How Nikola Stock Got Torched by a Short Seller

The response has been different for Mr. Anderson’s most recent work, a 67-page report published Sept. 10. In the wake of that report, alleging a series of improprieties at Nikola Corp. NKLA 1.88% centering on founder Trevor Milton, the electric-truck startup’s shares have sunk 50%. U.S. securities regulators and the Justice Department launched an investigation into whether Nikola misled investors, and on Monday Mr. Milton said he resigned as executive chairman. The stock’s fall has helped the 36-year-old Mr. Anderson and his five-person firm, Hindenburg Research, which bet against Nikola shares, score sizable profits.

A Nikola spokesman pointed to previous comments by the company that the Hindenburg report was aimed at providing investors with “a false impression” to “negatively impact” the stock. Nikola said the report contained “false and misleading statements.”

Earlier this week, Mr. Milton said on Twitter that he intended to defend himself against “false allegations.” A spokesman for Mr. Milton said he “does not have any further comment on these matters at this time.”

Mr. Anderson, the founder of Hindenburg, says more bad news will emerge about Nikola, accusations that he contends could raise fresh questions about the due diligence of big-name companies, executives and investors who backed the company.

“The story is definitely not over,” Mr. Anderson says.

Nikola has drawn attention as investors have chased technology and other hot stocks amid the market’s recovery from its March lows. The enthusiasm reminds some of the late 1990s, when companies with great stories but few sales soared. Eventually, many of these companies’ shares collapsed in the spring of 2000.

‘There were points along the way I had to question our own sanity,’ says Mr. Anderson, who was nervous as he published his Nikola report.. Photo: Johnny Milano for The Wall Street Journal

The market’s rise has forced some short sellers and bearish investors to the sidelines, but Mr. Anderson’s experience is a reminder that money can still be made with bearish calls.

In June, Nikola merged with a public company in a so-called reverse merger. Riding growing excitement for electric vehicles, the stock soared. A strategic partnership with General Motors Co. briefly pushed Nikola’s market value above that of Ford Motor Co. , even though Nikola had yet to produce a single truck.

It took research from Mr. Anderson, an unknown in the investing world, to cut Nikola’s market value, which has fallen to under $11 billion from as high as $30 billion earlier this month.

“This is all happening because of his report,” says Gabriel Grego, who runs hedge fund Quintessential Capital Management, which placed its own Nikola short positions after reading Hindenburg’s research.

A native of Storrs, Conn., Mr. Anderson graduated from the University of Connecticut with a degree in international business. He spent a year as a volunteer ambulance medic in Jerusalem before joining data company FactSet Research Systems Inc. in New York, where he worked with large investment companies. He changed his view as he watched the credentialed investors operate.

How should companies like Hindenburg, which specializes in forensic financial research, be monitored for accuracy? Join the conversation below.

“I realized they were doing a lot of run-of-the-mill analysis, there was a lot of conformity,” he says.

“These were some of the most brilliant investors and P.h.D.s; I found it very intimidating,” Mr. Anderson says.

Mr. Anderson joined a firm investing for a wealthy family, discovering promising hedge funds and identifying problematic investment vehicles.

“I was always more interested in digging into those,” he says.

Starting around 2014, he developed a network of like-minded individuals eager to uncover questionable investment firms. He submitted whistleblower complaints to the government, hoping to score rewards that sometimes accrue to those who identify wrongdoing. Harry Markopolos, the fraud investigator who tried to warn authorities about Bernard Madoff’s Ponzi scheme and more recently has profited from whistleblower complaints related to alleged bank misdeeds, became Mr. Anderson’s model, he says.

That strategy can involve a long and often fraught process. It can take years for whistleblowers to be paid by the government, if they ever are compensated.

“I was living in a run-down place in Inwood,” he says, referring to an area in upper Manhattan. “I wasn’t doing a great job paying my bills.”

At the time, Mr. Anderson believed investment firms, rather than publicly traded companies, were more likely to yield frauds and other issues.

