Insider trading lawsuit targets Coinbase directors despite internal approval

A Delaware judge has ruled that a shareholder lawsuit accusing several Coinbase Global Inc. directors of insider trading can proceed. The lawsuit accuses Coinbase directors, among them Brian Armstrong, of using nonpublic information to sell $2.9 billion in stock at the 2021 debut, sparing themselves over $1 billion in losses.

It was initially filed in 2023. The complaint says Armstrong, Coinbase’s chief since its launch in 2012, unloaded $291.8 million in stock. This ruling by the judge comes despite an internal review clearing the executives.

The plaintiffs say Andreessen sold $118.7 million in shares

Judge Kathaleen St. J. McCormick permitted the lawsuit to proceed on Friday due to conflicts involving one of the committee members. But she also suggested the Coinbase directors might end up coming out ahead, citing the special committee’s report, which offers a compelling narrative in their favor.

The lawsuit focuses on Coinbase’s decision to pursue a direct listing, rather than a conventional IPO, and names Armstrong, Andreessen, and several other executives. The company’s direct listing meant no new shares were issued, holdings weren’t diluted, and early investors weren’t barred from trading their stock.

According to the complaint, Andreessen — a Coinbase board member since 2020 — sold $118.7 million in shares through his venture firm, Andreessen Horowitz, in connection with the direct listing. The shareholder’s legal team argues the directors relied on insider information to sell their holdings ahead of a downturn. Nonetheless, lawyers representing the directors argued that no insider trading occurred and that the plaintiff failed to link the sales to confidential information.

On the judge’s Friday decision, Coinbase noted, “We are disappointed by the court’s decision and remain committed to fighting these meritless claims in court.” 

Judge McCormick had rejected a motion earlier made by Coinbase’s directors to toss out the case, ruling the plaintiff’s claims were plausible. The case was temporarily suspended while Coinbase’s special litigation committee investigated the claims. Kelly Kramer, Cisco’s former CFO, and Gokul Rajaram, a Silicon Valley angel investor, joined the committee; neither was involved in the case nor sold shares in the direct listing. After 10 months, the committee asked McCormick to dismiss the case, calling the accusations “deficient” and harmful to the company and its shareholders. The committee found that defendants hadn’t used inside information to sell shares, refuting the claims in the lawsuit. 

The close correlation between Coinbase stock and Bitcoin means the trades can’t be attributed to insider knowledge, the report said.

Brad Sorrels, an attorney for the special litigation committee, “The evidence roundly showed that defendants, including the two biggest stockholders, didn’t want to sell because they were bullish about the company. There was really a push and struggle to get the stockholders to participate.” 

Andreessen’s firm wants to reincorporate outside Delaware

Andreessen’s firm has openly criticized Delaware’s corporate courts, arguing that judges tend to side with management and against founders and their boards.

In July, the firm’s legal team published a blog post outlining its intention to reincorporate outside Delaware and encouraging its portfolio companies to do the same. The decision mirrors Musk’s Tesla move from Texas, prompted by McCormick’s blocking of his record compensation package, which was later reinstated by the state supreme court in December.

Earlier last year, Delaware lawmakers enacted corporate law reforms that made it more difficult for minority shareholders to sue leaders, in an effort to prevent businesses from fleeing the state.

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