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A Delaware court has denied Coinbase’s motion to dismiss a shareholder lawsuit accusing CEO Brian Armstrong and board member Marc Andreessen of insider trading during the company’s 2021 public listing.
The ruling allows the case, which alleges executives avoided over $1 billion in losses by selling stock based on nonpublic information, to proceed to discovery, marking a significant legal setback for one of the cryptocurrency industry’s largest exchanges.
The case, which was filed in 2023, is a derivative lawsuit alleging that Coinbase’s leadership used confidential information to orchestrate stock sales during the company’s 2021 direct listing, avoiding more than $1 billion in potential losses while ordinary investors suffered price declines.
The case, heard by Delaware Chancery Court Judge Kathaleen St J. McCormick, survived a motion to dismiss this week despite an internal probe that previously cleared the executives of wrongdoing.
In his motion opposing dismissal, a lawyer for the plaintiffs framed the case as a pivotal test of corporate accountability in the crypto industry:
“The defendants’ actions during the direct listing raise serious questions about whether fiduciary duties to shareholders were upheld.”
The attorney in court filings said during Legal counsel for plaintiffs, Delaware Chancery Court filing.
The judge’s ruling ensures the lawsuit will proceed at least to the discovery stage, where both sides will exchange evidence. Coinbase has stated it plans to continue contesting the claims.
At the heart of the lawsuit are allegations that Coinbase executives and directors sold large blocks of stock based on nonpublic information suggesting the company’s valuation was inflated.
According to the complaint, insiders sold more than $2.9 billion worth of shares around the direct listing, with Armstrong personally offloading approximately $291.8 million and Andreessen, through his venture firm Andreessen Horowitz, selling roughly $118.7 million.
Plaintiffs contend that these sales were not routine portfolio management but calculated moves to protect insiders from an impending downturn in the company’s stock price.
A key focus of the litigation will be whether the executives possessed and acted on confidential financial data not available to public investors.
In response to the allegations, Coinbase told regulators and shareholders it was disappointed by the court’s decision to let the suit proceed and characterised the claims as meritless.
“There is no evidence that these trades were executed based on material nonpublic information.”
A Coinbase spokesperson said in a statement to Bloomberg Law.
Legal experts note that the case shows the unsettled nature of fiduciary standards in the evolving crypto market.
Last year, Coinbase’s board established a special litigation committee to investigate the insider trading claims, resulting in a ten-month review that concluded the allegations were unsubstantiated.
The committee argued that the stock sales were limited in scope and executed to ensure sufficient liquidity for the direct listing, an approach the board has defended as responsible.
But the plaintiffs challenged the committee’s independence, citing prior business ties between one committee member and Andreessen’s firm. Judge McCormick agreed that questions about the committee’s impartiality were sufficient to deny the motion to dismiss.
The decision raises broader governance questions for the exchange, which has faced criticism over its handling of disclosures, executive compensation, and compliance issues.
Advocates for shareholders argue that the Delaware court’s willingness to let the suit advance sends a clear signal that procedural safeguards and transparency cannot be sidelined even in high-growth tech sectors like crypto.
The lawsuit represents a potential drag on Coinbase’s stock and reputation. Legal proceedings of this scale can influence market perception and risk premiums around shares of publicly traded crypto firms.
Analysts say that if the case moves into discovery and beyond, it could also unlock sensitive corporate documents that provide a rare window into insider decision-making at one of the industry’s flagship companies.
The next phase of the lawsuit will likely involve intense legal wrangling over evidence, testimony, and the standards for proving insider knowledge in a direct listing context, a legal landscape that has seldom been tested.
As the case progresses, Coinbase’s defence will likely emphasise contemporaneous market conditions and the inherent volatility of crypto valuations, while plaintiffs will seek to prove that internal insights, not market forces, drove the timing and scale of executive stock sales.
