According to a recent lawsuit, Disney shareholders have accused the media giant's leadership of misleading investors with "a fraudulent scheme designed to hide the extent of Disney+ losses." The lawsuit was lodged the day before Disney shares closed at a nine-year low of $82.47 per share.
The complaint was filed by New Jersey-based Stourbridge Investments on Aug. 23 in a federal court in Delaware. It claims that Disney management under then-CEO Bob Chapek, who was fired from his post in late 2022, tried to hide the "staggering costs" the company incurred while attempting to boost the number of subscribers on its new streaming service Disney+ to fulfill its promise of becoming profitable by the end of 2024.
Bob Iger, who retired from Disney after 15 years as chief executive, has agreed to serve as CEO for two more years. He replaced Chapek, who took over as Disney CEO in February 2020.
According to investors, they were misled by statements from Chapek, particularly one dated December 2020 which said that "Disney+ has exceeded our wildest expectations" and "bolstered our confidence" despite questionable profitability forecasts.
The suit also mentions a "controversial" reorganization of Disney's media and entertainment operations that gave Chapek "near complete control over the company's strategic decisions around content."
Chapek led the company through the Wuhan coronavirus (COVID-19) pandemic, but Disney disappointed investors in November 2022 with an earnings report that showed continued losses at Disney+, its streaming media unit. (Related: Disney announces price hikes for Disney+ and Hulu ad-free plans to compensate for several box-office flops.)
Susan Arnold, chair of Disney's board, said the Board has concluded that as Disney "embarks on an increasingly complex period of industry transformation, Iger is uniquely positioned to lead the company through this crucial period."
Disney facing another lawsuit over alleged "cost-shifting scheme"
Disney is involved in another investor suit over a presumed "cost-shifting scheme" in its streaming division.
The lawsuit also claims that it obstructed a deal between TSG Entertainment Finance and 20th Century Studios, which Disney owns, to boost Disney+ and juice its stock price.
In the Stourbridge Investments suit, the plaintiff named Chapek, who ran Disney from 2020 to 2022, Iger, Christine McCarthy, former chief financial officer, and Kareem Daniels, ex-Media & Entertainment Distribution chairman.
According to Stourbridge Investments, "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." Shareholders were also made to believe that 2024 Disney+ targets were achievable when they were not.
In 2022, Disney reported that it missed analyst estimates by wide margins on revenue, sales and earnings. According to the complaint, Disney also reported a decline in its average revenue per Disney+ subscriber because more customers subscribed through a discounted bundle with its other services.
The bundled offering made up about 40 percent of domestic subscribers, effectively proving that Disney was relying on short-term promotional efforts to boost subscriber growth while also affecting the platform’s long-term profitability.
Despite those headwinds, Chapek went "all in" on the platform, announcing a major reorganization of the company’s media and entertainment operations. The shareholder claimed that the move was a "dramatic departure from Disney's historical reporting structure and was hugely controversial within the company because it took power away from creative content-focused executives and centralized it in a new reporting group" led by Daniels.
The suit also said that Iger undid many of his predecessor's decisions after returning to work again for Disney. The complaint concludes that Disney’s "wrongful acts and omissions" were responsible for the "precipitous decline in the market value" of the company’s shares.
Earlier in August, Iger reported that Disney+ lost 146.1 million subscribers during the most recent quarter, a 7.4 percent decline from the previous quarter. According to reports, Disney has taken a $3.7 billion hit over the past 12 months ending June 30 from its streaming services, which include Disney+, ESPN+ and Hulu.
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