Luka Misic

May 16, 2023

In recent years, the corporate world has witnessed several high-profile fraud cases. These cases all had a few commonalities; The fraudsters would find their prey in vulnerable investors desperate to hitch their wagons to rising stars in the corporate realm, touting groundbreaking technologies that would change the world. These scammers would then live in lavish wealth for years, with the government taking little to no action against them or their companies. Eventually, they would see themselves undone by their own carelessness, but they would drag the people they scammed down into ruin alongside them.

A token case of this sort of fraud shook the automotive industry to its core in the latter half of 2020. Founded in 2014 by Trevor Milton, Nikola Corporation was a company that promised to change the world. Like its contemporary, Tesla Inc, Milton’s company was named after the legendary inventor Nikola Tesla and promised to revolutionize the automobile industry through the creation of pollutant free, electric cars.

On the surface, Nikola seemed to be a company of great promise. Milton set out to fill an emergent consumer niche which other electric car competitors had left critically unattended for years: heavy-duty, commercial, battery-electric vehicles, such as high horsepower electric trucks. Other companies had ignored this demand, believing market demand to be limited compared to the immense costs necessary to construct an apparatus capable of successfully supplying electricity to such heavily power intensive vehicles. Milton, however, was undeterred. He promised not only to deliver these vehicles, but to do so in a completely green, environmentally friendly way through transformative hydrogen fuel cell technology that Nikola had developed. These new hydrogen fuel cell batteries were so powerful that they would allow for zero pollution travel.

For years, Nikola chugged along mostly in the shadows. Milton claimed to be developing truck models and perfecting his technology. Numerous photos of his supposed trucks were released during this time while Milton went around courting the interest of private investors, in order to secure the capital he needed to bring his grand dream into reality.

In 2020, after seeing the incredible rise of Tesla in the stock market, Milton decided to take his project to the next level; It was time for Nikola to become a public company. Upon its IPO, Nikola would garner incredible attention. Investors were overawed at the prospect of securing a stake in “the next Tesla” and poured hundreds of millions of dollars into the company. At its peak, the company was valued at over $60 billion, which was more than its famous contemporary, Ford. This valuation came despite its quarterly revenue being only $36,000, the entirety of which was attributed to installation of solar facilities on behalf of Milton. When this shocking news came out, naturally the stock price saw some decline. However, Milton was quick to get the ball back on the road, reminding investors that they were investing in the future, not the present.

Less than a month after the initial revelation, on September 8, 2020, Milton revealed that he had secured a partnership with automotive giant, GM. According to this agreement, GM would acquire an 11% stake in Nikola and earn the right to nominate one member to Nikola’s board. In return, GM agreed to use its manufacturing facilities to produce the Badger, Nikola’s first truck, as well as supply fuel cells and batteries to Nikola for global use. Investors leaped at the news and overnight, Nikola’s stock surged over 50%. It seemed that Milton’s grand ambitions were back on track for success once more.

Only, underneath the surface, nothing was as it seemed at Nikola. Two days later, on September 10, 2020, short selling firm Hindenburg Research would release a report exposing the depths of Milton’s fraud. Nikola’s revolutionary hydrogen cell technology had never existed. The closest he ever got to “creating” this technology was through an acquisition of a rival firm’s battery technologies, a deal that fell through when Milton discovered that the rival firm did not have an actual product either¹.

If the lynchpin of Milton’s project didn’t actually exist, how did he build a model truck to show off to his investors? The answer is, he didn’t. The Nikola One truck Milton famously filmed driving down a hill did not drive at all. Milton had the car towed to the top of the hill and recorded gravity pulling it downwards². Once Milton had used his lies to secure a partnership with GM, he planned to transition to using their fuel cells to power his hypothetical vehicles. GM pulled out of the deal after Milton was exposed, investors were outraged, and Nikola’s stock price proceeded to crater.

Milton was forced to resign from his position as Executive Chairman at Nikola³, though the company would retain him as an unpaid consultant for some months thereafter. He also still retained 91.6 million shares of Nikola worth roughly $3.1 billion at the time of his resignation⁴. Despite his humiliation and exposure, Milton remained an extraordinarily wealthy man. His automobile empire may have been built on lies, but the wealth it brought him remained very real.

