On March 22, 2024, the Securities and Exchange Commission (SEC) filed fraud charges against Stephen Scott Burns, former Chairman and CEO of bankrupt automaker Lordstown Motors Corp., for misleading investors about “pre-orders” for Lordstown’s flagship electric pickup truck called Endurance.

Facts Of The Case

CASE SUMMARY

The SEC alleged that Stephen Scott Burns made inaccurate statements about Lordstown Motors Corp.'s progress in bringing an electric pickup truck to market. 

As per the SEC’s complaint, Lordstown Motors Corp., under the leadership of Stephen Scott Burns, allegedly made materially inaccurate statements about the company's business both during and after its merger with DiamondPeak Holdings Corporation. 

These statements included claims about an established base of customer demand, purportedly demonstrated by tens of thousands of "pre-orders" from commercial fleet customers. 

According to the SEC’s complaint, Burns' statements negligently created a misleading portrayal of demand for Lordstown Motors Corp.'s electric pickup truck among commercial fleet customers. 

This alleged conduct may have violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which pertain to fraudulent or deceptive practices in the offer or sale of securities. As a result, the SEC is likely to pursue legal action to address these alleged violations and uphold securities laws designed to protect investors and ensure transparency in the market.

DEFENDANT BACKGROUND

Stephen Scott Burns, the defendant in this case, was the founder, director, and CEO of Lordstown Motors Corp. from April 2019 to October 2020, at which point he assumed the role of Chairman of the Board of Directors and CEO. 

However, Burns resigned from both positions in June 2021. Currently, he resides in Maineville, Ohio. These details provide context to his involvement with Lordstown and his positions of authority within the company during the period relevant to the allegations.

RELEVANT ENTITIES

I. Lordstown Motors Corp.

Lordstown Motors Corp., the focal entity in this complaint, was incorporated in Delaware with its primary operational base in Lordstown, Ohio, during the relevant period. It was engaged in electric light-duty vehicle production targeting the commercial fleet market. 

The company’s Class A common stock traded on the Nasdaq Global Stock Market under the "RIDE" symbol from October 26, 2020, until July 7, 2023. On July 7, 2023, Lordstown Motors Corp transitioned to trading on the over-the-counter market under the "RIDEQ" symbol. 

Lordstown was registered with the SEC under Section 12 of the Exchange Act and obligated to file periodic reports as per the Exchange Act’s Section 13(a). 

On June 27, 2023, Lordstown initiated voluntary bankruptcy proceedings under Chapter 11 of the U.S. Bankruptcy Code, emerging from bankruptcy on March 14, 2024, under the name "Nu Ride Inc." Lordstown relocated its headquarters to New York, New York, and changed its common stock ticker symbol to "NRDE".

II. Lordstown Motors Corp.

The second relevant entity in the case is DiamondPeak Holdings Corporation. DiamondPeak was a Delaware corporation headquartered in New York, NY. It was a Special Purpose Acquisition Company (SPAC) that merged with Lordstown effective October 23, 2020. 

before the merger, DiamondPeak's Class A common stock was registered with the SEC under Section 12 of the Exchange Act and traded on the Nasdaq Capital Market under the symbol "DPHC". 

Like Lordstown, DiamondPeak was required to file periodic reports with the SEC under Section 13(a) of the Exchange Act. Following the merger, DiamondPeak changed its name to Lordstown Motors Corp.

OVERVIEW OF THE FRAUD

FORMATION OF LORDSTOWN MOTOR CORP. AND MERGER WITH DIAMONDPEAK HOLDINGS CORPORATION

The case indicates that Stephen Scott Burns founded Lordstown in April 2019 to develop and produce light-duty electric trucks for sale to fleet customers. Lordstown's primary focus from its inception was developing its flagship vehicle, the Endurance, an electric full-size pickup truck designed for the commercial fleet market. 

In November 2019, Lordstown took a significant step toward realizing its manufacturing goals by acquiring an assembly and manufacturing plant in Lordstown, Ohio, from General Motors Company. This acquisition likely played a crucial role in Lordstown's plans to bring the Endurance to market and establish itself within the electric vehicle industry.

