A class action lawsuit filed against the cryptocurrency exchange Coinbase, Coinbase Global and CEO Brian Armstrong alleging the sale of unregistered securities was dismissed in the United States District Court of Southern New York on February 1. The suit, filed on March 11, claims that 79 of the tokens are registered on Coinbase are securities that are sold without proper registration and customers are not warned about the risks.
The lawsuit was filed 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 object to each token individually. In his ruling, Judge Paul Engelmayer said of Howey’s claim:
“If this case reaches a summary conclusion, this contention will emerge as a central battleground.”
But the judge considered the tokens to be securities for the purposes of the analysis and did not consider Howey’s claims further. They stated that Coinbase’s user agreement refutes the plaintiffs’ claim that Coinbase is the “actual seller” of the tokens. Furthermore, Coinbase does not solicit sales under the strict legal definition. Thus, claims under the Securities Act are dismissed.
The judge held that the claim under the Exchange Act alleged a contract involving a prohibited transaction. He dismissed the claim noting that only the user’s agreement is responsible for the claim, and “does not require illegal action.” The judge cited case law in his analysis.
BREAKING
Class action lawsuit against @coinbase dismissed by a US Judge$ COINS up 5% in the news pic.twitter.com/3IXf8m6Kus
– Bankless (@BanklessHQ) February 1, 2023
The plaintiffs’ representatives apparently realized the flaw in their argument after the suit was filed. The March 11 suit was an amended complaint that made no reference to the user agreement, but did not interfere with the judge’s analysis.
Related: Breaking: Coinbase fined $3.6M in Netherlands
The lawsuit was filed with a national lawsuit and claims under the state laws of California, Florida and New Jersey. The national lawsuit was dismissed with prejudice, meaning the plaintiffs could not file the same lawsuit again. The state’s claim was dismissed without prejudice, as the judge determined that the court had not “invested the necessary resources to resolve” the state’s claim.
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 users’ wallets and users were locked out of their accounts in high market volatility. In addition, it said that “Coinbase does not disclose that crypto assets on its platform are securities.”