Lordstown Motors was founded in 2018 by Steve Burns, the former CEO of the Workhorse Group – a developer of electric commercial vehicles. The company was named for the Lordstown, Ohio factory it bought from General Motors after the automaker said it would close the plant in response to flagging sales of key models. Lordstown’s commitment to building a new electric vehicle at the site saw many jubilant headlines proclaiming it as a victory for the American auto industry.

However, much of the new company’s shine was dulled in March 2021 with the publication of a scathing report by short-selling research firm Hindenburg Research. While Lordstown has publicly refuted the claims put by the report, the markets appear to have taken note of the problem – Lordstown’s Nasdaq ticker RIDE was, at its peak, trading at more than $30 per share but has since sunk below $10 per share.

Hindenburg Research has form in this field, which is one of the reasons why investors are taking note of this report. In 2020, the company identified problems with hydrogen trucking startup Nikola including an accusation that the company had faked a video of its truck driving under its own power by simply rolling it down a hill. This ultimately led to the resignation of Nikola’s founder Trevor Milton and a significant scaling back of a supply deal it had set up with General Motors.

For Lordstown, Hindenburg alleges that the company misled investors on both demand for its vehicles and its production capabilities. For example, Hindenburg has suggested that Lordstown’s claim that is has 100,000 pre-orders for its electric pickup truck is heavily exaggerated. It points to a 14,000-unit sale worth $735 million to a company called E Squared Energy – a company Hindenburg claims actually operates from a residential apartment in Texas with no operational vehicle fleet. Another example would be an apparent 1,000-truck order worth $52.5 million – Hindenburg says the startup that placed the order does not have a physical office address and the owner has described the deal as simply a “marketing relationship”.

Following the publication of the report, Hindenburg Research also released photos it had acquired of a Lordstown Motors test vehicle breaking down and setting on fire while being evaluated. This wiped even more value off Lordstown’s stock.

Hindenburg’s report has now led to multiple lawsuits being filed against Lordstown. Investors allege that the company knowingly continued to sell its stock while being aware that many of its claimed vehicle orders were, in fact, fraudulent. Court documents state that the suit is being brought because the company’s “actions have irreparably damaged Lordstown’s corporate image and goodwill”.

If the allegations are true, Lordstown would be another example of a company merging with a special purpose acquisition company (SPAC) to list stock publicly and generate investor capital, based on fraudulent information.

With the hype around electric vehicles at such a feverish level thanks to unicorn stocks such as Tesla, investors have been clamouring for more electric vehicle startups to fund. We have now seen a number of EV startups keen to leverage this willing investor capital by going public through a SPAC merger. This includes mergers between Lucid Motors and Churchill Capital, Faraday Future and Property Solutions, and Xos and NextGen Acquisition.

The fallout from the Lordstown report should serve as a warning to other investors looking to jump on the next hyped-up electric vehicle stock. Some firms will be willing to overstate their capabilities to win investor favour and generate capital – worrying about whether they actually have the tech to back up their claims at a later date. This is a risky approach and could see some EV startups fail before they even begin but, it should be noted, that even Tesla has engaged in overstating its production strengths previously but remains the leading EV company, having now ridden out the worst of the storm.