In a significant legal setback for Coinbase, a federal judge has ruled that the company’s executives must face a shareholder lawsuit alleging they downplayed regulatory risks related to the U.S. Securities and Exchange Commission (SEC).
The ruling, issued on September 5, 2024, denies Coinbase’s request to dismiss the class action suit.
The lawsuit, initiated on May 10, 2023, by investors Sjunde AP-Fonden, Ryan R. Firth, and Zvia Steinmetz, accuses Coinbase of misleading shareholders about the potential risks of an SEC enforcement action.
Judge Brian Martinotti found that the shareholders’ claims were sufficiently detailed to proceed, particularly focusing on accusations that Coinbase falsely portrayed the SEC’s likelihood of pursuing legal action.
This development comes 15 months after the SEC filed a civil lawsuit against Coinbase, alleging the company operated an unregistered securities exchange.
The SEC’s lawsuit led to a sharp decline in Coinbase’s stock price, which dropped by up to 22% upon the announcement.
The judge’s ruling also permits claims related to Coinbase’s alleged misrepresentations about the security of customer assets in case of bankruptcy.
While some claims, such as those accusing Coinbase of misleading about proprietary trading, were dismissed, CEO Brian Armstrong and other top executives will remain defendants in the case.
In its response, Coinbase expressed confidence in its position, stating, “We remain confident that we are right on the facts and the law, and we look forward to proving the rest of our case.”
The legal troubles for Coinbase are compounded by ongoing regulatory scrutiny.
The company’s motion to dismiss the SEC’s lawsuit was rejected in August 2023, signalling a significant challenge for the exchange.
Despite these challenges, Coinbase’s stock recently saw a mixed signal from Barclays.
The bank upgraded Coinbase shares from “underweight” to “equal weight,” reflecting expectations that the stock will perform in line with the broader market.
However, Barclays also adjusted its price target for Coinbase shares downward from $206 to $169, anticipating an 18% decline.
