Disney Sued Over “Fraudulent Plan” To Mislead Investors

The Walt Disney Company is certainly no stranger to lawsuits.

In recent years, we’ve seen Disney celebrities like Scarlett Johansson sue over contracts, Annual Passholders filed a suit over blockout dates, plus Disney itself recently sued the Governor of Florida over First Amendment violations and more.

Disney investors filed a federal lawsuit in California on May 12th accusing the company of “engaging in a fraudulent scheme designed to hide Disney+ costs and make forecasts that it would be profitable by 2024 believable,” according to The Hollywood Reporter.

The suit calls out former Disney CEO Bob Chapek’s apparent “cost shifting scheme” that first aired certain shows on legacy television networks instead of Disney+ as intended. This was allegedly done to hide that Disney+ was “suffering decelerating subscriber growth, losses, and cost overruns.”

Disney shifted priorities during the pandemic to put more of a focus on streaming — something that then-CEO Chapek went “all-in” on, going so far as to reorganize the company’s media and entertainment division. The new Disney Media and Entertainment Distribution (DMED) branch had become responsible for monetizing global content.

But investors say that this was a “dramatic departure from Disney’s historical reporting structure” and that it was rather controversial within the Company. The new structure took power out of the hands of creatives and put it into the hands of Chapek’s right-hand man, Kareem Daniel. The complaint alleges that together, the two “exerted near complete control over the company’s strategic decisions around content.”

According to the suit, Chapek and Daniel misled investors about the success of Disney+ multiple times from December 2020 to November 2022. They reportedly hid the “true costs of the platform” and the difficulty of maintaining subscriber growth, along with claiming it was still on track to achieve profitability by the end of 2024.

In addition, investors say there was also a fraudulent plan to debut shows like The Mysterious Benedict Society and Doogie Kameāloha, M.D., on the Disney channel instead of Disney+. The complaint alleges, “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 platform.”

Also mentioned in the suit are comments made by Chapek during a December 2020 earnings call, where he said, “Disney+ has exceeded our wildest expectations with 86.8 million subscribers as of December 2nd. This success has bolstered our confidence in our continued acceleration towards a DTC-first business model.”

Disney later acknowledged a slow in subscriber growth in 2021, along with reporting missing analyst estimates on revenue, sales, and earnings in November 2022. Just before Chapek was ousted from Disney, the Company’s direct-to-consumer division reported an operating loss of $1.47 billion.

Once Iger returned to Disney, he made the announcement that improving steaming services was his “number one priority,” putting power back into the hands of creative executives. During the 2023 Q2 earnings call, we learned that Disney+ has 157.8 million subscribers, down from 161.8 million subscribers in December 2022.

It’s unclear how this lawsuit might affect Disney+ and the rest of The Walt Disney Company. As of now, Disney hasn’t made any public comments about the suit. We’ll keep an eye on this developing situation, so stay tuned to AllEars for more.

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