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“I thought these incredibly smart people were vetting companies,” he says.

After seeing a public company tumble as part of one of his fraud investigations, he switched gears. Mr. Anderson launched Hindenburg in 2017, searching for companies he believed were behaving in a fraudulent or illegal manner.

In 2018, overwhelmed by the mounting lawsuits related to accusations he had leveled at various firms, Mr. Anderson learned about a cannabis stock he believed was misleading investors. Bonding with Mr. Grego at a short sellers’ conference, the pair teamed up to short the stock. Mr. Anderson used the resulting windfall to hire a few associates to identify new targets. Hindenburg uses its own capital to make trades or brings in a partner willing to put up cash for a short trade. It doesn’t sell its research.

Mr. Anderson and a reporter for The Wall Street Journal are among the more than 20 defendants in a lawsuit brought by private-equity firm Catalyst Capital Group and Callidus Capital Corp. alleging a short-selling conspiracy related to a 2017 article about Catalyst. A Journal representative has said the news organization is “confident in the fairness and accuracy” of its reporting. Mr. Anderson says: “We stand by our research on the subjects 100%.”

Some of Hindenburg’s work has led to losses. The firm alleged problems at Canadian mining company New Pacific Metals Corp. , but the stock has climbed as silver prices strengthened. A representative of the company wasn’t immediately available for comment.

As recently as June, Mr. Anderson knew little about Nikola. But two well-connected individuals—a former Nikola business partner and another person close to the company—began sharing texts, emails and a former employee’s communications related to Mr. Milton and the company, raising questions about Nikola’s operations, Mr. Anderson says. The Hindenburg team tested various public claims of Mr. Milton and the company, such as that Nikola had extensive proprietary technology, concluding that many were misleading or inaccurate.

Mr. Anderson came to believe Nikola had staged a video showing one of its trucks cruising at a high speed. A former Nikola business partner concluded that the video was a ruse—Nikola had towed the truck to the top of a hill and filmed it rolling down the hill in neutral, he said.

Nikola founder Trevor Milton resigned Monday as the company’s executive chairman. Photo: massimo pinca/Reuters

“This three-year-old video of a Nikola prototype is irrelevant except for the fact that the short seller is trying to use it for its main thesis,” a company spokesman says.

Nikola adds that the truck shown had functional batteries and other parts. Nikola said the video, titled as showing the truck “in motion,” never stated the prototype was driving under its own power. Nikola also has said its newer trucks are able to be driven.

Nikola boasted blue-chip investors, including hedge-fund manager and company director Jeff Ubben, making Mr. Anderson wonder if he was missing something. Former GM executive Stephen Girsky was on Nikola’s board and is now the company’s executive chairman. The company also had various deals with companies like Anheuser-Busch InBev SA and GM, which called Nikola “one of the most innovative companies in the world.” GM Chief Executive Mary Barra has defended the company’s due diligence.

“There were points along the way I had to question our own sanity,” Mr. Anderson says.

He was nervous as he published his report on Hindenburg’s website and shared it with others. “I know people can lose their jobs, their careers,” he says. “People will lose money, I’ll be threatened with lawsuits.”

The report said Mr. Milton had exaggerated Nikola’s progress on key technology, including on hydrogen-powered semi-trucks, misled partners and claimed to have proprietary technology, among other accusations.

Nikola and Mr. Milton denied allegations of fraud. Nikola has said it contacted and briefed the Securities and Exchange Commission regarding Hindenburg. Nikola said it had retained the law firm Kirkland & Ellis LLP.

Mr. Anderson says Nikola’s issues extend beyond Mr. Milton. He argues that Nikola will have difficulty raising financing and that its brand has been compromised. Nikola declined to comment on its brand or financing.

Mr. Anderson won’t say how much he has made shorting Nikola. “It’s been a big win,” he says. “We are short and still are short.”

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

Appeared in the September 24, 2020, print edition as 'Short Seller Who Hit Nikola Has Big Payday.'