Securities Class Action Claims Coinbase Misled Investors Prior to Stock Listing

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A proposed class action lawsuit claims Coinbase Global, Inc. and its CEO and CFO artificially inflated the value of the company’s securities by failing to disclose certain risk factors to investors.

The 37-page lawsuit more specifically alleges that when the cryptocurrency platform’s common stock began publicly trading on the stock market in mid-April 2021, investors paid more for each share than they would have had Coinbase made truthful disclosures leading up to the direct listing.

According to the case, the company’s stock price plummeted by more than 26.4 percent in May 2022 when it was revealed that the crypto assets Coinbase held in custody for its customers could, in the event of a bankruptcy, qualify as the property of the bankruptcy estate instead of the customers’ property. Two months later, in July 2022, Coinbase’s stock price took another hit when Bloomberg reported that the company is facing a Securities and Exchange Commission (SEC) probe into whether it allowed Americans to trade unregistered securities.

The lawsuit argues that in light of these facts, Coinbase’s public statements in the lead-up to its direct listing were “materially false or misleading” and caused investors to be injured financially when the truth was eventually revealed.

The timeframe covering the complaint begins on April 14, 2021, when Coinbase’s common stock began trading on the NASDAQ via a direct listing. Per the suit, the documents filed with the SEC in connection with the listing represented that the cryptocurrency platform had “stored and custodied” over $90 billion in total fiat and crypto assets as of December 31, 2020. Importantly, the case alleges, neither the offering documents nor subsequent shareholder communications disclosed the fact that crypto assets held in custody for the platform’s customers could be found to be the property of Coinbase should the platform declare bankruptcy.

According to the lawsuit, this risk factor came to light on May 10, 2022, when Coinbase disclosed in its quarterly report that the company’s “failure to safeguard and manage our customers’ fiat currencies and crypto assets could adversely impact our business, operating results, and financial condition.” The suit relays that Coinbase explained to investors that it held in custody $256 billion in fiat currencies and cryptocurrencies on behalf of customers as of March 31, 2022. Per the case, Coinbase warned that if the platform were to declare bankruptcy, the bankruptcy court could find that the crypto assets held in custody by the company are the property of the bankruptcy estate, and not the customers.

The suit relays that on May 12, a Georgetown University Law Center professor published a draft of an article in which he explained that custodial holdings of cryptocurrencies—i.e., when a platform such as Coinbase holds a customer’s crypto assets on their behalf—are not protected by U.S. law. In other words, the professor warned, if a cryptocurrency exchange were to fail, the bankruptcy court may find that its custodial holdings are the property of the exchange and not its customers, the case says. If this were to happen, the customers would be treated as unsecured creditors and entitled only to a pro-rated distribution of the bankrupt company’s assets after secured or priority creditors have been paid, according to the article cited in the complaint. Moreover, the suit says, even if the court found that the exchange’s holdings were the property of its customers, they would be unable to access those holdings for an extended period of time.

According to the suit, Coinbase CEO Brian Armstrong acknowledged in a tweet commenting on the company’s disclosure that Coinbase “should have updated our retail terms sooner” and had failed to “communicate proactively when this risk disclosure was added.”

The case says that following the company’s May 10 disclosure, the price of Coinbase’s common stock dropped by 26.4 percent.

Per the lawsuit, the value of Coinbase’s stock fell another 21.08 percent after Bloomberg reported on July 25, 2022 that the company was facing an SEC probe into whether it had allowed the trading of digital assets that should have been registered as securities.

The case claims the defendants’ failure to disclose these facts has caused investors to experience “significant losses and damages.”

The lawsuit looks to represent anyone who purchased or otherwise acquired Coinbase securities anytime between April 14, 2021 and July 26, 2022 and was damaged upon the revelation of the alleged corrective disclosures.

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