Nikola and the Nature of Fraud
It’s been quite a few days for shareholders of Nikola Corporation. Last week came news of a deal with General Motors, sending the stock up over 40%. Then came a short report published by the aptly-named Hindenberg Research alleging fraud within the business, which has sent the stock right back down.
One of those allegations was that the Nikola One, which the company promoted widely, never actually worked. This despite the following quote from CEO Trevor Milton; “This thing fully functions and works, which is really incredible”.
The company has now admitted that the Nikola One wasn’t functional at a company event in December 2016 and still wasn’t working when the company released this video, showing the truck moving along a highway. Hindenburg reported that the company actually towed the truck up to the top of a hill and filmed it rolling down the slope in order to make it appear as if the truck was fully operational.
This story is developing by the minute. Last night CEO Trevor Milton announced he had purchased about $1.4 million of Nikola shares, we still aren’t fully aware of the scope of SEC involvement, and it’s been reported that GM is about to pull out of the aforementioned deal. With that in mind, I’m not going to make any big judgments just yet. Rather, I’m going to furnish you with some thoughts from much smarter people on the nature of fraud.
First, from Morgan Housel’s brilliant new book, ‘The Psychology of Money’:
Let me tell you another story of someone who, like Bill Gates, was wildly successful, but whose success is hard to pin down as being caused by luck or skill.
Cornelius Vanderbilt had just finished a series of business deals to expand his railroad empire. One of his business advisors leaned in to tell Vanderbilt that every transaction he agreed to broke the law.
“My God, John,” said Vanderbilt, “You don’t suppose you can run a railroad in accordance with the statutes of the State of New York, do you?”
My first thought when reading this was: “That attitude is why he was so successful.” Laws didn’t accommodate railroads during Vanderbilt’s day. So he said “to hell with it” and went ahead anyway. Vanderbilt was wildly successful. So it’s tempting to view his law-flaunting—which was notorious and vital to his success—as sage wisdom. That scrappy visionary let nothing get in his way!
But how dangerous is that analysis? No sane person would recommend flagrant crime as an entrepreneurial trait. You can easily imagine Vanderbilt’s story turning out much different—an outlaw whose young company collapsed under court order.
Next, a paragraph from the closing chapters of ‘Bad Blood: Secrets and Lies in a Silicon Valley Startup’ by John Carreyrou:
A sociopath is often described as someone with little or no conscience. I’ll leave it to the psychologists to decide whether Holmes fits the clinical profile, but there’s no question that her moral compass was badly askew. I’m fairly certain she didn’t initially set out to defraud investors and put patients in harm’s way when she dropped out of Stanford fifteen years ago. By all accounts, she had a vision that she genuinely believed in and threw herself into realizing. But in her all-consuming quest to be the second coming of Steve Jobs amid the gold rush of the “unicorn” boom, there came a point when she stopped listening to sound advice and began to cut corners. Her ambition was voracious and it brooked no interference. If there was collateral damage on her way to riches and fame, so be it.
Finally, back to Morgan Housel and an interview he conducted with Bethan McClean — a journalist who was instrumental in uncovering the massive fraud at Enron (I’ve made some constructive edits here for clarity):
Morgan: I want to make a statement about [Elon] Musk and see how you react to it. Musk, of course, is a very unique and eccentric individual, who doesn't think a lot of the rules apply to him, either explicitly or implicitly, who kind of does things his own way. That's what people love about him and that's why he's successful. Someone who starts a rocket company in his 30s doesn't think a lot of the rules of success apply to them. Someone who builds a car company to take on Ford and GM doesn't think the rules apply to them. That's what people like. But, of course, there is the other side of thinking that rules don't apply to you which is pushing the boundaries — which is probably the most charitable way to put it — of rules and regulations about corporate decorum and posting things on Twitter, etc. — kind of the Steve Jobs, Howard Hughes of our day. I just don't think it's possible sometimes to have someone who pushes the boundaries in ways that you like, but then expect them not to push the boundaries in ways that you don't like. I'm curious if that makes sense to you when thinking about and summarizing Elon Musk.
Bethany: I think that makes a tonne of sense. He made me start thinking about the idea which is that the visionary and the fraudster are much closer in personality than we would think. We think of them as at opposite ends of the spectrum, but I actually think where the circle meets, the line between the visionary and the fraudster is much more narrow. And I sometimes think that the only thing that might separate the two is that the visionary gets away with it — he doesn't get caught. He gets the rope from investors or gets the rope from capital markets to be able to persevere through the times when they were lying and it wasn't working to get to the other side when it works. Sometimes I think it's just a timing question.
As I said, the story is still developing. I’m sure we’ll know a lot more about what has happened this time next week. Every business idea needs capital to get off the ground. When you’re starting a business, you have to sell a vision that inspires investors to get behind you — to fund that vision until the business can stand on its own two feet.
Audacious visionary entrepreneurs inspire me. I love investing in people who go out to try and change the world, knowing that complete failure is a very real possibility. However, I would never invest in someone I can’t trust. Right now, I’m genuinely shocked that there’s still a “B” next to Nikola Corporations market cap.
Obviously, plenty of investors don’t share my concerns.