Coinbase Executives Misled Shareholders About Public Listing, New Lawsuit Alleges

·3 min read
Steven Ferdman

Coinbase (COIN) made history last year when it became the first crypto exchange to go public in the U.S. Now, a shareholder wants the exchange’s executives to pay damages to the firm for allegedly mismanaging its public listing, according to a complaint filed with a federal court in Delaware.

The complaint, filed with the U.S. District Court in Delaware, was made by Donald Kocher on behalf of Coinbase Global, Inc. It alleges the company’s leadership made “false and misleading statements” in the firm’s public filings ahead of its direct listing in April 2021. Those statements allowed investors to purchase company shares on the Nasdaq stock exchange without the involvement of intermediaries like Wall Street investment banks, he claims.

Kocher accuses nine former and current Coinbase officers, including CEO Brian Armstrong, Chief Financial Officer Alesia Haas and board member Marc Andreessen (co-founder of VC firm Andreessen Horowitz), of violating federal securities law, abusing their power, causing financial harm to the firm and “gross mismanagement.”

“Coinbase’s business, goodwill and reputation with its business partners, regulators and shareholders have been gravely impaired,” said the complaint, filed on Aug. 4.

A shareholder can sue executives on behalf of the company, in what is called a shareholder derivative suit like this one. Coinbase can be sued this way because it is publicly traded.

This lawsuit is the latest in a series of litigious actions taken by Coinbase investors against the exchange in recent months. On Thursday, an aspiring class action lawsuit was filed in the U.S. District Court of New Jersey, accusing Coinbase of, among other things, allowing U.S. persons to trade unregistered securities.

Coinbase is currently being investigated by the U.S. Securities and Exchange Commission (SEC) over the alleged sale of securities, a probe that was strengthened by a separate insider trading action involving a former Coinbase employee. The crypto exchange is also trying to send to arbitration two separate lawsuits filed by disgruntled investors.

Read more: SEC Calls 9 Cryptos 'Securities' in Insider Trading Case

Allegations

The lawsuit filed in Delaware, where Coinbase was incorporated, states the company made misleading statements in its registration form with the SEC, filed in February 2021, months before the direct listing. The suit points specifically to the alleged failure of Coinbase’s growth strategy, referred to as “flywheel” in the file.

“Our unique approach draws retail users, institutions and ecosystem partners to our platform, creating a powerful flywheel: retail users and institutions store assets and drive liquidity, enabling us to expand the depth and breadth of crypto assets that we offer, and launch new, innovative products and services that attract new customers,” Coinbase said in its SEC registration statement.

But the increased volume on Coinbase ruptured its “flywheel” cycle, the suit alleges, adding that the crypto exchange increasingly suffered system disruptions and delays due to heavy demand. However, the complaint only references six such disruptions in 2019 and 12 incidents in 2020 in support of its claim. Coinbase went public in 2021.

Kocher’s suit also alleges Coinbase executives violated the Securities Act of 1933, which compels companies to provide “full and fair disclosure of the character of securities sold in interstate and foreign commerce.”

Aside from damaging the company’s image and reputation, the suit alleges, “Coinbase has been, and will continue to be, severely damaged and injured by the Defendants’ misconduct.”

The file says compensation and benefits paid to the named executives and board members who violated the securities law is unjust enrichment. It also states that losses in market capital and costs of defending the company against legal action is damaging Coinbase, and asks a jury to award damages to the firm from the defendants (and cover Kocher’s legal costs).

This is not the first time Coinbase leaders have been called out for mismanagement: an unsuccessful petition circulated in June by a group of Coinbase employees sought to replace three executives.