Coinbase is facing a new legal challenge, this time from its own shareholders. A derivative lawsuit has been filed against members of the company’s board, including CEO Brian Armstrong, accusing them of breaching fiduciary duties and violating federal securities laws between 2021 and 2023. Coinbase Directors Accused Of Misleading Investors The complaint, detailed in a social media post by pro-crypto attorney Bill Hughes, alleges that during that time frame, Coinbase’s directors and senior executives caused the company to issue public statements and disclosures that were materially false or misleading. Plaintiffs argue that while the company consistently emphasized safety and trust in its public messaging, it did not adequately disclose that crypto assets held in custody for retail customers could be considered part of a bankruptcy estate in the event of insolvency. According to the filing, those alleged misstatements exposed the company to substantial regulatory scrutiny and litigation risk, ultimately harming Coinbase itself. The complaint further contends that Coinbase commingled retail customer assets, unlike its institutional custody structure , while still using customer-facing language suggesting users retained title and control over their holdings. Plaintiffs describe this as a disconnect between marketing assurances and the legal realities of bankruptcy risk. The derivative action also targets the company’s representations about securities compliance. According to the complaint, Coinbase repeatedly stated that it did not list securities on its platform and that its internal review process was designed to prevent securities from being traded. However, plaintiffs argue that both internal assessments and external indicators suggested that certain listed digital assets posed meaningful securities risk. The lawsuit further alleges that federal regulators later asserted that Coinbase listed assets with high risk scores. These issues culminated in the Securities and Exchange Commission’s (SEC) enforcement complaint filed on June 6, 2023. Alleged AML Failures And $100M NYDFS Settlement Anti-money laundering controls form another major pillar of the case. The complaint highlights Coinbase’s January 4, 2023, settlement with the New York State Department of Financial Services (NYDFS), which required a $100 million resolution following an investigation into the company’s compliance practices. The lawsuit claims that the company’s know-your-customer (KYC) and customer due diligence systems were immature and insufficient, and that Coinbase performed only minimal validation of due diligence information. The complaint also describes operational shortcomings in transaction monitoring. By the end of 2021, Coinbase allegedly faced a backlog of more than 100,000 transaction alerts. Efforts to address the backlog were said to suffer from inadequate training, weak oversight, and poor quality control. Plaintiffs further assert that suspicious activity reports were often filed months after potentially problematic conduct was first identified, leaving the platform vulnerable to criminal misuse. The filing claims these compliance failures exposed Coinbase to risks tied to fraud, money laundering, drug trafficking, and activity related to child sexual abuse material. Plaintiffs Demand Compensation In their prayer for relief, the plaintiffs request that the court award damages to Coinbase in an amount to be determined at trial. The damages sought include compensation for losses allegedly tied to regulatory investigations , enforcement actions, financial penalties, settlements, legal expenses, and reputational harm. Beyond monetary damages, the complaint seeks restitution and disgorgement from individual defendants, including compensation, bonuses, proceeds from stock sales, and other benefits allegedly obtained as a result of the challenged conduct. The plaintiffs also request contribution and indemnification from certain defendants for amounts Coinbase has paid or may pay in future settlements or judgments. In addition, the suit calls for corporate governance reforms aimed at strengthening oversight. Featured image from DALL-E, chart from TradingView.com
