A federal court in New York has allowed a class action lawsuit to proceed against crypto mining firm Stronghold Digital, over allegations the company misled investors in its initial public offering (IPO).
Lead plaintiff Mark Winter alleges Stronghold’s registration statement and prospectus contained materially false and misleading information about the company’s mining operations. That included its ability to generate revenue, according to a court order filed Thursday.
The lawsuit claims Stronghold misled investors about a certain supplier’s contract failure and the performance of their bitcoin miners, violating sections of the US Securities Act.
Specifically, Winter alleges Stronghold overstated its hash rate, which is a measure of the computing power of its mining equipment, while also understating its costs of production.
As a result of the alleged misrepresentations, plaintiffs argue they suffered damages when they purchased Stronghold stock at an artificially inflated price.
Stronghold first filed its IPO with the SEC in July 2021 before going public via the Nasdaq stock exchange three months later. Stronghold was initially listed at $26.50 per share under the ticker $SDIG, marking a 55% increase over the expected range of $16 to $18 per share.
SDIG was up more than 10% on the day to $8.08. The stock is up more than 87% year-to-date alongside most other competitors, though remains down more than 98% from its 2021 peak of $357, exchange data shows.
Stronghold’s defense
The bitcoin miner, along with its key executives, filed a motion to dismiss the lawsuit in December of last year.
“This entire case is premised on the illogical notion that a supplier’s failure to fulfill a contract with a company — subsequent to that company disclosing the risk of that very issue — somehow renders those disclosures materially false and misleading,” the company said in its December motion.
Stronghold acknowledged on Nov. 8, 2021, that it wouldn’t be able to obtain supplier MinerVa miners in line with the delivery schedule. This was followed by an earnings call on Nov. 30, where the company disclosed it had only 240 MV7 miners on hand but expressed it would receive all 15,000 miners within the first quarter of the following year.
The severity of the delivery problems and the discrepancy in numbers wasn’t fully revealed until March 2022, according to the filing Thursday.
“Because plaintiffs have identified at least one actionable misstatement or omission in the offering materials, the complaint survives the motion to dismiss,” Judge Ronnie Abrams wrote in the document.
Stronghold did not immediately return a request for comment.
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Source: https://blockworks.co/news/stronghold-digital-class-action