It would take nearly a year before the government took any action against Milton. In July 2021, a United States federal grand jury would finally issue an indictment against Trevor Milton for three counts of securities fraud and wire fraud⁵. Milton, using his stolen wealth, would further forestall facing the consequences for his misdeeds, easily posting the $100 million dollars needed for his bail⁶.

The belated nature of the action taken by the government against Milton cannot be ignored. They would only make a move against him long after he was already exposed by other actors operating within the marketplace. They did nothing to hinder his scams while they were taking place, and if not for the actions of Hindenburg Research, it is likely they never would. The damage had already been done, and countless investors had been ruined. For the government to allow this state of affairs to persist is simply unacceptable.

Milton’s tale, though a particularly grievous example of fraud, is far from alone in the corporate world. In fact, Milton was exposed and brought to justice relatively quickly compared to some of his more infamous counterparts.

Elizabeth Holmes founded Theranos in 2003, with a promise to “democratize healthcare” through her groundbreaking blood testing technology. Holmes would operate Theranos under an atmosphere of utmost internal secrecy, forcing her employees to sign nondisclosure agreements as part of their contracts. Furthermore, she would only accept investor funds under the condition that she retain total control over the company, and she didn’t reveal any details of how the company’s supposed technology actually worked⁷.

Despite her secrecy and lack of definitive technological results, investors had wholeheartedly embraced Theranos. By appealing to those seeking to tie themselves to the next great scientific breakthrough, Holmes was able to fundraise hundreds of millions of dollars. Her company quickly grew to be valued at more than $9 billion dollars. She lived in lavish luxury, enjoying the fruits of her newfound wealth.

The problem with Holmes’s meteoric rise to prominence as a technological giant was that her product didn’t work, giving users wildly inaccurate results when used. This would be uncovered by John Carreyrou in an investigative Wall Street Journal article analyzing the validity of her claims⁸. In response, Holmes would attempt to cover up her initial lies by utilizing the widely used blood testing machines that she claimed she built Theranos to replace, to provide her medical patients with accurate results, all while pretending they came from her technology. She went on to invite then-Vice President Joe Biden for a tour of Theranos’s facility to strengthen her faltering credibility⁹, before leading him through a fake lab constructed solely to give her company the impression of legitimacy during his visit.

Holmes and Theranos would be subjected to a series of investigations by the Centers for Medicare and Medicaid Services (CMS) and Securities and Exchange Commission (SEC) over the coming years. Theranos would go defunct and in 2018, Holmes was indicted on nine counts of wire fraud and two counts of conspiracy to commit wire fraud in the U.S. District Court for the Northern District of California alongside her co-conspirator, Theranos COO Ramesh Balwani¹⁰.

If any sort of significant audit had been conducted into Theranos’s operations, Holmes’s scam would have been discovered much earlier. All it would have taken is the sort of audit one can well argue should be routine for the field in question, given its relation to the health of countless thousands. Just as a random person off of the street cannot claim to practice medicine, so too should companies not be allowed to operate under false premises designed to mislead the public. There are many such laws purporting to be to this effect, but because Theranos had too much money tied into its operations, no one cared to look until the problem became impossible to ignore. Once again, through its inaction, the government failed its people.

More recently, in 2019, Sam Bankman-Fried founded cryptocurrency exchange FTX, with a vow to revolutionize the world of finance. FTX would quickly grow to become the third largest cryptocurrency exchange in the world. At the peak of FTX, Bankman-Fried was worth over $26 billion dollars and was rated as the 60th richest man in the world¹¹.

In November 2022, FTX would suffer a sudden and violent collapse when a crypto newspaper, CoinDesk, published an article stating that Alameda Research, a trading firm closely affiliated with FTX and owned by Bankman-Fried, was the primary owner of FTX’s exchange token, FTT. Following the leak, Binance, a competing cryptocurrency exchange and one of the largest investors in FTT, announced they would sell all of their FTT tokens¹², leading to a crash in the market price. This crash triggered a rush of withdrawals from FTX, creating a liquidity crash and forcing the exchange to freeze all outward transactions.

On November 10, 2022, citing whistleblowers at the firm, The Wall Street Journal would publish an article claiming that Bankman-Fried had used FTX to lend money from customers’ accounts to fund his other firm, Alameda Research, earlier in 2022¹³. This move put the money at incredible risk, unbeknownst to Bankman-Fried’s customers, and was explicitly forbidden by FTX’s own terms of service.

