Coinbase directors face shareholder lawsuit over stock sales

A Delaware court has allowed a shareholder lawsuit to proceed against Coinbase directors, including Chief Executive Officer Brian Armstrong and venture capitalist Marc Andreessen.

The lawsuit, filed in 2023, claims that company executives used confidential information to avoid losses of more than one billion dollars. According to the filing, they sold over 2.9 billion dollars in shares when Coinbase went public in 2021.

According to a Bloomberg report, Coinbase chose a direct listing instead of a traditional initial public offering. This approach allowed existing shareholders to sell shares immediately and avoided share dilution. However, Delaware Chancery Court Judge Kathaleen St. J. McCormick declined to dismiss the case, citing concerns over possible conflicts in the company’s internal investigation.

Still, the judge noted that the directors could eventually prevail. She said the internal committee’s report presented a strong defense. Coinbase and Andreessen have denied all allegations and said no evidence shows the use of material nonpublic information.

Direct listing and executive stock sales

The case centers on Coinbase’s decision to go public through a direct listing. Unlike a traditional IPO, a direct listing allows existing shareholders to sell shares without a lockup period.

During the listing, Armstrong sold shares worth about 291.8 million dollars. Andreessen sold approximately 118.7 million dollars through his investment firm Andreessen Horowitz. Shareholder lawyers argue that directors knew the shares were overpriced and sold early to avoid losses.

The executives said they sold shares to support the listing process. Brad Sorrels, speaking for the special litigation committee, said company leaders wanted to encourage shareholder participation. He added that Coinbase’s stock price closely tracks Bitcoin, which limits the value of confidential information.

Armstrong and Andreessen sold about one percent of their holdings. According to the committee, these sales helped ensure enough shares were available for trading.

Committee investigation and independence concerns

The Coinbase board formed a special litigation committee to review the claims. The committee included Kelly Kramer, former Chief Financial Officer of Cisco, and Silicon Valley investor Gokul Rajaram. After a ten month review, the committee recommended dismissing the lawsuit due to limited evidence.

However, the court raised concerns about Rajaram’s independence. Judge McCormick pointed to his past business relationships with Andreessen’s firm, including joint investments and a startup funding deal in 2007. She said these ties could create material questions about impartiality.

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Sorrels argued that the past business links were insignificant given Andreessen’s broad investment history. Even so, shareholder lawyers questioned whether the committee acted independently when clearing the directors.

Broader implications for the crypto industry

The Coinbase case highlights wider governance and trust issues within the cryptocurrency sector. Last month, Binance suspended an employee after a whistleblower accused them of using insider information during a token launch.

Binance described the incident as a serious breach and warned that such actions can undermine user confidence. Together, these cases show that crypto companies continue to face regulatory pressure and reputational risks.