Microsoft is facing a legal battle after shareholders filed a proposed class-action lawsuit accusing the tech giant of ‘fraud’. The suit alleges that Microsoft inflated its stock price by hiding a slowdown in its crucial Azure cloud business while quietly pouring billions of extra dollars into artificial intelligence (AI) infrastructure. According to a report by news agency Reuters, the lawsuit has been filed in a Seattle federal court by a Michigan-based pension fund, the City of St. Clair Shores Police and Fire Retirement System.
Why shareholders have sued Microsoft
According to the complaint, Microsoft overhyped its AI advancements and its AI assistant, Copilot, to drive investor optimism. At the same time, the lawsuit claims the company downplayed the financial risks of its massive AI investments and its complex partnerships with tech companies, like ChatGPT creator OpenAI.
The lawsuit names several top Microsoft executives as defendants, including CEO Satya Nadella and Chief Financial Officer Amy Hood, the report said.
The legal action follows a massive financial hit to the company on January 29, when Microsoft shares plummeted 10% in a single day. The crash, which was Microsoft’s biggest single-day decline in nearly six years, erased $357 billion in market value after the company released its quarterly earnings report. The cracks in the strategy appeared when Microsoft released its financial results for the second fiscal quarter. Reuters said that there were two major red flags for investors. This first was slowing cloud growth as the revenue for Microsoft’s flagship Azure cloud ecosystem slowed down to 39%, dropping from 40% the previous quarter. Furthermore, the company projected that growth would slow even further, down to 37% or 38%, for the first three months of 2026.
Microsoft revealed a $37.5 billion in capital expenditures for just one quarter. This was a 66% increase from the previous year and higher than the $34.3 billion Wall Street analysts had expected. When confronted with the numbers, Microsoft blamed the slowing cloud growth on “capacity constraints.”
Shareholders demand accountability
The investors behind the lawsuit argue that Microsoft was not transparent about these internal bottlenecks. The pension fund claims Microsoft misled the public into believing it was perfectly positioned to profit immediately from its AI investments.
The lawsuit aims to represent anyone who purchased Microsoft stock during the “class period” between May 1, 2025, and January 28, 2026.
