A group of investors or shareholders of The Walt Disney Company have filed a lawsuit against The Walt Disney Company, Bob Chapek, Bob Iger, Christine McCarthy, Kareem Daniel, Susan Arnold, and other Disney executives for damaging the company.
The 63 page claim was filed by Stourbridge Investments LLC on behalf of a number of Disney shareholders and The Walt Disney Company.
It accuses The Walt Disney Company and its executives of violating the Exchange Act, breaches of fiduciary duty, insider trading and misappropriation of information, unjust enrichment, and waste of corporate assets.
Legal analyst Andrew Esquire joined financial and box office analyst Valliant Renegade to break down the lawsuit.
He explained, “So we’ve seen the other lawsuits like the TSG lawsuit, which talks about Disney+, which talks about this shift to streaming and their loss of revenue from their breach of contract. But it’s that element that is in there, within that lawsuit, as well as within the previous pension fund lawsuit talking about this kind of funny accounting. This kind of Hollywood accounting that’s going on with shifting costs from Disney+ to legacy media. So that is one of the big allegations, here.
“And when they do that, when they make those allegations they say this damaged shareholders,” he continued. “So this a shareholder lawsuit. It’s a little bit different than TSG because TSG was a financier, was a business partner. This is actually shareholders who are actually suing on behalf of the company itself because they are saying, ‘Hey, look, you as a board, as the leaders, as the CEO had a duty to Disney.’ So they’re suing actually, technically on behalf of not just the shareholders themselves, but on behalf of the company saying you have damaged the company by hiding the loses in your public statements, in your press releases, in your earnings calls.”
He went on, “The statements you have made that were misleading about Disney+ were damaging to us as investors. As investors we’ve been harmed by the lies you’ve been spouting about Disney+, specifically about the growth trajectory that you projected it to go to 230, 260 million [subscribers].”
“You actually said it was going to hit profitability by next year, by 2024, and obviously that was a lie. Not only was it a lie, but it was a lie that Chapek knew was a lie, that Disney knew was a lie, the whole board knew was a lie. But they kept parroting this for a long time,” he elaborated.
While that is the old element from previous lawsuits, Esquire then detailed what’s new in this lawsuit, “Now, these board members or rather the higher-ups, executives, particularly McCarthy, Kareem Daniels, and Chapek, they’re under scrutiny for selling their stock.”
“So they sold a significant amount of stock during this period of time in which Disney+ was booming. So before the stock bust they sold. Well, there’s now an allegation in this complaint, in this lawsuit of insider trading.”
Esquire reiterated, “This is new new. This is something that was not seen before. Is that the individuals are being named and saying, hey, Bob Chapek, [Christine] McCarthy, you guys are insider trading. That’s the allegation in the lawsuit.”
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Esquire then shared his opinion that the lawsuit “will survive a motion to dismiss.” He explained, “Meaning it’s not a frivolous lawsuit. There’s certainly enough reasonable basis, right? Which is what we look at as lawyers for the basic bar to pass, you know to pass the bar and get in court. There’s a reasonable basis for these allegations.”
“And frankly, they’ve submitted a large amount of evidence from their public filings, their proxy statements, and things that are regulated by the SEC,” he relayed.
He continued, “And to be clear this is a federal lawsuit that is really taking action under various provisions under the Securities and Exchange Act. So these are essentially securities allegations brought by the shareholders that they are violating securities law.”
Esquire further broke down the lawsuit in a two-hour livestream on his Legal Mindset YouTube channel.
As noted by Esquire, this lawsuit comes in the wake of film financier TSG Entertainment suing the company for breach of contract and claiming Disney “tried to use nearly every trick in the Hollywood accounting playbook to deprive us out of hundreds of millions.”
The TSG claim specifically accuses 20th Century Fox Film Corporation and The Walt Disney Company of breach of contract, breach of implied covenant of good faith and fair dealing, intentional interference with contractual relations, and inducing breach of contract.
Back in May, The Walt Disney Company, Bob Chapek, Christine McCarthy, and Kareem Daniel were sued by Local 272 Labor-Management Pension Fund.
That lawsuit alleged the defendants “were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, and were aware of, or recklessly disregarded, the false and misleading statements being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws.”
It goes on to specifically accuse the defendants of being “provided with copies of the documents alleged herein to be false and misleading before or shortly after their issuance, participated in conference calls with investors during which false and misleading statements were made, and had the ability and opportunity to prevent their issuance or cause them to be corrected. Accordingly each Individual Defendant is responsible for the accuracy of the public statements detailed therein and is, therefore, primarily liable for the representations contained therein.”
It specifically accused the company of engaging in a fraudulent scheme involving Disney+, “During the Class Period, defendants repeatedly misled investors about the success of the Disney+ platform by concealing the true costs of the platform, concealing the expense and difficulty of maintaining robust Disney+ subscriber growth, and claiming that the platform was on track to achieve profitability and 230-260 million paid global subscribers by the end of fiscal year 2024.”
It goes on to assert, “In truth, during the Class Period, Disney+ was never on track to achieve the 2024 profitability and subscriber figures provided to investors and such estimates lacked a reasonable basis in fact. To conceal these adverse facts, defendants engaged in a fraudulent scheme designed to hide the extent of Disney+ losses and to make the growth trajectory of Disney+ subscribers appear sustainable and 2024 Disney+ targets appear achievable when they were not. Specifically, defendants used the newly created DMED to inappropriately shift costs out of the Disney+ platform and onto legacy platforms.”
It alleges, “As part of a scheme to make Disney+’s financial performance appear more successful than it was, defendants aired certain shows that were supposed to be Disney+ originals – such as the mystery show The Mysterious Benedict Society and the medical drama Doogie Kameāloha, M.D. – first on legacy television networks such as the Disney Channel. By doing so, a significant portion of the marketing and production costs of the shows were shifted away from Disney+ and on to the legacy platforms.”
What do you make of The Walt Disney Company now facing a lawsuit from shareholders on behalf of The Walt Disney Company? What do you make of the allegation that the company was involved in insider trading?
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