Equinix Faces Another Fraud Suit After Judge Allows First To Proceed

Equinix, the world's largest data center REIT, is facing a new lawsuit accusing its leaders of accounting fraud. The complaint comes one month after a federal judge denied Equinix’s motion to dismiss an earlier lawsuit stemming from the same allegations. 

Filed Friday in Northern California federal court by Equinix shareholder Boris Benkovski, the latest lawsuit accuses top executives at the company of “collective engagement in fraud” by intentionally manipulating the firm’s accounting to artificially inflate a key measure of profitability. 

The suit — a shareholder derivative complaint, in which a shareholder alleges that a corporation’s leadership has harmed the company — lists 11 current and former Equinix executives and board members as defendants, including CEO Adaire Fox-Martin and Executive Chairman Charles Meyers. 

The accusations of financial malfeasance stem from a report published by short seller Hindenburg Research in March 2024 alleging that Equinix’s leadership has for years used an “accounting trick” to artificially inflate the firm’s adjusted funds from operations, or AFFO, a key profitability metric for REITs.

Equinix has denied the allegations leveled by Hindenburg, but the report has now prompted two lawsuits from shareholders. In the first suit, a federal judge in California last month denied Equinix’s request to dismiss the case, finding that the evidence gathered by Hindenburg was sufficiently credible for the case to proceed.

“The defendants point to no specific factual inaccuracies in the Report that would undermine its reliability or raise doubts as to whether the plaintiff’s counsel here properly investigated the Report’s reliability,” U.S. District Judge Vince Chhabria wrote. 

According to Hindenburg's report, Equinix intentionally misled investors by categorizing the company’s spending in a way that falsely inflated AFFO. Equinix did this by intentionally misclassifying maintenance expenses as “growth capex,” giving the impression that the company is spending less to maintain its existing assets than it actually is, the report says. Hindenburg estimated the REIT overstated its 2023 AFFO by at least 22%. 

The report also points to the fact that executive compensation at Equinix is tied to AFFO and alleges that the firm’s leadership was motivated to manipulate the metric for personal gain. 

“We estimate that Equinix's manipulation of maintenance capex has resulted in a cumulative $3 billion boost to AFFO since its 2015 conversion to REIT status,” Hindenburg wrote in its report. “Equinix’s questionable AFFO accounting has contributed to an estimated $295.8 million in stock award grants to top executives who have personally benefited from these accounting games.”

Citing interviews with former Equinix executives and other employees, the report provided examples of ways Equinix leadership has classified routine maintenance costs as growth capital expenditures. This includes putting new serial numbers on refurbished equipment so it could be listed as new and classifying expenses like replacing batteries and lightbulbs as capital improvements — practices that the report says made some employees uneasy. 

“That’s really on the edge,” one told Hindenburg, according to the report.

Following the report’s publication, Equinix announced that its board’s audit committee would launch an independent investigation into the allegations. The investigation, led by law firm WilmerHale and AlixPartners’ forensic accounting practice, didn't identify any accounting inconsistencies or errors that would require an adjustment to previous financial statements, according to Equinix.

The company also revealed it has received a subpoena from the Securities and Exchange Commission and would be making changes to how it reported capex going forward. 

In May, a class-action suit was filed against Equinix and its senior executives on behalf of investors who claimed they were misled by its accounting practices. That lawsuit, like the derivative complaint filed Friday, relies heavily on evidence from Hindenburg’s report to argue that Equinix’s financial reporting practices amounted to fraud. 

While Equinix declined to comment on either pending lawsuit directly, a company spokesman pointed to the results of its board’s investigation last year in a written statement to Bisnow.  

“Based on the findings of the independent investigation, the Audit Committee concluded that Equinix’s financial reporting has been accurate, and that the application of its accounting practices has resulted in an appropriate representation of its operating performance,” the spokesperson said. 

Equinix and its attorneys pushed back against Hindenburg’s allegations more directly in a motion to dismiss the class-action suit. 

In court filings, Equinix questioned Hindenburg’s credibility as a financially motivated short seller and emphasized the report’s reliance on allegations from anonymous sources. The company argued that questions about the accuracy of its AFFO numbers are largely a matter of opinion, as it has discretion over how to classify certain spending. Equinix also claimed to have disclosed that some recurring expenses focused on efficiency improvements would be counted as capex.  

But a federal judge in California largely rejected these claims. In a January ruling denying Equinix’s request for dismissal of the litigation pertaining to its AFFO reporting, Chhabria deemed Hindenburg’s reporting to be sufficiently credible and corroborated by other sources for the class action to move forward. 

“[A] securities fraud complaint is not automatically doomed just because it relies primarily or exclusively on a short-seller report quoting anonymous sources,” Chhabria wrote. “In all, the complaint raises a strong inference that Equinix misclassified routine recurring capital purchases — like chillers, batteries, and lightbulbs — as non-recurring to artificially inflate its AFFO numbers in a way that misled investors.”

While Chhabria denied Equinix’s request to dismiss elements of the suit related to manipulating AFFO, he did dismiss other elements of the suit that also hinged on the Hindenburg report.

Along with manipulating financial metrics, the short seller had accused Equinix of selling customers more data center capacity than it actually had access to. Those allegations were included in the class-action suit, but the judge sided with Equinix, which had argued oversubscribed capacity is a standard business practice that posed no risk to customers.  

Equinix reported last week that it brought in $8.7B in revenue in 2024 and had AFFO of $3.4B, an 11% increase over the prior year. 

The REIT has been growing its development pipeline to take advantage of the booming demand for data center capacity coming from Big Tech's artificial intelligence arms race. Executives said on its earnings call last week that it has 62 major projects underway, 16 of which are hyperscale campuses. Half of its 25 largest deals last year were related to AI.