Underwood v. Coinbase Global, Inc.

Background

The plaintiffs brought a proposed nationwide class action against Coinbase Global, Inc., Coinbase, Inc., and Brian Armstrong under the federal securities laws and the laws of California, Florida, and New Jersey. The plaintiffs alleged that Coinbase operated two centralized digital-asset trading platforms and enabled users to trade 79 digital assets, which they called securities. They alleged that Coinbase was not registered with the Securities and Exchange Commission as a securities exchange or broker-dealer.

The plaintiffs asserted three main groups of claims. First, they sought damages under Section 12(a)(1) of the Securities Act of 1933, alleging that Coinbase sold or solicited the sale of unregistered securities. Second, they sought to cancel contracts under Section 29(b) of the Securities Exchange Act of 1934, alleging that the contracts involved transactions through an unregistered exchange or broker-dealer. Third, they asserted state-law claims based on the alleged sale of unregistered securities and failure to register. They also asserted related control-person claims against Coinbase Global and Armstrong.

Motion to dismiss

The defendants moved to dismiss the amended complaint under Rules 12(b)(6) and 8(a) of the Federal Rules of Civil Procedure. A Rule 12(b)(6) motion tests whether a complaint alleges enough facts to state a legally plausible claim. For purposes of this motion, the court assumed that the 79 digital assets were securities. It did not decide that issue.

Securities Act claims

The court dismissed the claim that Coinbase was a statutory seller under Section 12(a)(1). Under the Supreme Court’s decision in Pinter v. Dahl, a defendant generally must either have passed title to the security as the buyer’s immediate seller or have actively solicited the purchase for its own financial benefit.

The court held that the amended complaint did not adequately plead either route. The amended complaint alleged that Coinbase owned the assets and was the only counterparty in each transaction. But the original complaint had alleged that users could enter into trades with other Coinbase users, and the user agreement stated that title remained with the user and that Coinbase acted as an agent facilitating purchases and sales between customers. The court declined to credit the amended allegations that contradicted the original complaint and the incorporated user agreement.

The court also held that the allegations about Coinbase’s descriptions of tokens, promotions, airdrops, news updates, and links to outside stories did not show the direct and active solicitation required for Section 12 liability. The complaint also did not allege that the plaintiffs traded because of such solicitation. The court therefore dismissed Count One for failure to state a claim.

The court dismissed Count Two, the Section 15 control-person claim against Coinbase Global and Armstrong, because that claim depended on the dismissed Section 12 claim and therefore lacked an adequately pleaded underlying violation.

Exchange Act claims

The plaintiffs sought rescission, meaning cancellation of transactions or contracts, under Section 29(b) of the Exchange Act. The court explained that this provision applies to unlawful contracts, not merely to unlawful transactions carried out under an otherwise lawful contract.

The plaintiffs argued that each purchase or sale on Coinbase was a separate contract that could be rescinded. The court held that the amended complaint did not identify any transaction-specific contract. It treated the user agreement as the only contract capable of being rescinded under the allegations. Because that agreement did not require users to trade the tokens at issue—and permitted other uses of the Coinbase platforms—the court held that the agreement was not itself an unlawful contract under Section 29(b).

The court dismissed Counts Three through Six, which asserted direct Exchange Act claims against Coinbase Global and Coinbase, Inc. It also dismissed Count Seven, the Section 20 control-person claim against Coinbase Global and Armstrong, because it depended on an adequately pleaded primary Exchange Act violation, which the court found absent.

State-law claims and final disposition

After dismissing all federal claims, the court declined to exercise supplemental jurisdiction over the state-law claims. Supplemental jurisdiction allows a federal court to decide related state-law claims in the same case, but the court may decline that jurisdiction after dismissing all claims within its original federal jurisdiction. The court found no reason involving judicial economy, convenience, fairness, or respect for state courts to retain the state claims.

Judge Engelmayer granted the motion to dismiss in full. The federal claims were dismissed with prejudice because the court found that further amendment would be futile. The state-law claims were dismissed without prejudice because the court declined to exercise supplemental jurisdiction over them. The court directed the Clerk to terminate the motion and close the case.