A Coinbase (NASDAQ: COIN) shareholder is suing company management, saying growing pains and breakdowns caused by its public offering induced disruptions for users trading on the exchange. In a suit filed in Delaware on August 4, 2022, plaintiff Donald Kocher accused former and current Coinbase officers of “breaches of fiduciary duties, unjust enrichment, abuse of control and gross mismanagement.”
Kocher is suing Coinbase executives on behalf of Coinbase itself—something that’s possible as a “derivative action” since, as a verified shareholder, Kocher is a part-owner of the company. This means any damages awarded would be paid to Coinbase.
Nine defendants are named in the suit, including Coinbase officers (at the time of listing) CEO Brian Armstrong, CFO Alesia Haas, and CAO Jennifer Jones. and board members Marc Andreessen, Fred Ehrsam, and Kathryn Haun. Before joining Coinbase and the blockchain world, Haun had been a federal prosecutor investigating cybersecurity, organized crime, and Bitcoin-related cases.
The complaint alleges that Coinbase’s user base rapidly expanded prior to the company’s IPO in 2021. This, in turn, caused several incidences of delays and disruptions to traders. Coinbase had promoted itself as “powered by a robust backend technology system” that was integral to its growth strategy—a “flywheel” model designed to attract new business and users organically, at minimal marketing expense.
However, promotional efforts related to the public listing caused Coinbase’s marketing budget to skyrocket from US$24 million in 2019 to $196 million in 2021. The combination of service disruptions and ever-increasing operating expenses meant that potential investors attracted to Coinbase’s Nasdaq listing were making a far riskier purchase than they realized. Kocher alleges this represents a serious misrepresentation of the facts in Coinbase’s SEC Registration Statement and a breach of the 1933 Securities Act.
Public listing brought Coinbase profits…and a lot of legal scrutiny
This suit is the latest in a series of legal and regulatory actions targeting Coinbase since it went public in April 2021. Coinbase was the first notable “crypto” company to go public and, as a result, is experiencing the extra scrutiny from regulators and investors that comes with the territory. Investors unhappy with management decisions can challenge in court in the hope of redress or forcing executive/board changes, while regulators can take a closer look at operations in the interests of consumer protection. Many of these complaints detail disruptions traders have experienced while attempting to use the platform.
In July 2022, the U.S. Securities and Exchange Commission (SEC) charged three men, including Coinbase executive Ishan Wahi, with insider trading. This case also included criminal charges from the U.S. Attorney’s Office in New York’s Southern District.
It has also faced attempts at class-action lawsuits over whether assets it listed were unregulated securities and accusations by some in the BSV industry that it had failed to alert potential investors of risk from a potential lawsuit from Bitcoin creator Dr. Craig S. Wright.
Dr. Wright did indeed file suit in England’s High Court against Coinbase (as well as Kraken) in May 2022 over the exchanges’ use of the name “Bitcoin” in their materials. Using this name to trade and promote the BTC asset represented a “passing off” of a false product for another—as the original creator of Bitcoin under the pseudonym “Satoshi Nakamoto,” Dr. Wright says only BSV can truly be called Bitcoin. While Coinbase has been a publicly-listed company for over a year now, Kraken is still considering its options.
Other exchanges are likely watching Coinbase and its legal challenges closely as they wonder if the financial and marketing benefits of a public listing outweigh the threats. Exchanges have been by far the most profitable businesses in the Bitcoin and digital asset world, creating a situation where most of the industry’s energy has poured into creating and promoting new assets, rather than building real-world use cases for existing ones.
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