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SEC on February 29, 2024, he announced dismissed the charges against Lordstown Motors Corp. (Lordstown) for allegedly misleading investors about sales prospects for Endurance, Lordstown’s flagship truck for the electric vehicle (EV) market.

As claimed by the SEC, Lordstown was founded in April 2019 with the purpose of developing and manufacturing electric toll trucks designed for the commercial fleet market. In August 2020, Lordstown became a public company through a merger with a special purpose acquisition company (SPAC) and 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 salable product” and suggested pre-order numbers that were “largely false and were used as a capital raising proposition and to provide 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 a proof of claim in Lordstown’s pending bankruptcy case.

Depending on the residence the order, Lordstown allegedly misled investors about the Endurance’s needs, as well as the company’s ability to offer the vehicle as the first electric truck that could be sold to the commercial fleet market. Allegedly, Lordstown reported false and non-binding orders to Endurance to increase 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 prohibit the issuance and sale of securities based on misrepresentations but specifically do not require a scienter. evidence of negligence
• Exchange Act Section 13(a) and Rules 13a-1, 13a-11 and 12b-20, based on the same allegations of misrepresentation regarding demand, delay and delivery, as well as the exclusion of financial statements audited by the required independent auditors in time and now. report
• Exchange Act Section 14(a) and Rules 14a-3 and 14a-9 regarding misleading information in agency statements.

Without admitting or denying the SEC’s allegations, Lordstown agreed to cease and desist and provide $25.5 million in payments the company agreed to make to settle two shareholder actions alleging the same conduct the SEC charged. The SEC agreed to withdraw its certification of claims in ongoing bankruptcy after satisfaction of the liquidation. The SEC did not impose a civil monetary penalty, possibly in light of the company’s bankruptcy filing.

In the related established regime to continue filed the same day, Lordstown’s former auditor, Clark Schaefer Hackett and Co. (CSH), agreed to settle charges of alleged violations of auditor independence standards by providing non-audit services to Lordstown during CSH’s audit of the company’s finances. The SEC charged CSH with violating:

• Rule 2-02(b) of Reg SX for falsely certifying that the audit report was prepared in accordance with PCAOB standards.
• PCAOB Rule 3520 for failing to comply with auditor independence requirements
• Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the SEC’s Code of Practice for professional misconduct.
• Section 13(a) and Rule 13a-1 and Section 14(a) and Rule 14a-3 for causing a Lordstown violation.

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

Important takeaways

• SEC staff will closely scrutinize the issuer’s claims to be first or quickly to accomplish the stated objective, which may have contributed to the SEC’s interest in Lordstown. As Associate Director of the SEC’s Enforcement Division Mark Cave he noted“in the fiercely competitive race to introduce the first mass-produced electric pickup truck to the U.S. market, Lordstown outsold true Endurance demand.”
• The SEC and other government agencies can continue investigations and enforcement actions when a company goes bankrupt. Although most legal proceedings against a debtor are automatically stayed upon the filing of a bankruptcy petition, (see 11 USC 362(a)), there are exemptions from actions or suits brought by a “unit of government” to enforce its “police.” and regulatory power.” See 11 USC § 362(b)(4).
• This settled action highlights that public companies should be vigilant in social media posts and generally informal channels of communication as they report to the SEC. Failure to do so can be dangerous.
• The execution intention in the SPAC has not yet been terminated. As noted by this blog in the past, the SEC’s “SPAC crackdown” continues to target SPAC sponsors and SPAC companies and managers.
• It is worth noting that the agreement with CSH, Lordstown’s auditor, included a violation of Rule 2-01 of Code SX for lack of independence, among other charges, for allegedly providing prohibited non-audit services to Lordstown while also performing financial audits of Lordstown. information, which was 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 post-SOX rules and regulations.

Holland & Knight’s Second Opinion Blog will continue to monitor these and other developments and provide updates. If you need more 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 Protection Team.