Coinbase and top execs face securities class action over Nasdaq listing

Regulation

A Coinbase shareholder has filed a securities class action against Coinbase for allegedly misleading investors ahead of its public listing about the company’s financial state and resilience as a crypto trading platform.

Filed by law firm Scott + Scott in California Northern District Court on Thursday, the class action names Coinbase shareholder Donald Ramsey as a plaintiff, both individually and on behalf of all other investors similarly situated. 

Ramsey is pursuing his claims under the United States Securities Act and has presented evidence drawn from Coinbase’s regulatory filings with the Securities and Exchange Commission (SEC), company press releases, analyst reports and other publicly disclosed information about the exchange.

Alongside the company itself, the class action names CEO Brian Armstrong, CLO Paul Grewal and other top executives as defendants, as well as several of its venture capital backers.

Ramsey accuses Coinbase and its executives of making “materially misleading statements” in their offering materials at the time of the public listing and offering positive statements that “lacked a reasonable basis.” The class action alleges that:

“At the time of the Offering: (1) the Company required a sizeable cash injection; (2) the Company’s platform was susceptible to service-level disruptions, which were increasingly likely to occur as the Company scaled its services to a larger user base.”

Ramsey further alleges that once the alleged discrepancies between self-presentation and reality came to public light, Coinbase’s share price fell accordingly. Citing events in mid-May, when Coinbase conceded it needed to raise funds and announced plans to raise $1.25 billion through a convertible bond sale, Ramsey emphasizes that the company’s stock sharply declined by close to 10% over two trading sessions.

The class-action marshals evidence from contemporary media reports in mid-May, citing a Forbes’ report on the bond sale announcement:

“Investors were also likely surprised by the timing of the issue, considering that Coinbase just went public in mid-April via a direct listing (which doesn’t involve issuing new shares or raising capital), signaling that it didn’t require cash. So the company’s decision to issue bonds a little over a month later is likely raising some questions.

Ramsey’s class action also points to the technical difficulties on the platform on May 19, when a surge of traders hoping to “get their money out” during a bearish period in the crypto markets experienced “delays […] due to network congestion.”

As Cointelegraph reported at the time, delays in Ether (ETH) and ERC-20 token withdrawals ostensibly due to congestion on the Ethereum network were experienced that day by users on both Coinbase and Binance. While not indicating the reason, the Gemini exchange also announced that it would be taking emergency maintenance actions to correct ongoing issues. 

Related: ETH developer Virgil Griffith back in jail after allegedly checking Coinbase account

The class action argues that these kinds of service-level technical issues are critical and damaging for the company’s claims to be the easiest place to buy and sell crypto in the retail market. The complaint emphasizes this all the more so, given that the company is reliant on transaction fees to “generate nearly all of its revenues.” 

By the time Ramsey commenced the class action, Coinbase stock was trading at $208 per share compared to its opening price of $381 on April 14.

Counsel for the defendants had reportedly not yet appeared as of Thursday. Cointelegraph has reached out to Coinbase representatives for comment and will update this article accordingly.

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