Judge dismisses proposed class-action suit alleging Coinbase securities sales

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A proposed class action suit against cryptocurrency exchange Coinbase, Coinbase Global and CEO Brian Armstrong alleging unregistered securities sales was dismissed in the United States District Court of Southern New York on Feb. 1. The suit, filed on March 11, claimed that 79 of the tokens listed on Coinbase were securities being sold without proper registration and customers were not warned of their risks.

The suit brought charges under the Securities Act of 1933 and Exchange Act of 1934 and used the Howey test, established by the U.S. Supreme Court in 1946, to identify the tokens. The plaintiffs argued for each token individually. In his decision, Judge Paul Engelmayer stated regarding the Howey claims:

“Were this case to reach summary judgment, this contention would emerge as a central battleground.”

But the judge assumed the tokens are indeed securities for the purposes of his analysis and did not consider claims based on Howey further. He stated that the Coinbase user agreement contradicts the plaintiffs’ claim that Coinbase was the “actual seller” of the tokens. Furthermore, Coinbase did not solicit sales under a strict legal definition. Thus, claims under the Securities Act were dismissed.

The judge stated that the claim under the Exchange Act alleged the presence of a contract involving a prohibited transaction. He dismissed that claim by noting that only the user agreement was liable to that claim, and it “did not necessitate illegal acts.” The judge cited case law throughout the analysis.

The plaintiffs’ representation apparently became aware of the flaw in their argument after the suit was initially filed. The March 11 suit was an amended complaint that did not make reference to the user agreement, but that did not sway the judge in his analysis.

Related: Breaking: Coinbase fined $3.6M in the Netherlands

The suit was filed with national claims and claims under California, Florida and New Jersey state law. The national claims were dismissed with prejudice, meaning that the plaintiffs cannot file the same claims again. The state claims were dismissed without prejudice, as the judge determined that the court had not “invested the resources necessary to resolve” the state claims.

A class action suit was filed against Coinbase in the Northern District Court of Georgia in August, claiming the exchange did not do enough to protect user wallets and locked users out of their accounts at high market volatility. In addition, it claimed that “Coinbase does not disclose that the crypto assets on its platform are securities.”