Lawsuit Alleges Crypto Mining Firm Hid Unprofitable Business Details From Investors

News | June 20, 2024 By:

On Friday, June 7, 2024, a second amended class action complaint was filed against Michael Levitt, Michael Trzupek, and Denise Sterling in the United States District Court for the Western District of Texas.

The complaint was brought on behalf of investors who had purchased securities of Core Scientific, Inc. or its predecessor entity, Power & Digital Infrastructure Acquisition Corp. between January 2022 and October 2022. Core Scientific operates blockchain computing data centers and engages in digital currency mining.

It is alleged in the complaint that the defendants failed to disclose material information related to Core Scientific’s business and financial performance, misleading investors. Specifically, the plaintiffs claim Core Scientific omitted trends showing its hosting business, which rents computing power and infrastructure to other digital currency miners, had very thin margins or was unprofitable for the past couple of years.

As electricity is one of the largest costs for digital currency mining, Core Scientific faced rising power expenses in late 2021. According to former employees cited in the complaint, to address this Core Scientific attempted to pass these higher energy costs through to its hosting customers. However, several clients disputed these charges, citing their long-term hosting agreements which fixed their power rates.

The filing also notes Core Scientific’s auditor, Ernst & Young, raised concerns about recognizing revenue from the disputed cost pass-throughs. As customers threatened legal action and terminated contracts, Core Scientific lost over 20% of its hosting business. The company was also engaged in litigation with bankrupt client Celsius Network over electricity surcharges.

In October 2022, Core Scientific announced it may not be able to continue operating due to financial difficulties partly related to the sharply lower bitcoin price and issues stemming from the power cost attempts. It ultimately filed for bankruptcy in December 2022.

The plaintiffs claim the defendants concealed the unprofitable hosting segment and risks of the power cost strategy from investors, violating securities laws. They are seeking damages for losses on Core Scientific stock purchased when material information was allegedly withheld.

Please contact BlockTribune for access to a copy of this filing.