A suit filed in Delaware accuses Coinbase (NASDAQ: COIN) CEO and board members of insider trading that saved them over $1 billion by selling shares when the company went public, knowing they would lose value when negative information about the company came out.
The shareholder lawsuit, filed in a Delaware state court, alleges that Coinbase executives, including CEO Brian Armstrong, failed to disclose a disparity between the company’s internal valuation and perceived market value before it went public in April 2021, saving themselves a reported $1.09 billion as a result.
The Derivative Complaint, which is a legal claim filed on behalf of a business entity by one or more of its shareholders, was filed with the Court of Chancery of Delaware on May 1 by investor Adam Grabski and on behalf of Coinbase Global. As well as CEO Brian Armstrong, it names eight officers and directors of the company: Marc Andreessen, Surojit Chatterjee, Emilie Choi, Frederick Ernest Ehrsam III, Alesia J. Haas, Kathryn Haun, Jennifer Jones, and Fred Wilson.
The suit revolves around the defendants’ choice to put the digital asset exchange through a direct listing of existing shares instead of the more common initial public offering (IPO), the latter of which would have involved issuing new shares that potential dilute shareholder value and also typically requires a lockup period, preventing insiders from immediately selling their shares.
In contrast, the direct listing allowed Coinbase executives to sell their pre-existing shares as soon as the company went public: “The defendants were able to sell $2.9 billion worth of Coinbase shares made available to the public through a direct listing of the company’s stock on the Nasdaq exchange on April 14, 2021, and in the week that followed.”
Indeed, public filings show that Coinbase insiders have dumped hundreds of millions of dollars worth of stock since the direct listing. This included $300 million dollars worth of Coinbase stock dumped by CEO Brian Armstrong and another $111 million by CFO Alesia Haas.
In the process, the executives involved avoided $1.09 billion in losses that Coinbase’s non-fiduciary investors suffered in the five weeks after the listing when Coinbase’s market capitalization plummeted by more than $37 billion, according to the suit.
The price fell dramatically because the market was overestimating the company’s value, something the suit claims the defendants were aware of: “Management’s internal projections indicated value per share and an overall equity value that was dramatically lower than the pricing being realized on the private trading portal. In other words, there was a strong divergence between investor perceptions of Coinbase’s worth…and the value indicated by management’s own internal projections.”
The complaint accuses the company’s executives of using this information to their advantage, choosing a direct listing for this reason: “The Board and management pursued the Direct Listing, all the while receiving regular financial and operational updates.”
According to the suit, these actions by the board run counter to Delaware law, which expects that fiduciaries remain apprised of the business of the subject company but does not permit “fiduciaries trading on the basis of, and profiting from, such material, non-public information.”
Coinbase responded to the suit by calling it “frivolous” and “meritless,” whether this is true remains to be seen, but an equally appropriate word to use would be “embarrassing,” especially considering the timing.
The same day the Delaware suit was filed, a class action complaint was filed against Coinbase in California for unlawful biometric data collection practices. Both complaints came just a day before the company announced the launch of its international exchange platform, which will enable institutional users based in eligible jurisdictions outside of the U.S. to trade perpetual futures.
If that wasn’t awkward enough for Coinbase’s PR, all of these developments come amid an ongoing tussle with the Securities Exchange Commission (SEC) over digital asset regulation in the U.S., and an outstanding Wells notice from the SEC issued last March informing the company that an enforcement could be expected soon.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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