Further, on August 3, 2020, DiamondPeak Holdings Corporation and Lordstown Motors Corp. announced their intention to merge through a proposed business combination transaction, as outlined in a merger agreement. The merger was finalized on October 23, 2020. 

Following the completion of the merger, DiamondPeak underwent a name change, adopting the name Lordstown Motors Corp. Additionally, Stephen Scott Burns assumed the positions of Chairman and CEO within the newly merged entity. 

Subsequently, on October 26, 2020, Lordstown's common stock and public warrants commenced trading publicly, marking a significant milestone in the company's transition to a publicly traded entity.

As part of the merger between DiamondPeak Holdings Corporation and Lordstown Motors Corp., Lordstown received approximately $675 million in proceeds. These funds were sourced from DiamondPeak's cash held in trust and a private investment in public equity (PIPE) offered to accredited investors. 

Additionally, Lordstown assumed publicly traded and private warrants previously issued by DiamondPeak as part of the merger. These warrants were initially issued during DiamondPeak's initial public offering in March 2019, with additional private warrants issued specifically for the merger process. This influx of capital and assumption of warrants likely played a significant role in Lordstown's financial position and strategic planning following the merger.

Furthermore, Stephen Scott Burns received over 46 million shares of Lordstown's stock in connection with the merger between DiamondPeak Holdings Corporation and Lordstown Motors Corp. This substantial shareholding made him the largest shareholder in Lordstown after the merger. Also, the shares that Burns received were subject to a two-year lockup period, meaning he was restricted from selling or disposing of them for a specified duration following the merger. It's noted that during the period relevant to the complaint, Burns did not sell or dispose of any of these shares.

REGISTRATION OF LORDSTOWN MOTORS CORP WITH SEC BY FILING S-1

On November 12, 2020, Lordstown Motors Corp. filed a registration statement and prospectus on Form S-1 with the Securities and Exchange Commission (SEC). This filing aimed to register various securities, including Lordstown's common stock, publicly traded and private warrants, and the shares issued in the private investment in public equity (PIPE) offering, for resale. Further, on December 4, 2020, the SEC declared the Form S-1 registration statement effective. This process allowed for the legal offering and resale of these securities in compliance with regulatory requirements.

LORDSTOWN MOTORS CORP. ISSUES A REDEMPTION NOTICE FOR PUBLIC WARRANTS

On December 16, 2020, Lordstown Motors Corp. issued a redemption notice for its public warrants. Subsequently, on January 27, 2021, Lordstown completed the redemption process by redeeming all public warrants. As a result, Lordstown received approximately $107 million from investors who exercised these warrants. This action likely had financial implications for both Lordstown and the warrant holders. It demonstrates a strategic move by Lordstown to manage its capital structure and optimize its financial position.

FILING S-8 WITH SEC TO REGISTER STOCK OPTIONS

Then, on December 28, 2020, Lordstown Motors Corp. filed a registration statement and prospectus on Form S-8 with the SEC. This filing aimed to register certain of its common stock and stock options that were issued or intended to be issued to certain directors, officers, and employees under incentive compensation plans. Companies use Form S-8 to register securities offered to employees under employee benefit plans such as stock option plans, stock purchase plans, or other incentive compensation arrangements. This filing would facilitate the issuance of these securities to eligible recipients by the company's compensation policies and practices.

LORDSTOWN AND BURNS MAKE MATERIALLY INACCURATE STATEMENTS 

Between August 3, 2020, and February 6, 2021, Lordstown Motors Corp. and Stephen Scott Burns made a series of materially inaccurate statements about Lordstown’s pre-orders for the Endurance. These misstatements were reportedly made in SEC filings and other public statements. 

OVERVIEW OF LORDSTOWN’S PRE-ORDERS

Lordstown Motors Corp. initiated efforts to gauge demand for the Endurance electric pickup truck by engaging with potential customers starting in early 2020. The company's sales team approached potential customers and requested them to sign a non-binding letter of intent and reservation agreement (LOI). This agreement, as described, was a standardized, one-page form document prepared by Lordstown and did not necessitate any payment from the potential customer. 

