrated by individuals or companies in order to provide an advantageous financial outcome to those persons or establishments. Also known as corporate fraud, these schemes often appear under the guise of legitimate business practices.
If an entrepreneur holds out false inducements in advertisements, or otherwise, pretending to work cheaper and better than others, when he and others know it to be false, he is then a charlatan — a fraud. A charlatan is one who makes unwarrantable pretensions — a quack - a mountebank. He should be regarded by all as an arrant impostor and fraud. Every citizen , every voter , who takes a part in advancing the selfish career of a charlatan is doing irreparable harm to the country in his day and generation.
The 1873 novel “The Gilded Age: A Tale of Today” by Mark Twain and Charles Dudley Warner, satirized the economic excesses, personal greed and political corruption of the time, products of technology-driven upheavals of the late 19th and early 20th centuries. To “gild” is to cover something of lesser value with a coat of gold to make it look like what it is not - Gilded-Age fraud and quackery. Twain was noted for his spectacularly bad financial decisions during the Gilded Age.
In the New Gilded Age, technology-driven innovations have again improved daily life while creating great wealth, inequality of circumstances, non-competitive markets, and viral deceit. Mesmerized by charlatans, many have succumbed to speculator contagion.
It is “an old pattern in American economic history,” historian John Steele Gordon explained, “Whenever a major new force—whether a product, technology, or organizational form—enters the economic arena, two things happen. First, enormous fortunes are created by entrepreneurs who successfully exploit the new, largely unregulated niches that have opened up. Second, the effects of the new force run up against the public interest and the rights of others.”
What are some clues that scams might not be legitimate? They insist that the situation is urgent and issue warnings. They try to convince you to act now to avoid a dire consequence. They promise a deal or secret that the public doesn’t know about. In today's complex financial world, there are many opportunities. An investor's task is to sort out those investments that have the greatest potential. Typical schemes promise sky-high returns of 200% to 800% that will supposedly put investors on "Easy Street" with a bonanza of income. The investment schemes range across the latest in high-tech. The problem occurs when the predictions don't match reality or the investment doesn't exist at all.
During prosperous times, potential investors tend to become less cautious in considering investment alternatives, a course of action that can have disastrous results. One type of investment instrument that lures unwary investors is the "blind pool" offering. “SPAC” stands for special purpose acquisition company—what are also commonly referred to as blank check companies. SPACs have become a popular vehicle for various transactions, including transitioning a company from a private company to a publicly traded company. Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional initial public offerings, or IPOs.
Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is a shell company when it becomes public. This means that it does not have an underlying operating business and does not have assets other than cash and limited investments, including the proceeds from the IPO. Traditionally, a company starts and develops a business. Eventually, that company may grow to a scale that it determines that it has the resources and structures in place for the IPO process as well as the subsequent SEC reporting requirements and elects to seek to raise capital in the public markets, thereby becoming a public company.
Blind pools are investment vehicles that raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be. A common form of blind pool is the "blank check" offering. While the blind pool will usually provide at least some indication of what general industry the funds will be invested in, blank check offerings do not identify any proposed investment intent whatsoever. They are literally "blank checks" that the promoter can use at his whim.
Sometimes, however, the promoter knows exactly what he intends to do with the money raised at the time he offers blind pool shares to the public, but chooses not to disclose his intentions for fear that prospective investors might shy away if they "knew too much." In these cases, it is only the investor who is truly blind to the use of his or her money. Strangely enough, investors let greed cloud their good judgment, and readily agree to commit funds for totally unspecified purposes and with no assurance or commitments.
Blind pool offerings are typically characterized by undercapitalization - having virtually no assets other than the other money obtained through the offering itself. The primary purpose of many blind pools is to raise funds to acquire a private firm that wants to go public without going through the usual regulatory steps; stocks are usually offered at low prices, often under five dollars a share.
‘Pharma Bro’ Martin Shkreli
Daraprim was, until recently, the only FDA-approved drug for the treatment of toxoplasmosis, a parasitic disease which may pose serious and often life-threating consequences for those with compromised immune systems, including babies born to women infected with the disease and individuals with the Human Immunodeficiency Virus (HIV). Daraprim has been the gold standard for treatment of acute toxoplasmosis for decades.
