Disney & Former CEO Bob Chapek Named in Lawsuit Accusing Executives of Misleading Investors About Disney+

    According to a lawsuit filed in US District Court for the Central District of California, former Disney CEO Bob Chapek is among a list of defendants that also includes The Walt Disney Company, current CFO Christine McCarthy, and former Entertainment Chief Kareem Daniel, who are accused of “misleading investors and concealing the true cost of the Disney+ platform”, via Bloomberg Law.

    The lawsuit is a securities class action on behalf of all purchasers of the Disney common stock between December 10, 2020 and November 8, 2022. Chapek was fired on November 20, 2022.

    The lawsuit takes issue with the October 2020 restructuring of the Company, which the lawsuit alleges was “a dramatic departure from Disney’s historical reporting structure”. The lawsuit says the restructuring was “hugely controversial within the Company because it took power away from the creative content-focused executives and centralized it in a new reporting group led by defendant Daniel who reported directly to defendant Chapek”.

    Disney Media and Entertainment Distribution (DMED) was born and a fraudulent scheme resulted. Disney+ faced a series of headwinds that remain to this day, although Iger says he’s focused on turning things around for Disney’s streaming business. The lawsuit says that Disney worked to conceal the difficulties of the Disney+ business and “engaged in a fraudulent scheme designed to hide the extent of Disney+ losses and to make the growth trajectory of Disney+ subscribers appear sustainable and 2024 Disney+ targets appear achievable when they were not.”

    The lawsuit says that Disney “used the newly created DMED to inappropriately shift costs out of the Disney+ platform” and onto the legacy platform, hidden under the DMED umbrella.

    DMED, under the direction of Chapek and Daniel and with the knowledge of McCarthy, debuted content created for Disney+ initially on a legacy platform in order to shift marketing and production costs onto that platform. Under the newly reorganized Company, the initial costs of marketing campaigns were generally recognized in the DMED distribution platform of initial exploitation, with allocation of programming and production costs driven by distribution of the relevant content across windows. As part of a scheme to make Disney+’s financial performance appear more successful than it was, defendants aired certain shows that were supposed to be Disney+ originals – such as the mystery show The Mysterious Benedict Society and the medical drama Doogie Kameāloha, M.D. – first on legacy television networks such as the Disney Channel. By doing so, a significant portion of the marketing and production costs of the shows were shifted away from Disney+ and on to the legacy platforms. Despite this cost-shifting scheme, defendants repeatedly represented during the Class Period that platform distribution decisions were made based on different reasons, such as customer preferences and what was best for the business commercially.
    Text of lawsuit

    The lawsuit continues, targeting the 2020 Investor Day presentation where McCarthy advised that the Company expected to have 230-260 million Disney+ subscribers by the end of 2024 and that the platform would achieve profitability. The lawsuit alleges that Chapek, McCarthy, and Daniels made materially false and misleading statements during the presentation, which helped boost the stock to $180 per share by the end of December 2020.

    The lawsuit says that Chapek and McCarthy continued to say that the 230-260 million subscriber figure was correct in subsequent earnings calls, but alleges that the statements were false and misleading, in part, because Disney+ was suffering from decelerating subscriber growth and that true costs were hidden by DMED and how Disney utilized legacy platforms as outlined in the block of text above. Essentially, the lawsuit says that there was a scheme to make platform distribution decisions not based on consumer demand, but based on the desire to hide the true costs of getting Disney+ off the ground.

    The lawsuit notes that Disney stock is still suffering from the misleading statements made by Chapek and McCarthy, with the latest significant slide in value coming last week following their Q2 2023 earnings report.

    The lawsuit seeks to become a class action lawsuit and is asking the court to award damages.

    As always, keep checking back with us here at BlogMickey.com as we continue to bring you the latest news, photos, and info from around the Disney Parks!

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