Coinbase Faces Shareholder Lawsuit Over Bankruptcy Risks and Insider Trading
1min read Coinbase, a prominent cryptocurrency exchange, is facing a shareholder lawsuit alleging it misled investors about bankruptcy risks and engaged in risky trading practices. The lawsuit, filed on February 18 in a New Jersey federal court by plaintiff Wenduo Guo, claims that Coinbase failed to disclose critical risks associated with digital asset custody, potentially leaving retail users as unsecured creditors in the event of bankruptcy.
The lawsuit contends that Coinbase positioned itself as a trusted custodian but downplayed the risks associated with digital asset custody. It points to the collapse of more than 75 crypto exchanges before Coinbase went public in 2021, which left customers without their funds. Despite repeated assurances from company leadership, the suit argues that Coinbase offered no greater protection against such risks.
Beyond bankruptcy concerns, the lawsuit accuses Coinbase of engaging in proprietary trading without properly disclosing this to investors. Guo claims that this was a desperate attempt to counter falling crypto prices, exposing the firm to further financial instability. The complaint also alleges that top Coinbase executives, including CEO Brian Armstrong, profited from insider knowledge, selling millions in stock while aware of the company’s vulnerabilities.
The lawsuit ties Coinbase’s troubles to the SEC’s 2023 lawsuit against the company, which alleged it listed unregistered securities and operated without proper regulatory approval. Guo argues that these mounting legal and regulatory pressures, combined with undisclosed internal risks, have led to substantial losses for the company’s shareholders. The lawsuit seeks damages and governance reforms to prevent future misconduct and has demanded a trial by jury.
Coinbase is also battling a class action in New York over alleged securities violations. Earlier this month, a U.S. judge ruled that Coinbase must face a lawsuit from customers accusing the exchange of illegally selling securities. The case, originally dismissed in 2023, was partially revived last year by an appeals court, allowing key accusations to move forward.
In May 2024, customers from California and Florida sued the exchange and CEO Brian Armstrong over similar allegations, identifying tokens like Solana, Polygon, Near Protocol, Decentraland, and Algorand as unregistered securities. Despite these legal troubles, Coinbase reported stronger-than-expected Q4 earnings in 2024, with its revenue surging 138% from 2023.