Convicted criminal Martin Shkreli engaged in illegal and monopolistic behavior when he served as the CEO of Vyera Pharmaceuticals (previously known as Turing Pharmaceuticals). In January 2020, Attorney General James and the FTC filed a lawsuit against Vyera, Shkreli, and his business partner — Kevin Mulleady — for anticompetitive behavior that stifled competition and allowed the defendants to exorbitantly raise the price of Daraprim more than 4,000 percent overnight, to $750 per pill.
Daraprim was cheap and accessible for decades. Then, in August 2015, Vyera purchased the drug, and increased the price dramatically overnight to a level that one former executive testified was “excessive”, “crazy” and “irresponsible.” Next, Vyera — under Shkreli’s control —altered its distribution and engaged in other conduct to delay and impede generic competition. The high price and distribution changes limited access to the drug, forcing many patients and physicians to make difficult and risky decisions for the treatment of life-threatening diseases.
Vyera anticipated that its exorbitant price hike would likely encourage entry into the market by other firms, so the pharmaceutical company took specific actions to impede and delay entry by competitors to preserve its monopoly. Among those actions was the illegal restriction of the sale and distribution of Daraprim to prevent generic drug companies from obtaining sufficient pills to complete the bioequivalence tests necessary to obtain approval by the FDA. Vyera also prevented competitors from accessing a critical ingredient used to manufacture the drug.
On December 17, 2015 the Federal Bureau of Investigation, New York Field Office (FBI) announced a seven-count indictment charging Martin Shkreli, the founder and managing member of hedge funds MSMB Capital Management LP (MSMB Capital) and MSMB Healthcare Management LP (MSMB Healthcare) and former Chief Executive Officer of Retrophin Inc. (Retrophin).
“‘Envy, greed, lust, and hate,’ don’t just ‘separate,’ but they obviously motivated Mr. Shkreli and his partner to illegally jack up the price of a life-saving drug as Americans’ lives hung in the balance,” said New York Attorney General Letitia James. “But Americans can rest easy because Martin Shkreli is a pharma bro no more. A federal court has not only found that his conduct was illegal, but also banned this convicted criminal from the pharmaceutical industry for life and required him to pay nearly $65 million. This is on top of the $40 million we’ve already secured from Vyera. The rich and powerful don’t get to play by their own set of rules, so I it seems that cash doesn’t rule everything around Mr. Shkreli."
Elizabeth Holmes - Theranos
Elizabeth Holmes and Ramesh “Sunny” Balwani are charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. According to the indictment, the charges stem from allegations that Holmes and Balwani engaged in a multi-million-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients. Both schemes involved efforts to promote Theranos, a company founded by Holmes and based in Palo Alto, California. Theranos was a private health care and life sciences company with the stated mission to revolutionize medical laboratory testing through allegedly innovative methods for drawing blood, testing blood, and interpreting the resulting patient data.
Holmes and Balwani used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’s blood testing laboratory services, even though, according to the government, the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests. It was further alleged that the tests performed on Theranos technology were likely to contain inaccurate and unreliable results.
The indictment alleges that Holmes and Balwani defrauded doctors and patients (1) by making false claims concerning Theranos’s ability to provide accurate, fast, reliable, and cheap blood tests and test results, and (2) by omitting information concerning the limits of and problems with Theranos’s technologies. The defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests, including the tests for calcium, chloride, potassium, bicarbonate, HIV, Hba1C, hCG, and sodium. The defendants nevertheless used interstate electronic wires to purchase advertisements intended to induce individuals to purchase Theranos blood tests at Walgreens stores in California and Arizona. Through these advertisements, the defendants explicitly represented to individuals that Theranos’s blood tests were cheaper than blood tests from conventional laboratories to induce individuals to purchase Theranos’s blood tests.
The defendants claimed that Theranos developed a revolutionary and proprietary analyzer that the defendants referred to by various names, including as the TSPU, Edison, or minilab. The defendants claimed the analyzer was able to perform a full range of clinical tests using small blood samples drawn from a finger stick. The defendants also represented that the analyzer could produce results that were more accurate and reliable than those yielded by conventional methods – all at a faster speed than previously possible. The indictment further alleges that Holmes and Balwani knew that many of their representations about the analyzer were false. For example, it was alleged that Holmes and Balwani knew that the analyzer had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines.
