Coinbase, a popular cryptocurrency exchange platform, has recently made headlines after a shareholder filed a stockholder derivative complaint against some of the company’s executives and board members, including CEO Brian Armstrong and prominent venture capitalists. The suit alleges that these defendants profited from inside information during the company’s public listing, potentially saving over $1 billion in losses.
In a stockholder derivative complaint, a suit is filed against a company on behalf of its stockholders. In this particular case, Coinbase shareholder Adam Grabski, who bought shares on the first day of the crypto exchange’s public listing, filed the suit in the Delaware Court of Chancery. According to the complaint, the defendants sold $2.9 billion worth of Coinbase shares made available to the public through a direct listing of the company’s stock on the Nasdaq exchange on April 14, 2021, and in the week that followed.
The suit argues that if the company had opted for an initial public offering instead of directly listing on the exchange, the defendants would have been prevented from selling their shares, and the value of the shareholdings would have been diluted. It further claims that the defendants sold their shares before disclosing information, which negatively affected the share price—it fell by more than 37% by May 18. This alleged inside information relates to the compression of the company’s revenue margins during the first fiscal quarter and the issuance of a dilutive convertible offering.
The company lost over $37 billion in market value after these unfavorable disclosures. However, the defendants reportedly sold $2.93 billion of stock before the price fell, preventing a loss of over $1 billion to themselves. The suit charges breach of fiduciary duty, unjust enrichment, and demands payment of damages to the company with interest, return of ill-gotten gains to the company, and reimbursement of the plaintiff for expenses.
Coinbase has responded to the case, with a spokesperson stating, “As the most popular and only publicly traded crypto exchange in the US, we are at times the target of frivolous litigation. This is an example of one of those meritless claims.”
This suit was filed on the same day as a class-action suit over alleged violations of Illinois privacy laws in its Know Your Customer procedure. Despite these legal challenges, the company launched the Bermuda-based Coinbase International Exchange on May 2. As the blockchain future unfolds and marketplaces like Coinbase continue to evolve, it will be crucial to keep an eye on legal developments and their potential implications for industry insiders and investors alike.