Coinbase Must Face Shareholder Lawsuit Over Regulator Risk Concerns, Judge Rules

• A federal judge ruled that Coinbase shareholders brought plausible allegations about how the exchange portrayed the chances the U.S. Securities and Exchange Commission might sue it.

• The judge dismissed most of the other allegations brought in the shareholder lawsuit.

A U.S. judge denied in part last week Coinbase’s request to dismiss a class action lawsuit from shareholders accusing the exchange of misleading them about its chances of being sued by the U.S. Securities and Exchange Commission.

A group of Coinbase shareholders sued the exchange in 2022, alleging the exchange “made materially false and misleading statements” about its operations and risk of regulatory action. United States District Judge Brian Martinotti, of the District of New Jersey, ruled Thursday that while the plaintiffs had a plausible case that Coinbase acted “negligently” when it came to regulatory action (the SEC did, in fact, sue Coinbase), they did not bring a plausible case for most of the allegations.

“The Court finds Plaintiffs have adequately alleged that Defendants misleadingly described a favorable picture of the improbability that the SEC would file an enforcement action by repeatedly emphasizing that the crypto assets they listed were not securities,” said in a court document.

In June 2023, Coinbase was sued by the Securities and Exchange Commission on allegations that the exchange violated the U.S. federal securities law. Coinbase also lost most of the motion to dismiss the SEC lawsuit, meaning the judge overseeing that case found the SEC brought plausible arguments that can be debated more deeply in court.

The class action lawsuit dates back to 2021, when the plaintiffs said they first began buying shares, but was later modified in July 2023. Coinbase filed a briefing related to its motion to dismiss in December 2023.

The recent document by Judge Martinotti said Coinbase’s motion to dismiss was granted in part and denied in part. Only count one “to the extent it is premised upon the Proprietary Trading Statements and the Bankruptcy Statements that tout customers’ trust in the Company, is granted” while all other counts were denied.

In a statement, a Coinbase spokesperson said, “the Court agreed that a significant portion of the plaintiff’s claims should be dismissed. It’s important to note that the remaining pieces are allowed to move forward because of the way this motion to dismiss works: the court draws inferences based on the plaintiff’s allegations rather than the reality of what happened. We remain confident that we are right on the facts and the law, and we look forward to proving the rest of our case. We appreciate the Court’s careful consideration.”