A federal judge has rejected Coinbase’s motion to dismiss a proposed class action lawsuit by shareholders, Reuters reported Sept. 6.

The lawsuit accuses the largest US crypto exchange of downplaying the likelihood of being sued by the US Securities and Exchange Commission (SEC).

US District Judge Brian Martinotti ruled on Sept. 5 that shareholders adequately alleged that Coinbase and top executives defrauded them. The decision highlighted that the class action lawsuit correctly described:

“A favorable picture of the improbability that the SEC would file an enforcement action by repeatedly emphasizing that the crypto assets they listed were not securities.”

The lawsuit was filed on May 10, 2023, by plaintiffs Sjunde AP-Fonden, Ryan R. Firth, and Zvia Steinmetz.

Notably, the decision comes 15 months after the SEC’s June 6, 2023, civil lawsuit against Coinbase for allegedly operating an unregistered securities exchange.

Moreover, Martinotti’s ruling allows shareholders to pursue claims that Coinbase misrepresented the risk of customers losing assets stored with the company in the event of bankruptcy.

While the judge dismissed claims that Coinbase falsely denied engaging in proprietary trading, CEO Brian Armstrong and other executives remain defendants in the case.

In response to the ruling, Coinbase stated:

“We remain confident that we are right on the facts and the law, and we look forward to proving the rest of our case.”

SEC lawsuit goes on

Coinbase was sued by the SEC on June 6, 2023, for multiple alleged violations of the securities law, such as operating as an unregistered broker and offering unregistered securities. Coinbase’s COIN shares fell up to 22% after news of the lawsuit broke.

Additionally, this prompted various class action lawsuits by investors who felt defrauded, such as law firms Bragar Eagel & Squire and Pomerantz LLP who sued the exchange for allegedly misleading the public about the level of compliance of the firm’s activities.

On Aug. 4, 2023, Coinbase filed a motion to the District Court of New York to dismiss the SEC’s legal enforcement entirely.

However, U.S. District Judge Katherine Polk Failla ruled that the lawsuit could go on, representing a major win for the regulator against Coinbase.

A good development amid legal turmoil

Despite the recent negative development, the research team at British bank Barclays upgraded Coinbase’s shares, moving COIN from underweight to equal weight in September.

This means that Barclays decided in their latest report that COIN is expected to perform in line with the broad industry for the next 12 months instead of lagging as the equity markets rise.

However, Barclays’ analysts adjusted the price target for COIN shares from $206 in August to $169 in September, which would equate to an 18% drop.

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