Securities Regulation Daily Wrap Up, BLOCKCHAIN—N.D. Cal.: Coinbase customers blast exchange’s holdup of trading, failure to honor smart contract peg, (May 29, 2025)

By Rebecca E. Hoffman, J.D.

The plaintiffs allege that Coinbase’s activities related to the WLUNA token caused substantial losses, and that its conduct was “intentional, reckless, oppressive, fraudulent, and malicious.”

Investors who purchased crypto asset WLUNA on the Coinbase platform sued the company, its parent Coinbase Global, Inc., its CEO, and other as-yet-unnamed principals on May 27 for damages resulting from the defendants’ blocking access to these assets, falsely stating the suspension of WLUNA trading was temporary, altering the designation of the token, and refusing to honor the immutable smart contract peg to the LUNA token (Heabeart v. Coinbase, Inc., No. 4:25-cv-04473 (N.D. Cal. May 27, 2025)).

Close and conflicted. According to the complaint, Coinbase had a “close … financial and operational relationship” with Terraform Labs, which created LUNA and the blockchain involved here. Coinbase had access to nonpublic information about the crypto ecosystem, and held Terra assets, giving rise to an inherent conflict of interest, the plaintiffs said.

WLUNA is an Ethereum-based counterpart of LUNA, and the two were supposed to have a “pegged” 1:1 ratio. “This pegged relationship was immutable and encoded into the blockchain,” the complaint explained, “assuring retail investors that each unit of WLUNA was always redeemable or exchangeable for one unit of native LUNA, maintaining price equivalence.”

Unpegged. The Terra blockchain collapsed in May of 2022, at which point Coinbase suspended WLUNA trading on its exchange. This suspension was supposed to be temporary, but Coinbase kept it going, and this prevented the plaintiffs from being able to convert their tokens to LUNA, as permitted by the pegged association. Coinbase also changed the display name of the asset to “Wrapped LUNA Classic,” or WLUNC, “thereby effectively severing the publicly guaranteed peg to the new LUNA token,” the plaintiffs asserted.

The complaint also states that the defendants tried to hide the mishandling of these assets by issuing inaccurate documents. In particular, the plaintiffs highlight tax documents pertaining to one plaintiff, which reflected an outlandish purchase of $76 million dollars’ worth of WLUNA, belied by blockchain ledger entries. The plaintiffs also aver that the defendants brushed off the plaintiffs’ inquiries, further concealing their wrongdoing.

Coinbase profited from this misconduct, the complaint said, while causing great financial loss to the plaintiffs. The plaintiffs justifiably relied on the defendants’ misrepresentations, such as their claim that the suspension was “temporary,” and would have acted to mitigate their losses had they known the outage would last this long.

The plaintiffs concluded that “Coinbase’s misleading communications, subsequent prolonged outage, improper asset renaming, and mishandling of WLUNA’s smart contract peg collectively deprived Plaintiffs of the opportunity to realize substantial potential recoveries through timely and proper conversion of WLUNA holdings into new LUNA tokens.”

The complaint seeks relief for violations of Exchange Act Section 10(b) and Rule 10b-5, breach of contract, breach of implied covenant of good faith and fair dealing, conversion, unjust enrichment, fraud, and violations of Exchange Act Section 20(a) against Coinbase Global and the CEO/chair as controllers, requesting compensatory and punitive damages, disgorgement, pre- and post-judgment interest, and attorneys’ fees and costs.

The case is No. 4:25-cv-04473.

Attorneys: Mario P. Tafur (Bulldog Law) for Joel Heabeart, Kyle Kelley, Noel Yount and Israel Alatriz.

Companies: Coinbase, Inc., Coinbase Global, Inc.

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