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A Coinbase shareholder takes the board and top executives to court, former Celsius CEO Alex Mashinsky invokes the “puffery” defence in his fraud case and the UK offers new incentives to registered crypto firms.
Coinbase has been hit by a new US lawsuit alleging foul play following its direct Nasdaq listing in April 2021, when it became the world’s first crypto exchange to go public.
In the lawsuit, five Coinbase board members and three executives are accused of selling more than $2.9bn of stock based on material non-public information “within days” of the listing.
As the lawsuit notes, within five weeks of going public, those same shares had lost more than $1bn in value, and Coinbase had lost more than $37bn in market capitalisation.
Filed by Coinbase shareholder Adam Grabski, the lawsuit alleges one count of breach of fiduciary duty and one count of unjust enrichment in relation to the early stock sales.
“No matter how much regulatory and financial innovations create opportunity for personal profit, some people cannot help but push the boundaries beyond their breaking point,” the lawsuit states.
Grabski alleges that Coinbase opted to go public through a direct listing, rather than an initial public offering (IPO), so that insiders could cash out while the stock was “grossly overvalued”.
In a direct listing, insiders can sell their pre-existing shares to the public immediately, whereas in an IPO, the company creates new shares that are priced and underwritten by an investment bank and then sold to the public.
In an IPO, underwriters typically insist on lock-up agreements that restrict insiders from selling their stock within 180 days of the listing.
According to Grabski, this helps to signal “incentive alignment” between insiders and potential investors, and also helps to “minimize concerns” that insiders are selling their shares based on material, non-public information.
The Coinbase executives named as defendants include co-founder, CEO and chairman Brian Armstrong, COO and president Emilie Choi and CFO Alesia Haas.
The board members named as defendants include co-founder Fred Ehrsam, lead independent director Fred Wilson and venture capitalist Marc Andreessen (who is currently Coinbase’s single-largest shareholder).
The lawsuit seeks to compel the defendants to return to the company the “ill-gotten gains” they realised through “improper trading”, and grant “further relief” as the court deems proper.
Not fraud but ‘puffery’, claims former Celsius CEO
In New York, former CEO of collapsed crypto lender Celsius is attempting to clear his name of fraud by invoking a defence known as “puffery”.
In a motion to dismiss filed this week, Alex Mashinsky responded to allegations from the New York Attorney General that he misled customers regarding the safety of the Celsius platform.
In what Mashinsky’s lawyers have referred to as “alleged” statements, Mashinsky compared the safety of Celsius to that of a bank or broker-dealer.
The motion to dismiss claims these alleged statements are “immaterial” because they are “opinion or mere puffery”.
“According to the complaint, Mashinsky stated Celsius deposits were ‘as safe as it is with the bank’ and that Celsius had ‘less risk’ than a bank,” the motion states.
“These statements did not guarantee a specific outcome but instead are opinions that cannot be proved.”
In their defence, Mashinsky’s lawyers refer back to the 2015 case of New York v Barclays, where Barclays had a fraud claim against it dismissed on the grounds that its statements about a product were unspecific.
In the ruling, the judge wrote that representations must “include enough of a degree of specificity about the characteristics of the [object at issue] for the representations to be actionable, as opposed to impermissibly vague descriptions and sheer puffery”.
In other words, customers should have recognised Mashinky’s comparison of Celsius with a bank or broker-dealer as an unproven opinion, rather than as a committed statement or an endorsement of his company’s product.
Register with us and approve your own promotions, says HMT
In the UK, lawmakers have voted in favour of an amendment to the Financial Services and Markets Act (FSMA) that will give new freedoms to registered crypto firms.
The amendment, expected to come into effect in Q3 this year, will enable crypto firms that are registered with the Financial Conduct Authority (FCA) under anti-money laundering/counter-terrorism financing (AML/CTF) rules to communicate their own financial promotions without input from a third-party authorised firm.
For non-registered crypto firms, under the FCA’s proposed financial promotions rules, each promotion must be reviewed and approved.
As stated by HM Treasury: “This would mean the estimated £5,000 – £15,000 fee paid by unauthorised firms per promotion would be eliminated or significantly reduced, reflecting the efficiencies that come from managing approvals in-house and that a third-party approver would operate with a profit margin.”
In France, a similar amendment was accepted this week by the Senate Committee on Economics Affairs, as part of a bill on social media influencers.
As per the amendment, social media influencers will be permitted to market crypto-assets online if the crypto-asset is being offered by a registered or licensed crypto firm.
Another amendment will ensure that such ads contain a disclaimer stating that the promotion is aimed at persons aged 18 or over. Both will head to the Senate floor next week.
Former Three Arrows execs reprimanded in Dubai
Finally, the co-founders of bankrupt crypto hedge fund Three Arrows Capital (3AC) have been served “reprimand” letters by the Virtual Assets Regulatory Authority (VARA) in Dubai.
Following the collapse of 3AC in 2022, co-founders Su Zhu and Kyle Davis re-emerged as backers of a new crypto exchange, OPNX, where customers can use their crypto bankruptcy claims as collateral to trade.
In February and March, VARA issued cease and desist letters to Zhu and Davies (and other OPNX execs) in response to OPNX’s operating in Dubai and marketing to Dubai customers without permission.
In April, VARA issued an Investor and Marketplace Alert warning against the platform and, in its latest update, VARA said it has written “reprimands” to Zhu, Davies and others.
“Following the launch, and with the continued lack of satisfactory remedial action by the responsible parties, VARA is continuing to actively monitor the situation and investigate OPNX's activity to assess further corrective measures that may be required to protect the market,” VARA said in an official statement.
