Judge Rules Coinbase Must Face Shareholder Lawsuit Over SEC Risks

A federal judge in the United States has told Coinbase that it must face the class-action lawsuit filed by shareholders, which accuses the crypto exchange of misleading them about the likelihood of being sued by the US Securities and Exchange Commission (SEC).

Coinbase had attempted to dismiss the lawsuit but US District Judge Brian Martinotti concluded that the shareholders' claim that the exchange and its executives had deceived them by presenting "a favorable picture of the improbability that the SEC would file an enforcement action" was sufficient. The shareholders also repeatedly asserted that listed crypto assets were not securities.

In his 50-page ruling, Martinotti permitted shareholders to proceed with claims that Coinbase misled them about the risk of customers losing their assets stored with the company in the event of a bankruptcy filing.

"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," the court document states.

Martinotti granted count one "to the extent it is premised upon the Proprietary Trading Statements and the Bankruptcy Statements that tout customers' trust in the Company" but denied all other counts.

The SEC sued Coinbase in June 2023, alleging Coinbase operated illegally without registering since 2019 and for handling cryptocurrency transactions whilst evading disclosure requirements meant to protect investors.

In a statement, a Coinbase 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."

In June, Coinbase told the SEC that it planned to subpoena SEC Chair Gary Gensler's personal communications related to crypto over the duration of his term as chair, as well as four years before his appointment.

Later that month, the SEC described the subpoena request as an "improper intrusion" into Gensler's private life.

In August, the SEC advised a federal judge to reject Coinbase's subpoena, describing it as "breathtakingly broad" and criticized the exchange for their search of “essentially all documents that in any way relate to crypto.”