Holmes represented to investors that Theranos had a profitable and revenue-generating business relationship with the United States Department of Defense and that Theranos’s technology had deployed to the battlefield when, in truth, Theranos had limited revenue from military contracts and its technology was not deployed in the battlefield. The evidence showed Holmes represented to investors that Theranos had been comprehensively validated by numerous major pharmaceutical companies and provided reports to investors with logos from pharmaceutical companies falsely suggesting the pharmaceutical companies endorsed Theranos. In addition, the evidence showed that Holmes represented to investors that Theranos would soon dramatically increase the number of Wellness Centers within Walgreens stores even though Theranos’s retail Walgreens rollout had stalled because of several issues.
The jury convicted Holmes of the investor wire fraud conspiracy count and three substantive wire fraud counts relating to the scheme to defraud investors, including wire transfers totaling more than $140 million. The jury acquitted Holmes of the patient-related conspiracy wire fraud count and three additional wire fraud counts. One count of wire fraud relating to a Theranos patient was dismissed during the trial. The jury could not reach a unanimous verdict with respect to three investor fraud-related counts. Holmes faced a maximum sentence of twenty (20) years in prison, and a fine of $250,000, plus restitution, for the conspiracy count and each count of wire fraud.
“Elizabeth Holmes chose fraud over business failure. A jury has determined, beyond a reasonable doubt, that she intentionally misled investors,” said Special Agent in Charge Craig Fair.
Trevor R. Milton - Nikola
Trevor R. Milton, the founder, largest stockholder, and former Chief Executive Officer and Executive Chairman of Nikola Corporation (“Nikola”), a publicly traded company, engaged in a fraudulent scheme to deceive retail investors about Nikola’s products, technical advancements, and commercial prospects for his own personal benefit in violation of the federal securities laws. Milton did so primarily by leveraging his social media presence and frequent appearances on television and podcasts to flood the market with false and misleading information about Nikola.
During a May 5, 2020 appearance on the Rise of the Young podcast, Milton claimed: "There’s two people in this world that know EVs better than anyone, and that’s Elon and myself. . . . . there’s very few people that know the EV industry or the whole entire vehicle like I do or like Elon does, so we’re probably the top two guys in the world that know this shit, and we know it better than anybody."
Serbian-American engineer and physicist Nikola Tesla (1856-1943) made dozens of breakthroughs in the production, transmission and application of electric power. He invented the first alternating current (AC) motor and developed AC generation and transmission technology. Although the last of Tesla’s years were tragic, he is remembered as an accomplished inventor who made significant advancements in the world of communication, electricity, and manufacturing.
Milton founded Nikola in 2015 with the primary goals of manufacturing semitrucks that run on alternative fuels with low or zero emissions and building an alternative fuel station infrastructure to support those vehicles. Nikola began its truck development program in 2016, when it unveiled its first truck prototype, the Nikola One.
At a December 2016 unveiling event for Nikola One, Milton repeatedly and falsely stated that the Nikola One was fully functioning. In his remarks at the December 1, 2016 event, Milton said, despite full knowledge of facts to the contrary, that the Nikola One “fully functions and works which is really incredible.” He went on to tell the audience that “you’re going to see that this is a real truck, this is not a pusher” [what they call in the automotive world a vehicle that they just push and it doesn’t move]. The Nikola One was not operable at the time because, among other reasons all electrical components were powered through a cord running from an external power source, rather than the truck’s battery.
In or about early 2018, Nikola participated in a commercial shoot in which the non-functioning Nikola One prototype truck was hauled to the top of an inclined stretch of road and then filmed rolling down the incline. Milton ultimately approved a final version of the clip, which had been sped up two- to-three times. This had the effect of making the Nikola One appear to move faster than it was.
VectoIQ was incorporated in the State of Delaware in January 2018 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses. VectoIQ completed its initial public offering in May 2018. In June 2020, the wholly-owned subsidiary merged with and into Legacy Nikola, with Legacy Nikola surviving the merger as a wholly-owned subsidiary of VectoIQ. The company incurred a net loss of $88.7 million for the year ended December 31, 2019 and incurred net losses of approximately $188.5 million from inception through December 31, 2019.
Nikola Corporation was vertically integrated zero-emissions transportation solution provider that designs and manufactures state-of-the-art battery-electric and hydrogen fuel cell electric vehicles, electric vehicle drivetrains, energy storage systems, and hydrogen fueling stations. The core product offering was centered around a battery-electric vehicle ("BEV") and hydrogen fuel cell electric vehicle ("FCEV") Class 8 semi-trucks. The key differentiator of the business model was the planned network of hydrogen fueling stations. Nikola offered a bundled lease model, which provides customers with the FCEV truck, hydrogen fuel, and maintenance for a fixed price per mile, locks in fuel demand and significantly de-risks infrastructure development.