Importantly, signing the LOI did not obligate the potential customer to purchase the Endurance trucks. This process suggests that Lordstown sought to assess interest in its product without requiring firm or financial commitments from potential buyers.

Further, in SEC filings and other public statements, Lordstown characterized these non-binding letters of intent and reservation agreements (LOIs) as "pre-orders," primarily from fleet operators. Lordstown clarified that these pre-orders were non-binding and did not necessitate any deposit from the potential customers. Additionally, Lordstown stated that there was no guarantee that these pre-orders would ultimately result in binding orders or sales.

Thus, Lordstown and Stephen Scott Burns used terms such as LOIs, reservations, pre-orders, and "pre-sales" interchangeably during the relevant period, indicating that they attributed the same meaning to such terms. This consistent use of terminology suggests that Lordstown sought to convey to investors and the public the nature of these agreements and their significance in assessing potential demand for the Endurance electric pickup truck.

The pre-orders held significant importance for Lordstown Motors Corp., particularly because it lacked established orders or sales to report to investors as a startup company developing a new product. Given Lordstown's focus on developing and manufacturing the Endurance electric pickup truck for the commercial fleet market, pre-orders served as a critical metric for assessing potential demand for the product.

Further, Stephen Scott Burns, as CEO, believed that pre-orders were crucial for potential fleet customers. He speculated that these customers might feel more confident purchasing a truck from a new manufacturer if they knew their peers were also placing orders. Burns and Lordstown perceived that increasing numbers of pre-orders from fleets could stimulate further demand for the Endurance, potentially creating a positive feedback loop.

Thus, following the merger with DiamondPeak Holdings Corporation, Burns instructed Lordstown's sales team to secure additional customer pre-orders to increase the total number. This emphasis on obtaining more pre-orders stemmed from Burns' belief that pre-orders held significance for the investment community and potential fleet customers, underscoring their importance in driving investor confidence and customer interest in Endurance.

As can be observed, formalized policies or procedures for evaluating pre-order counterparties did not exist at Lordstown Motors Corp. Additionally, the sales team, which reported to Stephen Scott Burns, consisted largely of individuals who lacked sales experience in the automotive industry. Furthermore, these team members were not provided with instructions or guidance to discern whether a customer qualified as a commercial fleet.

Moreover, Lordstown did not have established policies or procedures for recording, tracking, or maintaining pre-order data. This lack of formalized processes suggests a potential deficiency in Lordstown's ability to effectively manage and assess pre-order information, which could have implications for accurate reporting and decision-making within the company.

Overall, these factors indicate a potential gap in Lordstown's operational infrastructure related to pre-orders, which could have contributed to challenges in accurately assessing demand and managing customer relationships in the context of pre-sales activities.

Following Lordstown Motors Corp.'s announcement in August 2020 that it had secured 27,000 pre-orders for the Endurance electric pickup truck from fleet customers, Stephen Scott Burns directed the company to continue soliciting potential fleet customers. This effort aimed to assess eventual production capacity and increase the number of pre-orders to showcase to potential investors and customers.

Further, throughout the fall of 2020, Lordstown, under Burns' direction, made numerous public statements emphasizing the increasing number of pre-orders received from fleet customers. Then, on January 11, 2021, Lordstown issued a press release declaring that it had received 100,000 pre-orders from commercial fleets. Burns described this achievement as "unprecedented in automotive history."

FORMATION OF SPECIAL COMMITTEE

On March 12, 2021, a third-party research firm, which had taken a short position in Lordstown's stock, released a report making various allegations. The report claimed that Lordstown's purported 100,000 pre-orders were fictitious and nonbinding. The report further alleged that these pre-orders were from customers who generally did not even have fleets of vehicles.

Following the publication of this report, Lordstown's Board of Directors formed a Special Committee to investigate the allegations raised in the report. This response suggests that Lordstown's leadership recognized the seriousness of the allegations and the potential impact they could have on the company's reputation and investor confidence. The formation of the Special Committee indicates a commitment to transparency and accountability in addressing the concerns raised by the third-party report.