Only a day later, on the 11th, FTX, Alameda Research, and more than 130 associated legal entities declared bankruptcy. Bankman-Fried was forced to resign as CEO of FTX the same day. Liquidation specialist John J. Ray III was appointed to replace him and soon revealed that the company’s transaction records showed Bankman-Fried had used Alameda Research to give himself a personal loan in excess of $1 billion¹⁴.

As these revelations were playing out in the United States, Bankman-Fried hid in his lavish Bahamas vacation home. On December 12, 2022, he was arrested shortly after 6 p.m. by the Royal Bahamas Police Force to extradite him to the US to face trial. The Southern District of New York would charge Bankman-Fried with 8 counts of wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering. He was soon released on a $250 million dollar bail, one of the largest in American history¹⁵.

Despite their seemingly disparate nature, all three of these cases have significant elements in common; Trevor Milton, Elizabeth Holmes, and Sam Bankman-Fried all made a fortune promising investors revolutionary technologies that would transform the world around them. All three lived incredibly luxurious lifestyles on the back of these ill-gotten gains, without a concern in the world towards establishing legitimate businesses. All three parlayed false claims into media stardom and used a continuous chain of lies to sustain the lifeblood of their corporate empires.

Perhaps most importantly of all, none of the three were brought down by the government. Trevor Milton’s truck scam was exposed by private firm, Hindenburg Research, on the eve of a deal that would have secured him the legitimacy to extend his racket for years to come. Elizabeth Holmes was brought down at the height of her powers by investigative journalist, John Carreyrou. He continued to relentlessly pursue the truth, even as Holmes threatened legal action against him and the Wall Street Journal, all while she worked to cover her tracks. Sam Bankman-Fried was only brought to justice by chance. The initial CoinDesk dossier created the perfect storm to force FTX into bankruptcy, forcing more in-depth scrutiny by the requisite authorities.

The government failed to fulfill its responsibilities in all three cases. Despite extensive evidence of fraud in all three companies, extending years and involving tens of billions of dollars of transactions, it was individual efforts that brought their corruption to light. The government cases that came thereafter were obviously reactive in nature given their extraordinarily slow pace. It is clear that these companies were not even on the government’s radar until the extremely publicized nature of the scandals forced them into action.

Milton, Holmes, and Bankman-Fried are surely far from alone, but not all fraudsters are so audacious in their activities. Few would be bold enough to roll a fake truck down a hill to create the impression of a product, construct a fake facility entirely for the purpose of a Vice-Presidential visit, or take the majority of their company’s finances into their private firms, prompting an easily avoidable liquidity crisis. The majority of these scam artists are much less conspicuous, exaggerating rather than creating complete falsehoods which can be easily disproved. They choose to skim off of the top without endangering the entire financial pyramid upon which their fraud is built. This less risqué fraud is both incredibly prevalent and dangerous to the overall health of our economy.

Yet, if the government cannot catch fraudsters like Milton, Holmes, and Bankman-Fried without the assistance of outside actors and raw chance, what hope do they have to uncover their less flagrant brethren? Is there to be no hope whatsoever, with these incredible tales of scandal only revealed in retrospect of fortunate self-inflicted wounds?

Despite the difficulty of counteracting corporate fraud, our government can and should do more. Too often, these con men are allowed to run amuck for years or even decades at a time, dealing incalculable damage and ruining countless lives, before their crimes are finally brought to the light of day.

Key to countering would-be fraudsters before they get so deeply entrenched in their operations is identifying the means by which they operate. Though the degree of their claims may vary, there is generally a common thread uniting these con artists. Capitalizing off of the publicity of more successful, legitimate industry disruptors, these scammers claim to have made some sort of revolutionary breakthrough of their own. Investors, desperate to be part of the next big thing, flock to the fraudster’s company in droves. Thereafter, their money goes towards maintaining the illusion of some sort of productivity and forward progress.

The way to halt most of these operations is relatively straightforward. These fraudsters need an ever-increasing cash flow to preserve impressions of growth, lest their house of cards collapse. Indeed, most fraudsters are exposed when they are no longer able to continue delivering the mirage that their enterprises deliver some sort of exponential growth due to their “groundbreaking technologies.” The government can accelerate this natural process of collapse by imposing stricter regulatory hurdles for companies fundraising in their embryonic stage.

