Coinbase hit with lawsuits alleging insider trading and pocketing of client funds
There’s a price that comes from being perceived to be the biggest and the best in the crypto exchange world, as Coinbase is discovering.
The US exchange is on the end of two class action lawsuits. It follows the unwanted attention from the US Inland Revenue Service in recent months, which led to demands that it hand over customer trading histories – the records of 13,000 clients had to be given to the authorities in February.
The lawsuits were filed on the 1 and 2 March and concern alleged insider trading and unclaimed cryptocurrency funds, respectively.
Just before Christmas last year Bitcoin Cash (BCH) was riding high, with rumours building that the start of trading of BCH on the exchange was imminent.
Trading duly began on 19 December and the price spiked immediately. The US exchange suspended trading in BCH twice and finally stopped trading the instrument after reports surfaced that some employees of the exchange knew in advance when trading would be activated and indulged in insider trading to seek financial advantage.
The lawsuit, in which the lead plaintiff is Jeffrey Berk, alleges that:
“On December 19, 2017, a month after tipping off its own employees as to when it would commence fully supporting BCH, Coinbase suddenly announced that it was opening up its books to the buying and selling of BCH within minutes after its announcements.
“Unsurprisingly, those who had been tipped off, immediately swamped Coinbase and the GDAX with buy and sell orders, thinning the liquidity but obtaining BCH at fair prices. The market effect was to unfairly drive up the price of BCH for non-insider traders once BCH came on line on the Coinbase exchange.”
The complaint alleges that Coinbase had begun trading BCH “a month after tipping off its own employees as to when it would commence fully supporting BCH”.
GDAX is the sister altcoin exchange of Coinbase. The lawsuit is requesting a jury trial to resolve the matter.
On 20 December Coinbase opened its own investigation into the insider trading allegations after the price of BCH more than doubled on Coinbase – to reach $8,000 – which was twice the amount being quoted on other exchanges.
Co-founder and chief executive Brian Armstrong said in a blog post, dated 20 December:
“Given the price increase in the hours leading up the announcement, we will be conducting an investigation into this matter. If we find evidence of any employee or contractor violating our policies — directly or indirectly — I will not hesitate to terminate the employee immediately and take appropriate legal action.”
Coinbase has not revealed whether its investigation has finished and/or if any action has been taken against any employees and what if any measures have been taken to guard against the possibility of employees trading on “material non-public information” in the future.
The second complaint against the exchange lodged by Timothy G Faasse and Jeffrey Hansen “individually and on behalf of all other similarly situated”, alleges unlawful and unfair business practices.
The plaintiffs allege that Coinbase has effectively stolen unclaimed cryptocurrency, which they say is a practice akin to someone writing a cheque to a payee that doesn’t cash it and as a result the bank decides it is with its rights to pocket the funds.
“Imagine writing a cashier’s check to a friend. The bank withdraws funds from your account, but your friend never cashes the check. Does the bank get to keep the funds? The law clearly says no. But this is exactly what has happened with Cryptocurrencies sent through Coinbase.com, owned and operated by Coinbase, Inc.
“Coinbase users can send Bitcoin, Ethereum, Litecoin and Bitcoin Cash (collectively “Cryptocurrencies”) to an email address. Plaintiffs and the Class were sent an email from Coinbase stating they had Cryptocurrency, with a link to create a Coinbase account to redeem it. But until 2017, most people never heard of a “bitcoin” or cryptocurrency, so most of these emails were disregarded. And most of the Cryptocurrency went unclaimed.
“But instead of notifying Plaintiffs and the Class they had unclaimed Cryptocurrencies, or turning those Cryptocurrencies over to the State of California as required by California’s Unclaimed Property Law…Coinbase kept them.”
The plaintiffs are seeking remedy whereby Coinbase is forced to return cryptocurrency “as all ‘forks’ thereof” to “the intended recipients”.