On June 14, 2021, the Special Committee issued a public statement acknowledging the allegations and findings regarding Lordstown's pre-orders. The committee stated that certain statements made by Lordstown concerning pre-orders were "in certain respects, inaccurate." Specifically, the Special Committee determined that while Lordstown had represented on multiple occasions that its pre-orders were primarily from commercial fleets, in reality, many pre-orders were obtained from:

• Fleet management companies or other end users that expressed interest in purchasing Endurance trucks, similar to commercial fleets.
• "Influencers" or other potential strategic partners who committed to attempting to secure pre-orders from other entities but did not intend to purchase Endurance trucks directly.

Additionally, the Special Committee found that one entity that provided a significant number of pre-orders didn’t have the resources to complete large purchases of trucks. Furthermore, other entities provided commitments deemed too vague or uncertain to be appropriately included in the total number of pre-orders disclosed by Lordstown.

These findings suggest discrepancies between the representations made by Lordstown regarding the nature of its pre-orders and the actual composition and credibility of these commitments. The statement from the Special Committee indicates an acknowledgment of these discrepancies and a commitment to transparency in addressing them.

Lordstown’s Pre-Orders Were Not All From or Primarily From Fleet Customers

Lordstown Motors Corp. inaccurately represented the nature of its pre-orders in a preliminary proxy statement filed by DiamondPeak on September 21, 2020, to solicit votes for its merger with Lordstown. In the proxy statement, Lordstown stated that it had "received pre-orders primarily from fleet operators to purchase over 38,000 Endurance vehicles."

However, according to the analysis conducted by the Special Committee, pre-orders from intermediaries or influencers, rather than actual fleets, accounted for over 40% of the stated 38,000 pre-orders. This included pre-orders from customers that Stephen Scott Burns and Lordstown should have reasonably understood lacked the apparent resources or intent to purchase large quantities of the Endurance vehicles.

Then, on October 26, 2020, Stephen Scott Burns stated during an interview with The Detroit News, that Lordstown had "pre-sold 40,000" of the Endurance electric pickup trucks to fleet customers. Additionally, on November 12, 2020, Lordstown filed a Form S-1 with the Securities and Exchange Commission (SEC), signed by Burns, stating that it currently had "pre-orders primarily from fleet operators to purchase over 44,000 vehicles."

However, according to the analysis conducted by the Special Committee, 48% of the stated 40,000 pre-orders were from intermediaries or influencers rather than fleet operators. This suggests a discrepancy between the representations made by Burns and Lordstown regarding the composition of pre-orders and the actual nature of these commitments.

Then, on November 16, 2020, Lordstown issued a press release stating that it had "received approximately 50,000 non-binding production reservations from commercial fleets." On the same date, Stephen Scott Burns said in a capital markets-oriented forum that Lordstown had "50,000 pre-sales already, all from fleets." Additionally, on November 17, 2020, Burns stated in an interview with CNBC that Lordstown had received "50,000 pre-orders" sold to "fleets," describing the pre-orders as "very serious orders."

Furthermore, Lordstown's Form S-1/A, signed by Burns and filed on December 1, 2020, stated that it had "received pre-orders primarily from fleet operators to purchase approximately 50,000 Endurance vehicles." However, according to the analysis conducted by the Special Committee, 50% of the stated 50,000 pre-orders were from intermediaries or influencers rather than fleet operators.

Then, on December 2, 2020, Burns reiterated the claim of 50,000 pre-orders during an investor conference, stating, "[w]e have 50,000 pre-orders already, well in advance of what we thought we would have[,] … almost $3 billion in pre-orders already."

Further, on December 21, 2020, at Stephen Scott Burns' direction, Lordstown posted on social media and filed a Form 8-K with the Securities and Exchange Commission (SEC), stating that it had received "80,000 non-binding reservations for the Endurance to date." While these statements did not specify explicitly whether the pre-orders were, or primarily from fleets, they implied that the pre-orders were consistent with prior statements indicating they were from or primarily from fleets.

