Coinbase executives accused of cashing out $4.2 billion, relocating to Texas in an attempt to salvage their situation?

Original authors: Decrypt , BloombergLaw

Original translation by: Yuliya, PANews

A recent lawsuit filed by Coinbase shareholders has once again thrust the company's management into the spotlight. The lawsuit accuses Coinbase executives of concealing crucial negative information for years and manipulating the stock price to cash out billions of dollars. Meanwhile, Coinbase is planning to move its registered office from Delaware to Texas, citing the unpredictable legal environment in Delaware.

This article provides a detailed overview 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 alleged $4.2 billion in insider trading.

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

The core allegation in the lawsuit is that Coinbase executives and investors deliberately concealed several significant problems within the company from the outside world for years, including:

• Compliance failure: Failure to effectively implement Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
• Security vulnerability: The vulnerability of the company's systems to data breach attacks.
• Regulatory investigation: The veracity of the investigations conducted by regulatory agencies into the aforementioned issues.

The plaintiff alleges that this information was intentionally concealed, artificially inflating the company's stock price, and that Coinbase's stock price subsequently plummeted after these issues were exposed. The plaintiff argues that Coinbase executives were aware of the problems but chose to conceal the truth and profit from them.

A similar case occurred last year in Delaware, where a judge heard a lawsuit against Coinbase filed by investors in 2023. The core claim was that Coinbase executives concealed material information while selling shares, and that this was "reasonably credible." The case is currently progressing slowly within the Delaware court system.

Coinbase shareholders are seeking billions of dollars in damages through this lawsuit, while also demanding seats on the company's board of directors and greater say in the board's policies and guidelines.

Coinbase has not yet responded to the lawsuit.

The lawsuit was filed two years ago, and Coinbase had previously attempted to terminate it.

The lawsuit began in 2023.

This shareholder derivative lawsuit, which began in 2023, is technically filed on behalf of Coinbase against Andreessen, Armstrong, and other executives. The lawsuit alleges that these executives chose a direct listing instead of an initial public offering (IPO) to prioritize providing liquidity to insiders rather than injecting much-needed capital into the company, thereby avoiding approximately $1 billion in losses by selling shares when internal valuations indicated the stock was overvalued.

These allegations are essentially insider trading charges, but legally described as a breach of fiduciary duty, rather than a securities law violation that can only be pursued in federal court. The lawsuit alleges that Andreessen, Armstrong, and their allies betrayed Coinbase by profiting by selling shares when internal valuations indicated the stock was overvalued. Coinbase board members explained at the time that they chose a direct listing because the company was in a “very strong capital position” at the time of the IPO. Furthermore, they argued that imposing lock-up periods on insiders would be counterproductive, as the direct listing structure requires existing shareholders to sell their shares on the public market.

Then last year, the Coinbase board formed a special litigation committee, purportedly composed of independent directors, in an attempt to terminate the lawsuit on the grounds of insufficient evidence. However, Coinbase investor Adam Grabski, on behalf of shareholders, filed a 72-page legal brief opposing the motion, pointing out that the investigation process was plagued by a wide range of conflicts of interest.

The briefing focused on committee member and angel investor Gokul Rajaram, as well as the Silicon Valley law firm Wilson Sonsini Goodrich & Rosati PC, which led the investigation. It stated that Rajaram had been involved in at least 50 investments in a16z over the past few years, and that Wilson Sonsini had close ties to Andreessen. During the 10-month investigation period alone, the firm represented a16z in 10 funding rounds, raising $700 million. Grabski argued that in Silicon Valley's highly transactional environment, expecting someone with vested interests in Andreessen to conduct an impartial investigation is unrealistic.

Caught in another controversy, previously accused of concealing compliance deficiencies and data breaches.

This is not the first time Coinbase has been embroiled in controversy for "deliberately" concealing risks.

In early 2023, after being accused of "significant failures" in its anti-fraud and anti-money laundering practices, Coinbase chose to pay $100 million to settle with the New York State Department of Financial Services (NYDFS). Under the agreement, $50 million was a fine, and the remaining $50 million was invested to strengthen its compliance programs, such as transaction monitoring and KYC rule enforcement.

According to the NYDFS disclosure at the time, Coinbase's compliance program was flawed, making 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 had a backlog of over 100,000 suspicious transaction alerts that went unreviewed, resulting in some flagged transactions not being processed for months. Coinbase was also criticized for its perfunctory compliance with KYC and customer due diligence requirements, deemed merely a formality and failing to adequately fulfill its obligations. The lawsuit documents stated that despite leadership being aware of these issues and being investigated, they continued to issue misleading statements regarding the platform's security and compliance.

In May of this year, Coinbase disclosed a major data breach, in which the sensitive information of approximately 69,000 customers was stolen, potentially resulting in losses of up to $400 million. Insiders at the platform had known as early as January that hackers had obtained sensitive personal information of exchange customers, including names, addresses, partial bank details, and identification documents, by attacking a third-party customer service provider, but only released it to the public months later. Although no passwords, private keys, or funds were leaked, the attackers used this data to launch targeted social engineering scams against customers. (Related reading: Coinbase's worst data breach ever exposed: Outsourced customer service staff secretly photographed tens of thousands of customer data, selling each photo for $200 )

Recalling the incident, hackers attempted to send a ransom note to Coinbase demanding $20 million worth of Bitcoin or they would release stolen customer data. Coinbase took a hard line, refusing to pay the ransom and launching a counterattack reminiscent of the movie "Ransomware." CEO Brian Armstrong stated, "We will not pay your ransom." He also announced a $20 million reward for any information leading to the attackers' arrest and conviction.

Despite these remedial measures taken by Coinbase, Coinbase shareholders believe that the company’s material misrepresentations and omissions were intentional or at least reckless, with the aim of artificially inflating Coinbase’s stock price.

Due to regulatory uncertainty, Coinbase has moved to Texas.

Due to growing uncertainty in the regulatory environment, Coinbase announced last month plans to move its registration from Delaware to the more cryptocurrency-friendly state of Texas.

In explaining the decision, Coinbase Chief Judge Paul Grewal (another defendant in the new lawsuit) pointed out that the uncertainty of the Delaware court system was a major reason for the company's departure. He stated that Delaware's legal framework had previously 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 influences our choice of state of registration. Texas has a strong culture that celebrates builders who are developing our economy and creating prosperity for everyone. They have also embraced cryptocurrency."

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