Coinbase execs face shareholder lawsuit alleging they downplayed bankruptcy risks

Leading US centralized crypto exchange Coinbase and several of its executives have been hit with a new lawsuit that alleges they misled investors about its risk of bankruptcy.

Coinbase shareholder Wenduo Guo filed the complaint in a New Jersey federal court on Feb. 18. In the complaint, Guo said that Coinbase and its leadership failed to disclose that in the event of a bankruptcy, Coinbase customer assets could be considered part of the exchange’s bankruptcy estate. This would consequently make retail investors that use the platform unsecured creditors in a bankruptcy scenario.

Coinbase accused of using company funds to perform risk trades

Prior to Coinbase’s public listing in April of 2021, around 75 crypto exchanges collapsed, according to the Feb. 18 complaint. This, according to Guo, left the platforms’ customers unable to recover their crypto losses. The shareholder then alleged that customer funds on Coinbase are exposed to the same level of risk as the funds that were trapped in the collapsed exchanges should Coinbase file for bankruptcy.

“Despite repeated statements by Company management to the contrary, Coinbase was no different with respect to the risk of digital asset loss in the event of bankruptcy.”

In the complaint filed yesterday, Guo also claimed that the crypto exchange platform failed to tell investors that it engaged in proprietary trading in order to compensate for falling crypto prices during the 2021 bear market.

Coinbase still in legal trouble with the SEC for listing unregistered securities 

Guo’s lawsuit that was filed yesterday is not the only legal hot water Coinbase finds itself in. The concerned shareholder also noted a June 2023 lawsuit filed by the US Securities and Exchange Commission (SEC). In the SEC case, Coinbase was accused of listing unregistered securities.

This lawsuit was filed during the same time around when the SEC started going after crypto exchanges for facilitating the trade of what the regulator considered unregistered securities. While there has not been a definitive change in the SEC’s stance as to whether cryptos are securities or not, many companies operating in the space in the US find themselves embroiled in legal cases with the SEC.

In addition to the alleged listing of securities that were not registered with the SEC, the agency’s lawsuit also claims that Coinbase executives, including the company’s well-known CEO Brian Armstrong, sold millions of stock. This led to hundreds of millions in personal profits for Coinbase executives, according to the SEC.

Some of the executives named in Guo’s lawsuit include co-founder Fred Ehrsam, CFO Alesia Haas, COO Emilia Choi, CLO Paul Grewal and head of accounting Jennifer Jones, along with several board members.

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