A federal judge has denied Coinbase’s attempt to dismiss a class action lawsuit filed by shareholders, who argue that the largest U.S. cryptocurrency exchange misled them about the likelihood of facing legal action from the Securities and Exchange Commission (SEC). U.S. District Judge Brian Martinotti in Newark, New Jersey, made the decision, highlighting ongoing litigation that began with the SEC’s civil lawsuit against Coinbase on June 6, 2023, for operating what it deemed an unregistered securities exchange.
The lawsuit had an immediate impact on Coinbase’s market value, with its share price dropping 12% on the day the SEC lawsuit was filed. Judge Martinotti’s ruling supports the shareholders’ claims that Coinbase and its senior executives painted an overly optimistic picture of the regulatory risks involved. He pointed out that Coinbase’s communications suggested the crypto assets listed on their exchange were not considered securities, which may have misled investors about the severity of SEC scrutiny.
Furthermore, Judge Martinotti allowed shareholders to proceed with claims that Coinbase misrepresented the safety of customer assets stored with the company, particularly in the event of a bankruptcy. This decision follows a significant 26% drop in Coinbase’s share price on May 11, 2022, after the company updated its disclosures and reported a larger-than-expected quarterly revenue decline.
However, the judge dismissed allegations that Coinbase falsely denied engaging in proprietary trading. Brian Armstrong, Coinbase’s CEO, along with several other executives, were named as defendants in the lawsuit.
Following the ruling, Coinbase expressed its intention to continue fighting the charges, stating on Friday, “We remain confident that we are right on the facts and the law, and we look forward to proving the rest of our case.” This ongoing legal battle underscores the complex and evolving regulatory landscape that cryptocurrency exchanges must navigate.