Though critics will no-doubt argue that this regulation will stifle economic growth by impeding the development of promising young companies, it is a necessary price that must be paid for the greater good. These bad companies must be rooted out early on so that legitimate companies have the room they need to prosper without unjust impediments in this metaphorical economic garden.

To do this, the government must impose a stricter regulatory auditing process before large financial transactions to young companies can be completed. If this most basic of steps is taken, the most egregious of these offenders can be cut down at the start. Elizabeth Holmes and Trevor Milton never had real products. If they and their contemporaries were required to demonstrate at least some sort of proof of concept before they could secure the millions in cash infusions that served to keep them afloat, their scams could never have gained the capital needed to rise above the most primitive of operations.

This regulatory hurdle should not significantly impede healthy young companies. If they meet the burden of concept, they can continue with any transactions as they would in their normal course of affairs. The chief effect of this policy would be reducing the amount of reckless speculatory investments conducted in the marketplace. Investors would still be able to speculate, but they would be precluded from financing ludicrously risky ventures with little evidence to back up their long-term viability.

The effects of this policy have the dual effect of shoring up the health of our economy on two concurrent levels. The investors in these companies are disproportionately likely to be poorer financers desperate to make quick wealth, but often lacking the means to conduct any significant due diligence on their own. By preventing these investors from financing companies without a certain burden of proof on their part, the government can help protect the most vulnerable investors from the predatory actors seeking to gain unjust capitalization off of their enthusiasm.

Furthermore, by cutting these scamster companies out of the marketplace, the government steers the flow of capital towards enterprises with real, long-term potential for growth. The economy is strengthened, and companies developing technologies with the actual potential to change the world are given more funding. All too often these companies would otherwise fly under the radar despite having more fundamental substance due to not having the confident charisma and charm of fraudsters peddling nothing but air. In the process, our investors reap real dividends and will hence be more likely to support other potential endeavors in the future, rather than withdrawing their funds from the pool of fundraising capital after their dreams are shattered.

The government must stay the course with whatever reform they ultimately decide to undertake. In the wake of the Enron scandal, the Sarbanes–Oxley Act was devised and passed into law. This act was a significant step forward for accountability in the corporate world by increasing penalties for fraudulent financial activity, increasing the oversight the board of directors has over a company, and taking steps to ensure the independence of the outside auditors who are meant to review the accuracy of a company’s financial statements¹⁶. However, under the influence of intense lobbying, much of the initial law was watered down with the passage of the JOBS Act in 2012. Ostensibly passed to stimulate the economy, the JOBS Act had the capacity to endanger many smaller investors by creating legal mechanisms through which companies of dubious quality could avoid disclosing the true states of their finances, including critical information such as executive compensation¹⁷.

            History should not be allowed to repeat itself. With the collapse of Enron, America was given a wakeup call as to the risks of allowing widespread fraud to hide itself within the economy. Unfortunately, after initial efforts at change, this call went largely ignored, and much of the early progress was be undone. The cases of Milton, Holmes, and Bankman-Fried should serve as the canaries in the proverbial coal mine. While most frauds collapse by their own efforts in the end, imminent action is necessary to ensure that they do not deal irreparable damage to the economy and investors in the process.

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Works Cited

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¹ Hindenburg Research. “Nikola: How to Parlay an Ocean of Lies into a Partnership with the Largest Auto OEM in America.” Hindenburg Research, 10 Sept. 2020, hindenburgresearch.com/nikola/.

² Hindenburg Research. “Nikola: How to Parlay an Ocean of Lies into a Partnership with the Largest Auto OEM in America.” Hindenburg Research, 10 Sept. 2020, hindenburgresearch.com/nikola/.

³ Valdes-Dapena, Peter, and Charles Riley. “Nikola Founder Trevor Milton Steps down as Chairman in Battle with Short Seller | CNN Business.” CNN, 21 Sept. 2020, http://www.cnn.com/2020/09/21/investing/nikola-trevor-milton/index.html. Accessed 16 Apr. 2023.

⁴ Kopecki, Michael Wayland,Dawn. “Nikola Founder Trevor Milton Forfeits $166 Million in Stock He Would Have Lost Anyway and Gets to Keep $3.1 Billion under Separation Deal.” CNBC, http://www.cnbc.com/2020/09/21/nikola-founder-trevor-milton-forfeits-166-million-in-stock-and-gets-to-keep-3point1-billion-under-separation-deal.html. Accessed 16 Apr. 2023.