However, according to the analysis conducted by the Special Committee, 67% of the stated 80,000 pre-orders were from intermediaries or influencers rather than directly from fleets. Additionally, the 80,000 figure included a pre-order for 5,000 trucks, representing $263 million in potential revenue, from a customer who later canceled the pre-order due to a misunderstanding. Despite the cancellation, Lordstown's sales team continued counting it towards the total pre-orders.

Next, on January 11, 2021, Lordstown issued a press release declaring that it "has received more than 100,000 non-binding production reservations from commercial fleets." The press release included a quote from Stephen Scott Burns stating "[r]eceiving 100,000 pre-orders from commercial fleets for a truck like the Endurance is unprecedented in automotive history."

However, according to the analysis conducted by the Special Committee, by that time, 71% of the stated 100,000 pre-orders were from intermediaries or influencers rather than directly from commercial fleets. Additionally, the 100,000 figure included a verbal indication of interest from a customer who would agree to an "influencer" memorandum of understanding. It's worth noting that this memorandum of understanding was not a pre-order agreement or a letter of intent to purchase Lordstown's Endurance trucks. Instead, it was an understanding to assist Lordstown in generating leads to support the sale of up to 15,000 Endurance trucks by December 31, 2023. Importantly, this customer explicitly informed Lordstown that it didn’t have a fleet and did not intend to purchase any trucks.

Despite these nuances, in interviews with a research analyst and various media outlets in January and February 2021, Burns stated that the 100,000 pre-orders were submitted by "fleets" and described the pre-orders as "sticky."

Thus, the statements made by Lordstown Motors Corp. and Stephen Scott Burns regarding the increasing numbers of pre-orders from 27,000 to 100,000 were found to be materially inaccurate for several reasons.

First, despite assertions that pre-orders were primarily from fleet customers, as defined by Lordstown in SEC filings as "commercial or governmental organizations with three or more trucks," a significant portion of these pre-orders, ranging from 40% to 71%, were obtained from intermediaries or influencers. These intermediaries indicated they would encourage, facilitate, or influence the purchase of the Endurance but did not intend to purchase it for their use. This discrepancy suggests that Lordstown and Burns misrepresented the composition of pre-orders and the true nature of demand for the Endurance.

Second, Burns' characterization of these pre-orders as "very serious orders" or "sticky" was inaccurate because he knew that the pre-orders were non-binding, and customers were not obligated to purchase any trucks. This misrepresentation could have misled investors about the strength and stability of Lordstown's pre-order commitments.

Third, the pre-orders included large quantities from customers who, as Burns knew or should have known, had no apparent ability or intent to purchase such quantities of the truck. This discrepancy suggests that Lordstown and Burns misrepresented the credibility and reliability of certain pre-order commitments.

As a result, Lordstown and Burns inaccurately reflected the true nature of the demand for the Endurance, potentially misleading investors and the public about the company's prospects and financial health.

Charges Against Stephen Scott Burns

• The SEC's complaint, filed in the U.S. District Court for the District of Columbia, alleges that Burns violated the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933. Without admitting or denying the SEC’s allegations, Burns has consented to a settlement.
• Under the terms of the settlement, Burns has agreed to a permanent injunction, a payment of a $175,000 civil penalty, and a prohibition from serving as an officer or director of a publicly traded company for two years. However, it's important to note that this settlement is subject to court approval. Once approved by the court, the settlement will resolve the SEC's charges against Burns.

Key Takeaways For The Investors

As an investor, you must ensure that the disclosures companies registering with the SEC make in S-1 or S-8 are accurate and reliable. Further, you should be wary of the terms used in the SEC filings.  For instance, Lordstown and Stephen Scott Burns used terms such as LOIs, reservations, pre-orders, and "pre-sales" interchangeably indicating that they attributed the same meaning to such terms. The consistent use of such terminology was sought to convey to investors like you their significance in assessing potential demand for the Endurance electric pickup truck.