A proposed class action lawsuit against cryptocurrency exchange Coinbase, Coinbase Global and CEO Brian Armstrong alleging sales of unregistered securities was dismissed in the US District Court for the Southern District of New York on February 1. The lawsuit, filed on March 11, claimed that 79 of the tokens listed on Coinbase were securities that were being sold without proper registration and customers were not warned of their risks.
The suit brought charges under the Securities Act of 1933 and the Exchange Act of 1934 and used the Howey test, established by the US Supreme Court in 1946, to identify the tokens. The plaintiffs defended each token individually. In his decision, Judge Paul Engelmayer fixed regarding Howey’s claims:
“If this case were to go to summary judgment, this dispute would emerge as a central battleground.”
The judge assumed that the tokens are indeed securities in his analysis and did not further consider the claims based on Howey. He claimed that Coinbase’s user agreement contradicts the claimants’ claim that Coinbase was the “actual seller” of the tokens. Additionally, Coinbase did not solicit sales under a strict legal definition. Therefore, the claims under the Securities Act were dismissed.
The judge indicated that the lawsuit under the Exchange Law alleged the presence of a contract that involved a prohibited transaction. He dismissed that claim by noting that only the user agreement was subject to that claim, and “did not require illegal acts.” The judge cited jurisprudence throughout the analysis.
RIP
class action lawsuit against @coinbase dismissed by US judge$ CURRENCY up to 5% on the news pic.twitter.com/3IXf8m6Kus
— Bankless (@BanklessHQ) February 1, 2023
Apparently, representation for the plaintiffs realized the flaw in their argument after the lawsuit was initially filed. The March 11 complaint was an amended complaint that made no reference to the user agreement, but it did not influence the judge’s analysis.
Related: Breaking: Coinbase fined $3.6 million in the Netherlands
The lawsuit was filed with national claims and claims under California, Florida, and New Jersey state law. The domestic claims were dismissed with prejudice, which means that the plaintiffs cannot resubmit the same claims. The state claims were dismissed without prejudice, as the judge found that the court had failed to “expend the necessary resources to resolve” the state claims.
A class action lawsuit was filed against Coinbase in the Georgia Northern District Court in August, alleging that the exchange did not do enough to protect user wallets and locked users out of their accounts due to high market volatility. He further stated that “Coinbase does not disclose that the crypto assets on its platform are securities.”
