Disney Accused of “Fraudulent Scheme” to Hide Massive Streaming Losses

Clear Facts:

• Shareholders allege Disney, under then-CEO Bob Chapek, operated a “fraudulent scheme” to mask Disney+ losses and inflate subscriber count expectations.
• The lawsuit cites questionable restructuring decisions, giving Chapek almost total control over content-centric decisions.
• Disney’s streaming platforms, including Disney+, ESPN+, and Hulu, have reportedly faced losses amounting to $3.7 billion over the past year.

Disney is under fire as shareholders accuse the company of orchestrating a “fraudulent scheme” to underreport the losses of its streaming platform, Disney+.

This lawsuit was filed by Stourbridge Investments on Aug. 23 in a Delaware federal court, alleging that under the leadership of then-CEO Bob Chapek, Disney intentionally obscured the vast expenses it racked up as it sought to increase Disney+ subscribers, with the hopes of achieving profitability by 2024.

The case was registered just a day before Disney’s shares dipped to a nine-year low of $82.47 each – a stark contrast to its value of $100 after Bob Iger succeeded the dethroned Chapek the previous November.

Shareholders contend that Chapek’s declarations, especially one in December 2020 where he claimed that “Disney+ has exceeded our wildest expectations” and “bolstered our confidence”, were misleading in light of questionable profitability projections.

Adding to the accusations, the lawsuit references a substantial and “hugely controversial” overhaul of Disney’s media and entertainment sectors, granting Chapek almost unilateral power over the company’s content-centric strategic decisions.

The Hollywood Reporter has also shed light on a parallel investor lawsuit against Disney.

This second case alleges a deceptive “cost-shifting scheme” in Disney’s streaming department. It further suggests that Disney thwarted an agreement between TSG Entertainment Finance and 20th Century Studios (a Disney subsidiary) to artificially inflate the Disney+ platform and its stock value.

Within the Stourbridge Investments lawsuit, not only is Chapek (Disney’s head from 2020-2022) named, but Bob Iger, former CFO Christine McCarthy, and previous Media & Entertainment Distribution chairman Kareem Daniels are also implicated.

The plaintiffs argue that Disney obscured the truth about Disney+ losses, painting a rosy picture of its growth trajectory and 2024 targets, despite evidence to the contrary.

Subsequent to Disney conceding that subscriber growth had tapered in 2021, the corporation disclosed that it failed to meet revenue, sales, and earnings predictions set by analysts.

The lawsuit further states, “The company also reported a decline in its average revenue per Disney+ subscriber, as more customers subscribed through a discounted bundle with the Company’s other services,” emphasizing that these promotional efforts were harming the platform’s future profitability.

Despite these setbacks, Chapek remained undeterred, announcing a comprehensive restructuring of Disney’s media and entertainment branches.

The lawsuit claims this was a significant shift from Disney’s established reporting practices, drawing internal criticism as it stripped creative professionals of their authority, consolidating it within a newly-formed reporting group helmed by Daniel.

The case also underscores that Iger, who had his contract extended till 2026, reversed many of Chapek’s decisions upon his return to the company.

Ultimately, the lawsuit concludes that the company’s “wrongful acts and omissions” significantly reduced the market value of Disney’s stocks.

Disney, when approached, did not offer an immediate comment.

Earlier this month, Iger announced that Disney+ saw a drop of 146.1 million subscribers in the latest quarter, marking a 7.4% fall from the preceding quarter.

Over the last year ending June 30, Disney’s streaming services, which includes Disney+, ESPN+, and Hulu, suffered a staggering $3.7 billion setback, as reported by Forbes.

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