The Capital Market Commission has charged bankrupt Lordstown Motors misleading investors about the sales prospects of the Endurance electric truck.
Lordstown agreed to pay $25.5 million as a result — money the SEC says will go toward settling some pending class action lawsuits against the company.
“We argue that, in a highly competitive race to deliver the first mass-produced electric truck to the U.S. market, Lordstown oversold the real demand for the Endurance,” said Mark Cave, deputy director of the SEC’s Division of Enforcement. “Exaggerations that distort a public company’s competitive advantages distort the capital markets and hinder the ability of investors to make informed decisions about where to put their money.”
The SEC says its investigation into Lordstown Motors — which began in 2021 — is ongoing. Lordstown is still in the process of Chapter 11 bankruptcy. Steve Burns recently bought most of the assets related to Endurance and is using it to promote a new startup called LandX. It is not specifically charged in the SEC provision.
“Although I have not been charged by the SEC, they mischaracterized my actions in their settlement today with Lordstown Motors,” Burns said in a statement provided to TechCrunch. “I categorically reject the suggestion that my actions constituted wrongdoing. Facts and truth are supposed to matter. That’s not the way our system is supposed to work.”
According to the SEC, Lordstown and its founder Steve Burns not only misrepresented how many pre-orders it had for the Endurance, but also lied about having access to all the parts needed to build the truck.
“These statements told investors that Lordstown would be first to market with a sustainable electric truck aimed at the commercial fleet market, and Lordstown already had an established base of customer demand evidenced by tens of thousands of ‘pre-orders’ from commercial fleet customers” , writes the commission in the charge announcement order. “Knowing that this first-mover advantage would be critical to the company’s success, Lordstown and Burns misunderstood the true nature of the pre-orders for the truck, whether Lordstown had access to the key components needed to build the truck, and when the company will be able to deliver the truck to customers.”
The SEC explains that Lordstown’s sales team began contacting potential fleet customers in early 2020 and asked them to sign non-binding letters of intent to purchase the Endurance. The company then turned around and presented those letters as pre-orders in public statements and regulatory filings.
Giving the impression of a large order book was crucial to making the startup appear legitimate, and at one point the SEC says Burns “directed the Lordstown salesteam to obtain additional pre-orders from customers to increase the total amount because the pre-orders it was
‘[r]very important to the investment community and to our outlook[ive] fleet customers’.
But Lordstown’s sales team “was made up mostly of people with no automotive sales experience, [and] no instructions or guidance were provided to determine whether a customer was a commercial fleet customer,” the SEC writes. By January 2021, Burns was touting 100,000 pre-orders for the Endurance, which he said was “unprecedented in the history of the car.”
It all came crashing down three months later, when research firm Hindenburg Research released a report on Lordstown claiming that most of the pre-orders were fake. An internal investigation conducted by Lordstown’s board found that to be largely true, as a purported large buyer “did not appear to have the resources to complete large truck purchases,” according to the SEC’s account of events. The internal investigation also found that many other customers had only provided “commitments that seemed too vague or weak” to be included in the total.
Ultimately, between 40% and 71% of pre-orders were fraudulent. Burns’ comments that the pre-orders were “too serious” and “too sticky” were also misleading.
Lordstown had said when it went public in a 2020 merger with a special purpose acquisition company (SPAC) that it would have access to parts from GM, which sold a plant to the startup and provided financial backing. It was supposed to be another legitimizing aspect of Lordstown’s business. But that wasn’t really the case, according to the SEC.
Instead, “the parts were manufactured by GM’s suppliers under GM’s authorization, which was a complex, time-consuming process with no certainty as to whether GM would ultimately authorize Lordstown to use the parts,” according to the order. Lordstown’s management knew this before completing the SPAC merger. An officer told Burns in October that he had only been authorized for four of the 90 parts he had requested and that Endurance’s timing was “now in jeopardy” as a result.
In fact, GM told Lordstown and Burns in December of that year that Lordstown’s parts request could strain the auto giant’s supply chain and told them to find a backup option. But Lordstown continued to push in regulatory filings that it had access to the parts, and Burns said in a November CNBC interview that GM “opened its parts bin.”
“The spares bin is very valuable to us,” he said.
The SEC says that not only was this misleading, but that Lordstown had to source parts from other suppliers, adding an additional $150 million in costs to the Endurance program.
Through it all, Lordstown and Burns continued to push the ship date to September 2021 and stuck to that date in order to promote the idea of being the first electric truck on the market — even though it knew internally that it couldn’t reach on this date, according to the SEC.
This story has been updated to include a statement from Steve Burns.
