SF Judge Says Coinbase Must Go to Court in Account Security Lawsuit

A San Francisco judge says cryptocurrency giant Coinbase must go to court rather than seek confidential arbitration to resolve claims by four investors that the company lied about shoddy security practices that failed to protect them from thieves.

Coinbase says it has 110 million users of its cryptocurrency exchange in more than 100 countries. The company was founded in San Francisco in 2012 but closed its office in 2020 and is now working remotely.

Since then, Coinbase has laid off more than 2,000 employees, about a third of its workforce. Almost half of those layoffs were announced in January as the crypto industry collapsed financially.

The lawsuit was filed by four customers, who said hackers hacked into their accounts and stole hundreds of thousands of dollars worth of currency between April and November 2022, and that Coinbase did nothing about it. But the lawsuit isn’t seeking damages from the company, only a court order asking it to publicly acknowledge flaws in its security system.

“Coinbase has tricked thousands of retail investors who would otherwise use safe and insured banking and investment platforms into trusting Coinbase with billions of dollars in savings,” attorney Noah Hagey said in the Jan. 30 lawsuit. “Coinbase positions itself as a leader in security by making statements like ‘We are the only crypto exchange that has never been hacked’. ”

The company charges investors “significant fees and commissions,” Hagey said, but “if its security is breached, it takes the position that it has no obligation” to reimburse its customers. He said Coinbase should be barred from “telling potential customers that it offers a secure, bank-like platform for consumers to store their savings.”

Coinbase denied the allegations and requested that the dispute be submitted to arbitration as required by its contracts with investors. Arbitrators hold closed hearings, their verdicts are virtually final, and studies have shown that they typically favor corporations – their regular customers.

But Supreme Court Justice Richard Ulmer said Tuesday that following a 2017 California Supreme Court ruling, arbitration agreements cannot be enforced against plaintiffs who seek “public injunctions,” court orders to protect the public, rather than individual damages or other private benefits.

The four plaintiffs in this case “are not seeking relief that would benefit solely them or existing Coinbase customers,” Ulmer wrote. Instead, he said, if they can prove their claims about the company’s security vulnerabilities and misstatements in court, the order they seek “will benefit consumers in general.”

“This decision will protect the public,” said Matthew Borden, another attorney for the plaintiffs. “Coinbase uses threats against its fraud victims and its unlawful arbitration clause to prevent the public from learning about its security flaws.”

Coinbase did not immediately respond to a request for comment.

The company is meanwhile confronted with possible legal action by the federal government. The Securities and Exchange Commission notified Coinbase last week that it may file lawsuits over some of its crypto exchange products.

Reach Bob Egelko: [email protected]; Twitter: @BobEgelko

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