A Coinbase shareholder has filed a stockholder derivative complaint against some of the company’s executives and board members, claiming they profited from inside information during the company’s public listing. CEO Brian Armstrong and well-known venture capitalists are among the defendants.
A stockholder derivative complaint is a suit filed against a company on behalf of its stockholders. Coinbase shareholder Adam Grabski filed the suit in the Delaware Court of Chancery on May 1. Grabski bought Coinbase shares on the first day of the crypto exchange’s public listing.
According to a redacted version of the complaint posted by the court, the defendants were able to sell $2.9 billion worth of Coinbase shares made available to the public through a direct listing of the company’s stock on the Nasdaq exchange on April 14, 2021, and in the week that followed.
Fascinating lawsuit discusses Coinbase board’s confidential plan to go public two years ago> The process was given the internal nickname “Project Fall Fruits”.
— Jim Edwards (@Jim_Edwards) May 2, 2023
If the company had made an initial public offering instead of directly listing on the exchange, the defendants would have been prevented from selling their shares, and the value of the shareholdings would have been diluted.
The suit alleges that the defendants were able to sell their shares before disclosing information they already had that negatively affected the share price, which fell by more than 37% by May 18, after “the compression of the Company’s revenue margins during the first fiscal quarter and the issuance of a dilutive convertible offering were publicly disclosed.” According to the suit:
“Defendants were privy to material, non-public information about the health of the Company ahead of their multi-billion-dollar liquidity event. […] Delaware law does not permit, however […] fiduciaries trading on the basis of, and profiting from, such material, non-public information.”
The company lost over $37 billion in market value after the unfavorable disclosures. However, “Defendants, comprising a majority of the Board, sold $2.93 billion of stock” before the price fell, preventing a loss of over $1 billion to themselves.
The suit charges breach of fiduciary duty and unjust enrichment and demands payment of damages to the company with interest, return of ill-gotten gains to the company and reimbursement of the plaintiff for expenses.
The suit names nine individuals, including CEO Brian Armstrong, former chief product officer Surojit Chatterjee, chief operating officer Emilie Choi, chief financial officer Alesia Hass, chief accounting officer Jennifer Jones and board members Marc Andreesen, Frederick Ersham, Fred Wilson and Kathryn Haun.
A Coinbase spokesperson commented on the case in an email to Cointelegraph: “As the most popular and only publicly traded crypto exchange in the US, we are at times the target of frivolous litigation. This is an example of one of those meritless claims.”
This suit was filed on the same day as a class action suit over alleged violations of Illinois privacy laws in its Know Your Customer procedure. On the brighter side, the company launched the Bermuda-based Coinbase International Exchange on May 2.