Strategy Faces Class Action Over Bitcoin Accounting Claims
Summary of Developments in Litigation and Financial Position
Strategy is embroiled in a class action lawsuit alleging it misled investors regarding the risks associated with its Bitcoin strategy and the implications of newly implemented fair-value accounting rules. This legal action comes on the heels of a reported substantial loss of USD 4.22 billion (roughly AUD 6.54 billion) in the first quarter, which the plaintiff contends was predictable due to the accounting changes that the company previously portrayed as favourable, while downplaying potential volatility.
In conjunction with its latest acquisition of 7,390 Bitcoin, valued at over AUD 1.18 billion, Strategy disclosed the filing of this lawsuit on May 16 in the US District Court for the Eastern District of Virginia.
Details of the Lawsuit
According to an SEC filing submitted on Monday, Strategy intends to "vigorously defend" itself against the allegations, but acknowledged its inability to predict the lawsuit’s outcome or assess the potential financial repercussions of the proceedings.
The focus of the lawsuit centres around Strategy’s adoption of fair-value accounting for its Bitcoin assets, a change sanctioned by the Financial Accounting Standards Board (FASB) in the previous year. This accounting shift contrasts with the older model, which treated Bitcoin as an intangible asset, incurring impairment charges only when values declined. In contrast, fair-value accounting mandates quarterly market adjustments, necessitating firms to account for both gains and losses in their financial statements.
While Strategy publicly endorsed this change, asserting that it would provide investors with a "more relevant view" of its financial position and Bitcoin portfolio, the lawsuit claims the firm downplayed the associated volatility that could arise from this new accounting method. Concurrently, it highlighted metrics such as "BTC Yield," which tracks Bitcoin accumulation per share.
In early April, Strategy cautioned that it did not anticipate a profitable first quarter, citing an unrealised loss of nearly USD 6 billion (approximately AUD 9.3 billion) attributed to its Bitcoin holdings. Soon after, the company announced an actual net loss of USD 4.22 billion, equating to USD 16.49 per share (AUD 25.5).
Under the leadership of Michael Saylor, Strategy has solidified its position as the largest corporate holder of Bitcoin, amassing approximately 576,000 BTC, currently valued at over USD 60 billion (AUD 93 billion).
In the context of these developments, it’s crucial for investors and stakeholders to monitor both the ongoing legal challenges and the company’s significant Bitcoin accumulation strategy as it navigates this tumultuous financial landscape.