Lawsuit Against Strategy Over Securities Violations
A lawsuit has been filed against Strategy, previously known as MicroStrategy, by an investor based in California, Anas Hamza. The lawsuit alleges violations of federal securities regulations.
The complaint, submitted on Friday in the U.S. District Court for the Eastern District of Virginia, accuses the firm and its prominent leaders, including co-founder and Executive Chairman Michael Saylor, of knowingly presenting misleading information about the company’s financial health related to its Bitcoin investments.
Details of the Allegations
Hamza’s 38-page legal document outlines claims that Strategy did not adequately inform investors about the extent of potential losses on its digital holdings after adopting fair-value accounting standards. The investor contends that the company engaged in overly optimistic projections regarding its performance as a Bitcoin treasury management firm.
The lawsuit also names CEO Phong Le and CFO Andrew Kang as defendants. While the exact damages sought in the complaint are not specified, Hamza’s legal representation, Pomerantz law firm, is pursuing the case vigorously.
Company’s Response
In a recent filing with the Securities and Exchange Commission, Strategy indicated its intention to defend against Hamza’s allegations vigorously while also acknowledging uncertainty regarding potential legal costs and the outcome of the case.
Background on Strategy’s Bitcoin Investments
In 2020, under Saylor’s guidance, Strategy began accumulating substantial amounts of Bitcoin, amassing approximately 576,000 Bitcoins, valued at around $60.6 billion at today’s rates. The company transitioned to fair-value accounting for its Bitcoin holdings earlier this year, including recognizing gains and losses in quarterly financial results.
However, this move has been scrutinized, particularly after Strategy reported a $5.91 billion reduction in the market value of its Bitcoin assets in the first quarter, resulting in an astonishing net loss of $4.22 billion, or $16.49 per share, during that period alone.
Prior to this accounting shift, the firm used a different model for its Bitcoin investments that only required impairment reporting in cases where the asset price fell, marking up its Bitcoin value only upon sale.
Metrics and Accounting Standards
The company has emphasized metrics such as BTC Yield, which shows the ratio of Bitcoin holdings to outstanding shares, suggesting a strategy that may have downplayed the risks associated with fair-value accounting transitions. The Financial Accounting Standards Board affirmed the fair-value accounting approach for digital assets in 2023, a change that Strategy had publicly supported, claiming it would offer a clearer perspective of its financial standings and the economic worth of its Bitcoin assets.
As of now, Pomerantz has not offered additional comments regarding the situation, and inquiries from Decrypt have gone unanswered by Strategy.
