Coinbase Executives Hit with Shareholder Lawsuit Over Alleged Downplaying of Bankruptcy Risks

Coinbase and several of its top executives are facing a shareholder lawsuit that claims they misled investors about the company's risk of bankruptcy, violating securities laws in the process.

The lawsuit, filed by Coinbase shareholder Wenduo Guo in a New Jersey federal court on February 18, accuses the crypto exchange and its leadership of failing to properly disclose key risks related to the company’s financial stability. Specifically, Guo alleges that Coinbase did not reveal that in the event of bankruptcy, customer assets could be considered part of the company’s bankruptcy estate, effectively making retail customers unsecured creditors.

The complaint highlights a concerning pattern in the cryptocurrency space, citing the collapse of at least 75 cryptocurrency exchanges prior to Coinbase’s public listing in April 2021. Guo argues that these failures left customers unable to recover their assets, yet Coinbase’s management allegedly downplayed or ignored similar risks.

“Despite repeated statements by Company management to the contrary, Coinbase was no different with respect to the risk of digital asset loss in the event of bankruptcy,” the lawsuit states.

In addition to this, the lawsuit claims that Coinbase engaged in proprietary trading to offset declining crypto prices, a practice described as “risky” and involving the use of the company’s funds to trade assets. Guo contends that the company failed to adequately disclose this risky activity to its investors.

Guo’s legal action also references the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Coinbase in June 2023, accusing the company of listing unregistered securities and failing to properly register with the regulatory body. Guo argues that these missteps led to significant financial losses, regulatory penalties, lawsuits, and a damaged reputation for Coinbase.

The shareholder suit demands a trial by jury and seeks damages, as well as corporate governance reforms to prevent similar misconduct from occurring in the future.

In addition to Coinbase, the lawsuit targets several of the company’s top executives, including co-founder Fred Ehrsam, CFO Alesia Haas, COO Emilie Choi, legal head Paul Grewal, accounting chief Jennifer Jones, and board members Fred Wilson, Mark Andreessen, Kelly Kramer, Gokul Rajaram, and Tobias Lütke. The suit also names former board member Kathryn Haun.

Meanwhile, Coinbase is already facing another legal challenge in New York, where it is accused in a class-action lawsuit of selling securities without registering as a broker-dealer. This latest shareholder suit further complicates the company’s legal landscape as it grapples with ongoing regulatory scrutiny and legal battles.