What happened
Shares of embattled electric-truck start-up Lordstown Motors (RIDE 5.81%) fell sharply on Friday, after The Wall Street Journal reported that the U.S. Department of Justice (DOJ) is probing the company.
Trading in the stock was briefly halted after the news was released. As of 11:45 a.m., shortly after trading resumed, Lordstown's shares were down about 9.5% from Thursday's closing price.
So what
The Journal's report didn't have much detail, but it's not hard to figure out why the DOJ is interested in Lordstown. The company was already in a couple of varieties of hot water after admitting that it may have exaggerated the number of pre-orders it has for its upcoming Endurance electric pickup.
Lordstown's shares have been under pressure since March, when short-seller Hindenburg Research released a report with several tough allegations. After an investigation commissioned by Lordstown's board, the company admitted last month that one of those allegations -- that it had exaggerated the number of orders it has for the Endurance -- had some merit. (Moments later, it announced that its CEO and CFO had left the company.)
Lordstown has been hoping to get its Endurance pickup into production by the end of the year. But when -- and whether -- the Endurance will be built is becoming an open question. Image source: Lordstown Motors.
Lordstown has acknowledged in regulatory filings that the Securities and Exchange Commission (SEC) has issued subpoenas regarding the company's move to go public last year, and specifically around its representations about pre-orders.
In light of today's report, it's not unreasonable to assume that the SEC has uncovered something that merits a DOJ investigation. It's not at all hard to see why that might be bad news for the company and its stock.
Now what
Auto investors holding Lordstown shares already had good reasons to be wary. Not only is the company under pressure from the feds, it also said in regulatory filings last month that it might not have enough cash to survive another year.
That warning, a so-called "going concern" notice that was inserted by Lordstown's auditors, should have been a giant red flag for those still convinced that the company will be able to challenge Ford Motor Company's (F 2.84%) electric F-150 Lightning at scale. The stock held up surprisingly well through the end of June, but today's report could do real damage. Trade this one very carefully.