Nikola projected that, when its hydrogen station network was fully built out, this network would annually consume approximately 5 percent of all electricity consumed in the U.S. today. Nikola: (i) never produced a single kilogram of hydrogen, (ii) did not have a station permitted to produce hydrogen, and (iii) did not have any contracts signed with any electricity providers. Milton misrepresented aspects of Nikola’s business that it had planned or modeled as something that had already happened.
Having decided, in or around February 2020, that Nikola would develop a pickup truck he called the Badger, Milton went on to make misrepresentations about the Badger’s timeline for development and Nikola’s proprietary contributions to its design. Milton continued his pattern of touting capabilities of vehicles that, in the case of the Nikola One, was not functioning, and in the case of the Badger, simply did not exist beyond a computer-generated imagery (CGI) rendering of an illustration created by a Nikola employee many months before. An OEM engineer, who visited Nikola’s offices in February 2020 summed up the Badger’s state at the time as “vaporware.”
Before Nikola had produced a single commercial product or had any revenues from truck or fuel sales, Milton embarked on a relentless public relations blitz aimed at a class of investors he called “Robinhood investors.” Through frequent nationally televised media appearances and a ubiquitous presence on social media (where he garnered over 100,000 followers on Twitter alone), Milton built a significant following for himself and Nikola. In these appearances and on social media, Milton presented himself as a different type of CEO – one who “cared” and was “transparent” with the average investor. As part of his publicity campaign, Milton encouraged prospective investors to follow him on social media to get “accurate information” about the company “faster than anywhere else.” In reality, however, Milton used his platform to mislead investors, which helped inflate and maintain Nikola’s stock price.
Milton repeatedly made false and misleading statements about core aspects of Nikola’s products, technological advancements, and commercial prospects, including, among others: Falsely claiming that Nikola’s first semi-truck prototype, the Nikola One, could be driven under its own power, and using a misleading video to create the false impression that the Nikola One was, in fact, driving under its own power; Falsely claiming that Nikola was producing hydrogen, that it was doing so at a cost that was four times less than the prevailing market rates, and that it had obtained electricity at costs that made hydrogen production profitable; Falsely claiming that the total cost of ownership of Nikola’s trucks was 20-30 percent below that of diesel vehicles. Much of what Milton represented as accomplishments were, at best, internal targets years away from completion and subject to significant execution risks or, worse, ideas conceived only on paper.
Milton managed in a hard-charging, demanding, and intimidating manner. He frequently operated in a silo, making it difficult for Nikola’s technical leads to adjust to decisions he made or projects he initiated. At times, Milton announced company initiatives on Twitter without first consulting with – or even informing – relevant technical or business leads. It was not unusual for Nikola’s engineers, executives, and even marketing personnel to find out about company initiatives, timelines, or product features by reading a Milton tweet or watching him in an interview.
Market capitalization (or market value) is the most commonly used method of measuring the size of a publicly traded company and is calculated by multiplying the current stock price by the number of shares outstanding. On 29 June 2020, having never sold a single vehicle, Nikola's market cap peaked at $21.6 Bilion, at which time the market cap of Gneral motors was $24.5 Bilion. Nikola market cap as of January 14, 2022 is $4.08B. On February 25, 2021, Nikola filed its Form 10-K for the year ended December 31, 2020. In the filing, Nikola admitted that certain statements Milton made that were highlighted in the report released by the financial research firm were “inaccurate in whole or in part, when made.” Nikola’s stock price fell further on the filing of the Form 10-K and dropped a total of approximately 57 percent during the time period between the date of the research firm’s report and the day after the release of the Form 10-K.
On July 29, 2021 the Securities and Exchange Commission announced charges against Trevor R. Milton, the founder, former CEO and former executive chairman of Nikola Corporation, for repeatedly disseminating false and misleading information – typically by speaking directly to investors through social media – about Nikola’s products and technological accomplishments. The SEC’s complaint charges Milton with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Shares of Nikola skyrocketed nearly 600% to a closing high of $65.90 in 2020 before the accusations came to light; they since tumbled 85% to less than $9.50.
On 21 December 2021 the Securities and Exchange Commission announced that Nikola Corporation, a publicly traded company created through a special purpose acquisition company transaction, has agreed to pay $125 million to settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects.
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