Shareholders sue Coinbase C-suite over alleged $4.2B insider sell-off

A new group of Coinbase stockholders has filed a derivative lawsuit in Delaware, accusing the exchange’s leadership of engaging in a years-long scheme to unload $4.2 billion in stock at “artificially inflated” prices.

A derivative lawsuit is a legal action brought by shareholders on behalf of the company when they believe insiders harmed the firm through misconduct or breached their fiduciary duties.

The complaint, first reported by Decrypt, alleges that CEO Brian Armstrong, board member Marc Andreessen and other insiders withheld internal information about Coinbase’s inadequate Know Your Customer and anti-money-laundering controls, weaknesses in its data-security systems, and the scope of ongoing regulatory investigations.

According to the filing, insiders allegedly sold billions in shares while this nonpublic information remained concealed from the market.

Second lawsuit targets direct listing and insider enrichment

The suit, filed publicly just before the Thanksgiving holiday, argues that Coinbase’s leaders were aware of internal problems that later contributed to the company’s declining share price once disclosed.

This is the second lawsuit, with the earlier suit, first filed in April 2023, alleged that Armstrong, Andreessen, and others avoided roughly $1 billion in losses by selling $2.9 billion worth of stock following Coinbase’s 2021 direct listing.

The complaint asserts that insiders breached their fiduciary duties by enriching themselves through share sales informed by non-public valuations that showed Coinbase was overvalued.

Rather than pursuing a traditional IPO, Coinbase opted for a direct listing, a structure that allows existing shareholders to sell their stock immediately on the open market.
Plaintiffs argue this approach maximized insider liquidity and prioritized their ability to sell at high valuations rather than raising capital for the company.

Coinbase board members have pushed back, arguing the company was “exceptionally well-capitalized” at the time and that insiders were required to sell shares into the market under the mechanics of the direct listing. 

They dispute that tax valuations motivated the timing of the sales, noting that most occurred within two days of the listing — a pattern they claim reflects normal attempts to monetize long-held investments.

Coinbase did not respond to TheStreet Roundtable’s request for comment.

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Was Coinbase’s internal review compromised?

Chancellor Kathaleen St. J. McCormick previously allowed the earlier suit to move forward, ruling that the theory of insider enrichment was “reasonably conceivable.”

The company paused the litigation while a special committee of supposedly independent directors conducted an internal review — a standard step in derivative cases. The committee ultimately recommended terminating the suit, saying continuation did not justify the financial or reputational costs.

Plaintiff Adam Grabski challenged that conclusion, filing a 72-page rebuttal arguing the review was compromised by conflicts of interest.

The brief pointed to:

• Committee member Gokul Rajaram, an angel investor involved in more than 50 Andreessen Horowitz-backed startups.
• The law firm Wilson Sonsini, which represented Andreessen’s venture fund in 10 financing rounds during the 10-month investigation.

According to the filing, the “insularity and patronage” of Silicon Valley’s venture ecosystem made it unrealistic to expect the committee to impartially evaluate claims targeting Andreessen, given the potential damage to future deal flow.

Related: Coinbase CEO: Crypto Has 'A Black Eye' Because of Scammers