Original: Decrypt, BloombergLaw

Compiled by: Yuliya, PANews

Recently, a lawsuit filed by Coinbase shareholders has once again put the company's management in the spotlight. The lawsuit accuses Coinbase executives of concealing key negative information for years while artificially inflating the stock price to cash out billions of dollars. Meanwhile, Coinbase is planning to relocate its registered office from Delaware to Texas, citing the unpredictability of Delaware's legal environment.

This article details the background of the lawsuit involving massive insider trading allegations, past compliance and security risks, and Coinbase's latest moves in response to regulatory changes.

Coinbase Executives Sued by Shareholders for $4.2 Billion Insider Trading

The latest lawsuit filed in Delaware claims that Coinbase's leadership, including CEO Brian Armstrong and board member Marc Andreessen, sold $4.2 billion worth of stock while the company's stock price was overvalued. The plaintiffs argue that these profits constitute "lucrative insider trading."

The core allegations of the lawsuit are that Coinbase executives and investors deliberately concealed several significant issues about the company over the years, including:

• Compliance failures: Failure to effectively implement "Know Your Customer" (KYC) and Anti-Money Laundering (AML) regulations.

• Security vulnerabilities: The company's systems are susceptible to data breach attacks.

• Regulatory investigations: The true extent of regulatory scrutiny regarding the above issues.

The plaintiffs claim that this information was intentionally hidden, leading to an artificially inflated stock price, which subsequently plummeted when these issues were exposed. The plaintiffs believe that Coinbase executives were already aware of these issues but chose to conceal the truth and profit from it.

In a similar case, a Delaware judge heard a lawsuit against Coinbase last year, which was filed by investors in 2023, claiming that Coinbase's top executives sold stock while concealing significant information, and that this was "reasonable and credible." This case is still slowly progressing through the Delaware court system.

As a result, Coinbase shareholders hope to seek billions of dollars in damages through this lawsuit, while also demanding seats on the company's board and greater influence over board policies and guidelines.

Currently, Coinbase has not made any recent response to this lawsuit.

Lawsuit Started Two Years Ago, Coinbase Attempted to Terminate It

This lawsuit began in 2023.

The shareholder derivative lawsuit initiated in 2023 technically represents Coinbase in its claims against Andreessen, Armstrong, and other executives. The lawsuit argues that these executives chose to go public through a direct listing rather than an Initial Public Offering (IPO) to prioritize liquidity for insiders instead of injecting much-needed capital into the company, thus selling stock when internal valuations indicated that the stock was overvalued, avoiding approximately $1 billion in losses.

These allegations essentially fall under insider trading accusations but are legally framed as breaches of fiduciary duty rather than violations of securities laws that can only be pursued in federal court. The lawsuit claims that Andreessen, Armstrong, and their allies betrayed Coinbase by profiting from selling shares when internal valuations indicated that the stock was overvalued. At the time, Coinbase board members explained that they chose direct listing because the company's "capital situation was very good" at the time of listing. Moreover, since the direct listing structure requires existing shareholders to sell shares into the public market, imposing a lock-up period on insiders would be counterproductive.

Subsequently, last year, Coinbase's board established a special litigation committee allegedly composed of independent directors, attempting to terminate the lawsuit on the grounds of insufficient evidence. However, Coinbase investor Adam Grabski submitted a 72-page legal brief on behalf of the shareholders opposing this motion, pointing out that the investigation process was plagued by widespread conflicts of interest.

The brief focused on committee member and angel investor Gokul Rajaram, as well as the Silicon Valley law firm Wilson Sonsini Goodrich & Rosati PC responsible for the investigation, stating that Rajaram had participated in at least 50 a16z investments over the past few years, and that the law firm Wilson Sonsini had close ties to Andreessen. During the 10-month investigation period, the firm represented a16z in 10 rounds of financing, raising $700 million. Grabski argued that in Silicon Valley's highly transaction-dependent environment, it is unrealistic to expect someone with vested interests in Andreessen to conduct a fair investigation.

Another Controversy, Previously Accused of Concealing Compliance Deficiencies and Data Breaches

This is not the first time Coinbase has faced controversy for "deliberately" concealing risks.

In early 2023, Coinbase was accused of "significant failures" in its anti-fraud and anti-money laundering practices and chose to pay $100 million to settle with the New York State Department of Financial Services (NYDFS). According to the agreement, $50 million was a fine, and the other $50 million was to be invested to strengthen its compliance program, such as transaction monitoring and the implementation of KYC rules.

According to NYDFS at the time, Coinbase's compliance program had deficiencies that made it vulnerable to fraud, money laundering, and activities related to drug trafficking or child sexual abuse material. Regulators found that by the end of 2021, Coinbase's system had over 100,000 suspicious transaction alerts that had not been reviewed, causing some flagged transactions to be processed months later. At the same time, Coinbase was criticized for its KYC and customer due diligence requirements as being merely formalistic, failing to adequately fulfill its obligations. The lawsuit documents mentioned that although the leadership was already aware of these issues and was under investigation, they still issued misleading statements about the platform's safety and compliance.

In May of this year, Coinbase disclosed a significant data breach incident, where sensitive information of approximately 69,000 customers was stolen, potentially leading to losses of up to $400 million. Insiders at the platform had known as early as January this year that hackers had obtained sensitive personal information of exchange customers, including names, addresses, some bank details, and identification documents, through attacks on a third-party customer service provider, but this was made public months later. Although no passwords, private keys, or funds were leaked, attackers used this data to launch targeted social engineering scams against customers. (Related reading: Coinbase's Most Severe Data Breach Exposed, Outsourced Customer Service Employee Spied on Thousands of Customer Records, Selling a Photo for $200)

Looking back at this incident, the hacker attempted to send Coinbase a ransom note demanding $20 million in Bitcoin, or they would publicly disclose the stolen customer data. However, Coinbase took a hard stance, refusing to pay the ransom and retaliating in a manner reminiscent of the movie "Ransom." CEO Brian Armstrong stated, "We will not pay your ransom." He also announced a $20 million reward for any information leading to the arrest and conviction of the attackers.

Despite these remedial measures taken by Coinbase, shareholders believe that the significant false statements and omissions made by the company were intentional or at least reckless, aimed at artificially inflating Coinbase's stock price.

Relocating to Texas Due to Uncertainty in Regulatory Environment

Due to the increasing uncertainty in the regulatory environment, Coinbase announced last month its plan to relocate its registered office from Delaware to Texas, which is more friendly to cryptocurrencies.

Coinbase Chief Legal Officer Paul Grewal (another defendant in the new lawsuit) explained this decision, stating that the uncertainty of Delaware's court system was the main reason for the company's departure. He noted that Delaware's legal framework once provided consistency for businesses, but recent rulings have become unpredictable.

Brian Armstrong also stated on social media, "Coinbase has always been committed to increasing economic freedom, which has influenced our choice of state for registration. Texas has a strong culture that celebrates builders who are developing our economy and creating prosperity for everyone. They have also embraced cryptocurrencies."

For a long time, American companies have chosen to register in Delaware because the state's equity courts are known for resolving corporate disputes. However, in recent years, top American companies, including Tesla and Charles Schwab, have relocated to Texas in search of lower taxes and more business-friendly regulations. Tesla CEO Elon Musk even suggested in a post, "Never register your company in Delaware."

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