A shareholder lawsuit filed in a Delaware state court alleges that Coinbase executives failed to disclose negative information about the company before it went public in April 2021. As a result, these insiders reportedly became richer by $1.09 billion.
The lawsuit, filed on behalf of all shareholders by investor Adam Grabski, names prominent investors Marc Andreessen and Fred Wilson and Coinbase CEO Brian Armstrong, and top management as defendants. Coinbase has dismissed the claims as “frivolous” and “meritless.”
“Project Fall Fruits” and the direct listing strategy
The lawsuit delves into the personal plan by Coinbase’s board to go public, internally dubbed “Project Fall Fruits.” Coinbase chose a direct listing of existing shares instead of a more common initial public offering (IPO), which would have involved issuing new shares and potentially diluting shareholder value. Additionally, an IPO typically requires a lockup period, preventing insiders from immediately selling their shares.
The direct listing approach allowed Coinbase executives and investors to sell pre-existing shares, directly benefiting them. Insiders allegedly sold their stock through a 10b5-1 trading plan, which automatically and frequently sells stock on a predetermined schedule. According to the lawsuit, these sales began on the first day of public trading.
According to the lawsuit: “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 based on and profiting from, such material, non-public information.”
Bad news allegedly withheld
The lawsuit claims that board members knew of two pieces of negative information that had not been made public:
#1: Coinbase’s revenue was under pressure as customers sought alternatives to the company’s transaction fees.
#2: The company planned a private sale of $1.25 billion in new convertible notes following the direct listing, diluting existing shareholders.
The lawsuit also alleges that the staged release of shares and negative information allowed Coinbase insiders to avoid $1.09 billion in losses as they sold $2.9 billion in shares.
Despite the lawsuit, Coinbase launched its international exchange today.
