On Wednesday, cryptocurrency exchange platform Coinbase announced that the Securities Exchange Commission (SEC) had identified potential violations of securities law. In the month leading up to the SEC sending Coinbase what’s known as a Wells notice, executives and insiders sold millions of dollars of company stock.
Now accusations of insider trading are flying online against those individuals, which includes CEO Brian Armstrong.
Coinbase and Armstrong insist that the company has done nothing wrong.
“Coinbase Executive sale timing is unrelated to recent market events, and were completed pursuant to a standard, pre-scheduled 10b5-1 plan, as we have previously discussed on our blog,” a Coinbase spokesperson told the Daily Dot via email. (Rule 10b5-1 plans allow insiders to trade shares provided they set up a predetermined plan.)
The company’s statement linked to a September 2021 blog denying that its executives and insiders sold shares in response to its receipt of a previous Wells notice.
While companies are not under an absolute obligation to disclose that they’re being investigated by the SEC, they are required to do so in some circumstances. Last year, a federal court ruled that a company was required to disclose an SEC investigation after revealing its accounting practices were being probed.
Because Coinbase revealed the SEC was looking into it last summer, this means it could have an obligation to disclose subsequent developments.
The SEC hasn’t commented on the matter.
On Wednesday, Coinbase revealed that it had received the latest Wells notice from the SEC.
This notice means that the SEC has completed its investigation and is giving Coinbase the opportunity to respond to the substance of its allegations. Wells notices don’t always lead to charges or indicate that the recipient has broken the law.
In a blog, the company suggested that the SEC is acting in bad faith. “We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead,” it wrote.
Coinbase claimed the investigation is in a “very early stage.”
It said that the SEC’s notice concerned an “undefined portion” of its digital assets, staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet. Coinbase said that it was “prepared” for this and is confident that its assets and services are legal. It also wrote that it would “welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”
The SEC began investigating Coinbase last summer. In its blog, the company said that it disclosed this at the time. Coinbase claimed that the SEC offered to discuss a “potential resolution that would include registering some portion of our business with the SEC,” and that Coinbase agreed. The company says it spent the last several months meeting with the SEC and creating two potential registration models.
The SEC agreed to provide feedback on those models in January, according to Coinbase, but canceled the day before and informed the company that it was resuming its investigation.
According to CryptoSlate, Coinbase executives and insiders have sold nearly $7.5 million worth of stock in the last month. This includes $5.8 million of stock that Armstrong reportedly sold, nearly half of which he sold on Tuesday, one day before Coinbase revealed the SEC had sent the Wells notice.
The timing of the stock sales, investigation, and Wells notice has many observers accusing Coinbase of facilitating insider trading, which entails buying and selling stock based on nonpublic knowledge that could materially affect its value.
These claims are purely speculative at this point. Coinbase says the sales were previously scheduled and unrelated to recent events.
Armstrong maintains that the crypto giant has done nothing wrong.
“While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court,” Armstrong tweeted on Wednesday.
The SEC has grown increasingly interested in regulating the cryptocurrency industry.
The agency recently went after celebrities including Kim Kardashian, Lindsey Lohan, and Jake Paul for allegedly illegally promoting crypto assets. In October, Kardashian paid $1.3 million to settle the SEC’s case against her for failing to disclose that she was paid to promote a cryptocurrency.
Last month, a former product manager at Coinbase insider pled guilty to insider trading. It was the first insider trading case involving a cryptocurrency market.