⁵ Wayland, Michael. “Grand Jury Indicts Trevor Milton, Founder of Electric Carmaker Nikola, on Three Counts of Fraud.” CNBC, 29 July 2021, http://www.cnbc.com/2021/07/29/us-prosecutors-charge-trevor-milton-founder-of-electric-carmaker-nikola-with-three-counts-of-fraud.html.

⁶ Wayland, Michael. “Nikola Founder Trevor Milton Pleads Not Guilty to Fraud Charges, Released on $100 Million Bail.” CNBC, 29 July 2021, http://www.cnbc.com/2021/07/29/nikola-founder-trevor-milton-pleads-not-guilty-to-fraud-charges.html.

⁷ Avery Hartmans, Sarah Jackson. “The Rise and Fall of Elizabeth Holmes, the Former Theranos CEO Found Guilty of Wire Fraud and Conspiracy Who Is Now Trying to Delay Her Prison Sentence after Having Her Second Child.” Business Insider, Business Insider, https://www.businessinsider.com/theranos-founder-ceo-elizabeth-holmes-life-story-bio-2018-4#at-one-point-holmes-was-the-worlds-youngest-self-made-female-billionaire-with-a-net-worth-of-around-45-billion-27.

⁸ Carreyrou, John. “Hot Startup Theranos Has Struggled with Its Blood-Test Technology.” The Wall Street Journal, Dow Jones & Company, 19 Nov. 2022, https://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901.

⁹ “Biden Visits Theranos Lab as Part of Healthcare Innovation Summit.” Web.archive.org, 8 Sept. 2021, web.archive.org/web/20210908210932/www.usatoday.com/story/tech/2015/07/24/biden-visits-theranos-lab-part-healthcare-innovation-summit/30634739/. Accessed 16 Apr. 2023.

¹⁰ “Theranos Founder Elizabeth Holmes Charged with Criminal Fraud.” The Guardian, Guardian News and Media, 15 June 2018, https://www.theguardian.com/technology/2018/jun/15/theranos-elizabeth-holmes-ramesh-balwani-criminal-charges.

¹¹ Sam Bankman-Fried. (n.d.). Forbes. Retrieved April 16, 2023, from https://www.forbes.com/profile/sam-bankman-fried/?sh=57bfc3314449

¹² Kharif, Olga. “Binance to Sell $529 Million of Bankman-Fried’s FTT Token.” Bloomberg.com, 6 Nov. 2022, http://www.bloomberg.com/news/articles/2022-11-06/binance-to-sell-529-million-of-ftt-token-amids-revelations?sref=CIpmV6x8&leadSource=uverify%20wall. Accessed 16 Apr. 2023.

¹³ Ostroff, Dave Michaels, Elaine Yu and Caitlin. “WSJ News Exclusive | Alameda, FTX Executives Are Said to Have Known FTX Was Using Customer Funds.” WSJ, http://www.wsj.com/articles/alameda-ftx-executives-are-said-to-have-known-ftx-was-using-customer-funds-11668264238?mod=hp_lead_pos2.

¹⁴ Hill, Jermey. “FTX’s New Boss Reveals Chaos Left behind by Bankman-Fried.” News.bloombergtax.com, news.bloombergtax.com/crypto/ftxs-advisers-have-found-just-a-fraction-of-companys-crypto. Accessed 16 Apr. 2023.

¹⁵ Weiser, Benjamin, et al. “Sam Bankman-Fried Released on $250 Million Bond with Restrictions.” The New York Times, 22 Dec. 2022, http://www.nytimes.com/2022/12/22/business/sam-bankman-fried-ftx-bail.html. Accessed 16 Apr. 2023.

¹⁶ “CORPORATE CONDUCT: THE PRESIDENT; Bush Signs Bill Aimed at Fraud in Corporations.” The New York Times, 31 July 2002, http://www.nytimes.com/2002/07/31/business/corporate-conduct-the-president-bush-signs-bill-aimed-at-fraud-in-corporations.html.

¹⁷ Pender, Kathleen. “Financial Regulations Gutted in New Bill.” SFGATE, 11 Mar. 2012, http://www.sfgate.com/business/article/Financial-regulations-gutted-in-new-bill-3407178.php. Accessed 16 Apr. 2023.