Andreessen, Coinbase Directors Face Insider Suit for Now (1)

A Delaware judge ruled that a shareholder lawsuit alleging insider trading by several directors of Coinbase Global Inc., including venture capitalist Marc Andreessen, can proceed for now after an internal investigation cleared the defendants of wrongdoing.

A shareholder of the crypto platform brought the lawsuit in 2023 claiming directors — including Chief Executive Officer Brian Armstrong — used confidential information to avoid more than $1 billion in losses by selling more than $2.9 billion of stock when the company went public in 2021. Armstrong, who has helmed Coinbase since its 2012 inception, sold $291.8 million of shares, according to the shareholder complaint.

Judge Kathaleen St. J. McCormick on Friday denied a motion to dismiss the lawsuit by an internal committee that investigated the claims because of what she considered to be conflicts of one of the members. But McCormick suggested the directors may ultimately prevail against the claims because the special litigation committee’s report “paints a compelling narrative” that supports their defense.

Direct Listing

The shareholder’s derivative claims against Armstrong, Andreessen and other officers center on Coinbase’s decision to become publicly traded through a direct listing, instead of an initial public offering. The direct listing didn’t involve issuing new shares to raise funds that would dilute holdings or require a lockup period in which existing investors must wait to trade their shares for a certain period.

Andreessen, who has been a Coinbase board member since 2020, sold $118.7 million of stock through his Silicon Valley venture firm, Andreessen Horowitz, tied to the direct listing, according to the complaint. The shareholder’s attorneys alleged the directors knew the company’s shares were overvalued based on confidential valuation information so they sold to avoid losses.

Attorneys for the directors denied their clients engaged in insider trading. They argued that the stockholder plaintiff failed to provide evidence that the defendants possessed material nonpublic information and that it motivated them to sell shares.

“We are disappointed by the court’s decision and remain committed to fighting these meritless claims in court,” Coinbase said in a statement.

A lawyer for Andreessen and Armstrong declined to comment. Representatives of Andreessen Horowitz and a lawyer for the plaintiff couldn’t immediately be reached for comment.

Vocal Critics

Andreessen’s firm has become one of the more vocal critics of Delaware’s business court by publicly raising concerns over bias by judges “against founders and their boards.” In a July blog post, legal and policy leaders at the firm announced a plan to reincorporate outside of Delaware and encouraged portfolio companies to do the same.

The move echoes Elon Musk’s decision to reincorporate Tesla Inc. in Texas after McCormick blocked his record-setting pay package. The pay plan was reinstated by the state supreme court in December. Fears over a business exodus from the state led to a corporate law overhaul last year that makes it harder for minority shareholders to challenge executives in court.

In the Coinbase case, McCormick had earlier denied a bid by the directors to toss the case, concluding the theory presented by the plaintiff was “reasonably conceivable.”

Litigation Committee

The lawsuit was then put on hold to let a special litigation committee formed by Coinbase investigate the legal claims. The board appointed two of its members, Kelly Kramer, a former chief financial officer of Cisco Systems Inc., and Silicon Valley angel investor Gokul Rajaram, to sit on the committee. Neither was named a defendant in the case or sold shares in the direct listing.

After a 10-month investigation, the committee recommended that McCormick terminate the case, calling the allegations “deficient” and against the “best interests of the company or its stockholders.” The committee also concluded the defendants didn’t rely on confidential information to sell stock, as alleged in the complaint.

Coinbase’s stock is “highly correlated” with the price of Bitcoin, making it impossible to conclude the trades were made based on material nonpublic information, the committee wrote in its report.

Counsel for the special litigation committee argued the directors reluctantly sold stock as part of an effort to provide enough supply in the direct listing and only divested a sliver of their total holdings.

“The evidence roundly showed that defendants, including the two biggest stockholders, didn’t want to sell because they were bullish about the company,” Brad Sorrels, an attorney for the special litigation committee, said during an October hearing. “There was really a push and struggle to get the stockholders to participate,” he said.

Company ‘Pleaded’

Armstrong and an affiliate of Andreessen Horowitz “ultimately agreed to sell just over 1% of their respective shares only after the company and its banker pleaded with them to provide supply necessary for the direct listing to launch,” according to a court filing by attorneys for the special litigation committee.

Attorneys for the Coinbase shareholder pushed back against the committee’s findings and accused it of lacking independence because of business dealings between Rajaram and Andreessen’s firm. Some interactions involved a 2007 investment by Andreessen in a startup co-founded by Rajaram and at least 50 financing rounds Rajaram or his venture firm participated in alongside Andreessen Horowitz since 2019, according to a court filing.

McCormick agreed in her Friday opinion. “No one — not plaintiff and thus not the court — questions Rajaram’s good faith,” she wrote. “But the thick ties between him and the subject of the SLC’s investigation are sufficient to raise material disputes regarding his independence,” she added.

Attorneys for the special litigation committee argued that business interactions with Rajaram were “immaterial” given the expansive universe of 700 investments made and that no evidence showed coordination with Andreessen Horowitz in financing rounds. The attorneys also noted that Andreessen’s investment in Rajaram’s startup was a small minority one that happened almost two decades ago.

“These are not close personal ties. These are professional ones,” Sorrels argued during the October hearing. Rajaram is “an upstanding, sophisticated executive with years of experience,” he said.

Sorrels declined to comment on Friday’s ruling.

(Updates with Coinbase statement in seventh paragraph. A previous version corrected spelling of lawyer’s name.)

To contact the reporters on this story:
Sabrina Willmer in Washington at swillmer2@bloomberg.net;
Michael Leonard in Arlington at mleonard68@bloomberg.net

To contact the editors responsible for this story:
Sara Forden at sforden@bloomberg.net

Peter Blumberg, Steve Stroth

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