A California judge gave Brian Armstrong’s cryptocurrency exchange Coinbase three quarters of a win Tuesday, throwing out fraud and unfair competition allegations.
The two allegations are the most serious brought in a class action lawsuit by trader Jeffrey Berk over the mishandled 2017 decision to begin trading Bitcoin Cash (BCH) on the highly regarded exchange.
The judge also threw out half of the negligence claim, saying only BCH buyers could show they were damaged, not sellers.
The issue arose when Coinbase halted trading in BCH after less than three minutes due to a price spike that caused buyers orders to be filled at a high cost. While it was publicized that trading of the recently launched bitcoin (BTC) fork would begin no earlier than January 1, 2018, Coinbase’s December 19 decision to list was announced with just an hour’s notice.
To make matters worse, the Coinbase launch took place with only buy orders pending, accelerating the price rise. Some $15.5 million worth of trades took place in just two minutes and 40 seconds, 90%of them buy orders. The price jumped from $1,837 on December 17 to a high of $4,300 two days later, according to CoinMarketCap.
Coinbase itself investigated the widespread rumors of insider trading by employees before the rushed December 2017 listing.
In allowing the negligence claim to go forward, federal Judge Vince Chhabria of the Northern District of California said, “the buyers have alleged a plausible motive for Coinbase’s seemingly rushed decision to launch under subpar conditions: The Chicago Mercantile Exchange opened trading in Bitcoin futures the day before the launch.”
As for the sellers’ claim that halting trading caused them to lose the opportunity to sell at high prices, Chhabria said that the injury they suffered by the trading halt wasn’t negligent. Instead, it stopped more buyers from being hurt. He also noted that if Coinbase hadn’t screwed up the launch, the sellers wouldn’t have been able to sell at such inflated prices anyway.
Chhabria threw out the fraud allegations, saying that while the facts paint a compelling picture of an incompetent launch by Coinbase, calling the reasoning behind it “implausible.” The allegations amounted to “shadowy inferences” that Armstrong had a “nefarious plan” to sabotage Coinbase’s BCH launch as part of a “pump and dump” scheme to help unnamed insiders sell BCH at an inflated price, he said.
The same reasoning applies to the unfair competition law violation allegations that were thrown out, Chhabria said. He added that if Berkand the other plaintiffs found actual evidence of the schemes alleged in the suit, the claims could be revived.
He did hand Coinbase another loss by rejecting the company’s attempt to force the lawsuit into binding arbitration.