The District of Columbia famously filed a civil lawsuit on August 31 alleging that Michael Saylor, the leading proponent of Bitcoin, had defrauded the District of $25 million in taxes. The price of the leading cryptocurrency has not yet been affected by the revelations in the case. However, they paint an intriguing image of the flamboyant promoter’s purported behavior as a conman who was so enthralled by his schemes that he couldn’t resist talking about them, a weakness that seems to have been his downfall.
The lawsuits claim that Saylor called other wealthy people who paid taxes in the District “fools” and urged friends to imitate him. The most stunning accusation against Saylor is that he allegedly recruited his subordinates at MicroStrategy to join forces in a complex scheme to perpetrate the fraud. Aware that Saylor was flagrantly avoiding millions in taxes and endangering the company he built, the management at the data analytics company submitted to the boss out of fear.
An earlier whistleblower allegation gave birth to the District case. The District has historically used the False Claims Act to go after contractors who overcharge or don’t finish construction projects, for instance. The District of Columbia changed the statute in 2021 to allow private residents to file lawsuits for tax evasion against “high-earning organizations and individuals,” with DC as co-plaintiff. The first action was brought by the whistleblower in August 2021, charging Taylor with fraudulently avoiding $25 million in payments. The lawsuit was sealed and remained private until the District filed a different action on the last day of August that essentially contained the same accusations.
It is obvious that the whistleblower had extensive contact with Michael Saylor, and given their understanding of the power struggles within MicroStrategy, they may have been a senior executive. The whistleblower’s story is rather in-depth, in fact. It claims that from 2013 to 2020, Saylor spent the most of her time in DC despite claiming to reside in Florida, a state without income taxes. The booklet is chock with of amusing tidbits that highlight Saylor’s love for the nation’s capital: How Saylor combined three opulent Georgetown waterfront apartments to create the 7,000 square foot penthouse he calls Trigate, as well as where he actually lived most of the time, the yacht and backup craft he docked in front of the residence, his frequent appearances at the prestigious Cafe Milano, and his addiction to flying around the world in MicroStrategy’s Bombardier Global Express private jet, for which the FAA maintains flight records that provide “an almost perfect representation of Saylor’s travel to and from the District” for the past 20 years.
According to the complaint, Saylor paid $13.1 million for Villa Vecchia, a bayfront Mediterranean villa in Miami Beach, in 2012. He soon obtained a driver’s license, registered to vote, and started paying his taxes in Florida. At the same time, he was spending the most of his time in Washington, DC, traveling to MicroStrategy’s offices in Tyson Corner, Virginia, and “indulging in the District’s social scene.” According to the complaint, “He even stated that his buddies from New York, California, or the District were ‘fools’ if they did not similarly purchase a residence in Florida and spend time there in order to dodge the personal income taxes levied by their respective states.”
The informant did extensive research to prove that Saylor spent most of the year at Trigate and only a small amount of time in Florida. Saylor, according to him, only cast in in three Florida general elections using absentee ballots delivered to him from his corporate headquarters in Virginia. The District’s lawsuit reproduces Saylor’s social media posts from 2012, after he claimed he was in Florida, as proof that he wasn’t moving. He proudly posts pictures of his Georgetown pleasure dome in the final phases of combining the surrounding units into opulent Trigate in them on Facebook. Taylor praises “my future house” in the captions and bemoans “how hard” it is to leave the residence on a lovely fall morning.
The whistleblower lawsuit gathers proof from social media posts, FAA flight data, and, most intriguingly, “witness testimony from his closest circle” to demonstrate how many days Saylor spent in Florida and Washington, DC, respectively, from 2013 to 2019. According to DC legislation, time spent traveling for business or pleasure where a person is only returning and forth to the District does not constitute as days away for tax purposes, thus you cannot claim that you are out of DC for half the year and therefore do not owe levies there. According to the complaint, Saylor spent between 270 and 331 days in DC between 2014 and 2019, including travel to and from the District. He never stayed in Florida for more than 71 days in a single year. Saylor is therefore far from having spent the necessary 183 days in Florida to be considered a resident of the state. Tracking his movements shows that he spent the majority of the days either physically present in DC or commuting in and out. 2012 was the sole exception. Even yet, Saylor spent 70 more days in DC than in Florida, so he was also liable for taxes there that year.
Saylor is being sued for large amounts
According to the District lawsuit, Saylor allegedly forged a devil’s bargain with MicroStrategy in order to continue the deception. According to the claim, the CFO determined that Saylor was actually residing in DC in 2014 by keeping track of the days she was present there and in Florida. His residence had been listed by MicroStrategy as Florida for years, even on the CEO’s W-2. Saylor was informed by the CFO (who is not named) that he could no longer “justify” hiding Saylor’s true residence. According to the complaint, “The CFO raised the subject of Saylor’s fraudulent tax evasion to Saylor as a potential cause of responsibility for the company.”
