Michael Saylors' Strategy Under Fire: Lawsuit After Massive $5,9 Billion Loss in Bitcoin

A California investor has accused Strategy, formerly known as MicroStrategy, and its executives of making false and misleading statements about the profitability of its Bitcoin treasury street, according to a complaint recently filed in the U.S. District Court for the Eastern District of Virginia.

In the 38-page document, Anas Hamza alleges that Strategy and its executives, including co-founder and Executive Chairman Michael Saylor, failed to disclose that the expected profitability of the firm's Bitcoin-focused investment strategy was overstated. The complaint does not specify damages, but alleges that the firm failed to disclose the extent of the losses it might have to recognize on its digital assets following the implementation of new accounting standards for BitcoinInstead, the company is said to have overstated its performance as a Bitcoin treasury street.

Hamza's lawsuit, which is being supported by attorneys from Pomerantz, also targets Strategy's CEO, Phong Le, and Chief Financial Officer, Andrew Kang. In a recent filing with the Securities and Exchange Commission, Strategy said it would "vigorously defend" Hamza's claims, but was unable to predict the outcome or cost of the lawsuit.

Strategy began hoarding Bitcoin in 2020 under Saylor’s leadership and currently holds approximately 576.000 Bitcoin, worth about $60,6 billion. In January, the company began tracking its Bitcoin holdings at fair value, reporting gains and losses as quarterly income.

In the first weeks of April, Strategy already warned that it did not expect a profit for the first quarter, partly due to a $5,91 billion drop in the value of its Bitcoin holdings. Later, a loss of $4,22 billion was announced, which equates to $16,49 per share.

Under a different accounting framework, where the Bitcoin holdings were classified as intangible assets, the company would only be required to recognize impairments if the asset’s price declined. Only if Strategy sold Bitcoin would the value of its Bitcoin holdings be marked up.

Strategy's decision to continuously monitor key performance indicators such as BTC Yield, in the spotlight, is seen as a way to cover up the risks of the transition to the new accounting standard. This measure was promoted as positive, despite the truths that lay beneath it.

It’s notable that the Financial Accounting Standards Board (FASB) approved fair value accounting for digital assets in 2023. Strategy has been pushing for this change, believing it would allow them to provide investors with a more relevant view of their financial position and the economic value of their Bitcoin holdings.

Frequently Asked Questions

Why did the investor sue Strategy?
The investor accuses Strategy of making false and misleading statements about the profitability of their Bitcoin treasury street, failing to disclose the full extent of potential losses.

What was Strategy's loss in the first quarter?
Strategy reported a loss of $4,22 billion in the first quarter, resulting in $16,49 per share.

What exactly does fair value accounting entail?
Fair-value accounting means that companies can track the value of assets like Bitcoin on a daily basis, with profits and losses reported as quarterly income.