Coinbase faces shareholder lawsuit over SEC risks

By Jonathan Stamp

(Reuters) – A federal judge has rejected Coinbase's request to dismiss a class action lawsuit filed by shareholders who accused the operator of the largest U.S. cryptocurrency exchange of downplaying the likelihood of a lawsuit by the U.S. Securities and Exchange Commission (SEC).

U.S. District Judge Brian Martinotti in Newark, New Jersey, issued a ruling Thursday, 15 months after the SEC's June 6, 2023, civil lawsuit accusing Coinbase of operating an unregistered securities exchange. Coinbase's share price fell 12% that day.

Martinotti said shareholders had made a sufficient case that Coinbase and its top executives had defrauded them by “painting a positive picture of the unlikelihood that the SEC would take enforcement action by repeatedly emphasizing that the crypto assets they listed were not securities.”

In his 50-page decision, Martinotti said shareholders could also argue that Coinbase misrepresented the risk that customers could lose assets invested with the company if the company filed for bankruptcy.

Coinbase's share price fell more than 26% on May 11, 2022, a day after the company announced its disclosure requirements and reported a larger-than-expected decline in quarterly revenue.

The judge dismissed allegations that Coinbase falsely denied that it engaged in proprietary trading. Coinbase CEO Brian Armstrong and several other executives are also defendants.

Coinbase said in a statement on Friday: “We remain convinced that we are correct on the facts and the law, and we look forward to proving the rest of our case.”

Lawyers for the shareholders did not immediately respond to requests for comment.

In March, a federal judge in Manhattan denied Coinbase's motion to dismiss the SEC's lawsuit.

The proposed class action lawsuit, led by Swedish pension fund Sjunde AP-Fonden, will apply to Coinbase shareholders from April 14, 2021, to June 5, 2023.

The case is In re Coinbase Global Inc Securities Litigation, U.S. District Court for the District of New Jersey, No. 22-04915.

(Reporting by Jonathan Stempel in New York; Editing by Jonathan Oatis)