By consenting to have MicroStrategy declare his genuine residence, Saylor did not appease his CFO. Instead, the lawsuit claims, he devised a plan to enlist the company’s aid in hiding the fraud. He consented to take a modest salary of $1 each year going ahead. According to the plan, a situation like that would make it less likely to draw the attention of the DC tax officials. The benefits MicroStrategy gave Saylor for personal air travel, use of a car and driver, and a security detail were also significantly raised at the same time. Federal taxes due on these benefits were paid for by the corporation. The risk of misreporting Saylor’s tax condition was offset by receiving no salary but increased benefits, which comforted the CFO. The audit and compensation committee chairs allegedly gave their approval for the arrangement, according to the complaint.
In the District, these non-cash things would often be regarded as remuneration and subject to full taxation. However, the benefits weren’t disclosed in DC since Saylor claimed Florida residence. Evidently, Saylor and the CFO thought that substituting fringes for cash would ensure that the scam would remain undiscovered. The complaint claims that by masking Defendant Saylor’s ongoing failure to pay District taxes, the agreement “[enabled] Defendant Saylor’s fraudulent avoidance of his obligation to pay District taxes.”
The District’s response is more extensive. It claims that Saylor misrepresented his residency for years in Virginia before relocating to Florida. The AG wants that Saylor pay $25 million in overdue taxes, 10% yearly interest, and various penalties. Saylor must pay triple the amount in back taxes, interest, and penalties if he loses since the new fraud statute includes treble damages. The exact amount Saylor owes is not specified in the complaint. Additionally, MicroStrategy is being sued for an undetermined sum of money. According to the press notice dated August 31, the AG estimates that Saylor and the business would spend about $100 million total to resolve the accusations. Saylor would undoubtedly bear the brunt of the burden; treble damages on the overdue taxes alone would total $75 million.
If the District prevails in the lawsuit, the Whistleblower, who allegedly witnessed Saylor bragging about his intelligence firsthand, could be awarded up to 25% of the settlement sum paid by Saylor and MicroStrategy, or about $25 million.
Saylor responded to the lawsuit by stating, “A decade ago, I purchased a historic home in Miami Beach and relocated my family there from Virginia. Despite the fact that MicroStrategy is headquartered in Virginia, my personal and family lives in Florida, where I also vote, have served on juries, and where I also reside. I respectfully disagree with the District of Columbia’s stance and look forward to a just legal outcome.
MicroStrategy stated in a statement that the lawsuit included Mr. Saylor’s personal tax matter. The Company was not in charge of his daily business and was not in charge of his personal tax obligations. Additionally, the Company did not assist Mr. Saylor in evading his personal tax obligations.
The price of MicroStrategy shares plummets
As of mid-afternoon on September 2, MicroStrategy’s shares had dropped from $245 per share to $217 since the lawsuit’s filing, a fall of approximately 9%. But given its Bitcoin misadventure and weak fundamentals, that’s actually not that bad. The business reported a startling operating loss of $918 million for the second quarter on August 2. This includes an impairment charge of $903 million from its collection of approximately 130,000 Bitcoin. The fact that the underlying software platform is currently in the red, though, is the most worrying. Interest payments on the enormous, $2.4 billion in debt accumulated to buy Bitcoin have surpassed its meager operating profit. Because of the appalling performance, Saylor resigned as CEO and took on the additional responsibilities of executive chairman, chief among them being the acquisition strategy for Bitcoin.
At the current price of just under $20,000 per coin, MicroStrategy has spent a total of $4 billion on Bitcoin, leaving the company’s war chest with a value of around $2.6 billion. This expenditure was financed by both new equity and debt. Therefore, Saylor’s crypto risk has cost him $1.4 billion. Its holdings are currently only worth $200 million more than the $2.4 billion in bond loans that were used to finance the purchase. The first payment on the debts is due in 2025. Saylor’s only chance of paying off the loan is if the price of Bitcoin keeps rising, according to Ryan Ballentine of Bireme Capital, a company that is shorting MicroStrategy. He values the business at only a few hundred million dollars. It’s challenging to contest his analysis: The software company is losing money and has Bitcoin holdings with a net value of less than $200 million. Given that even positive operating profits would be eliminated by the $40 million in annual interest on the Bitcoin debt, the software company has little to no potential to become profitable in the future. The stock has also become much riskier because to Taylor’s massive leverage and bet on the company’s part that Bitcoin’s price will skyrocket despite months of sharp decrease.
The wonder is that MicroStrategy still has a bloated market cap of $2.5 billion after taking a hit from the litigation. It was selling for an astounding $4 billion in the middle of August. Even now, I believe the company is being valued higher than it truly is as a profitable business. Why then does it defy gravity? Simply put, MicroStrategy is a meme stock—and an especially resilient one as a result of Saylor’s cult following. The litigation hasn’t obliterated that following yet. However, Saylor has turned a once-viable business into a stand-in for the riskiest significant investment vehicle in history. The truth about the prophet who once pretended to be a seer while pushing Bitcoin may soon come to light. He is actually the same carnival barker who is accused of cheating on his taxes while believing he couldn’t possibly be caught, then tumbled off the stage by bragging about it to a whistleblower. MicroStrategy may eventually come under fire from the markets as well.
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