Coinbase's stock sinks again as penalties from SEC suit could top $6 billion, analyst says

By Tomi Kilgore

SEC suit against the crypto exchange was in line with expectations, but penalties could a lot worse than feared

Shares of Coinbase Global Inc. tumbled again Tuesday, amid worries that the fallout from regulatory actions could be a lot worse than previously feared.

On Tuesday, U.S. Securities and Exchange Commission (SEC) said that it charged the cryptocurrency exchange with illegally offering exchange, brokerage, clearing and staking services. The suit came a day after the SEC charged rival Binance Holdings Inc. with securities fraud.

Barclays analyst Benjamin Budish said the SEC's suit against Coinbase is largely consistent with his expectations, and with what the SEC warned the company about in March. But there's more.

"[I]n the suit, the SEC also orders Coinbase to 'disgorge... all ill-gotten gains' resulting from the alleged violations, with interest -- in other words, the company would be required to pay a penalty totaling the entirety of revenues generated from trading in digital asset securities," Budish wrote in a note to clients.

Based on his analysis, Budish said Coinbase could be on the hook for a penalty of just over $6 billion, which would be "quite meaningful versus our prior expectations."

Budish reiterated his equal weight rating on the stock and his $61 price target.

The stock (COIN) dove as much as 20.9% intraday, before paring some losses to be down 12.0% in afternoon trading, and after sinking 9.1% on Monday.

The combined 20.0% selloff would be the stock's worst two-day performance since it plunged 21.1% over the two days ending March 23, after Coinbase received the SEC's warning. The difference is, the stock was recently trading about 22% below where it closed on March 23.

Coinbase Chief Executive Officer Brian Armstrong responded by tweeting, "we're proud to represent the industry in court to finally get some clarity around crypto rules."

In addition to the SEC's suit, the Alabama Securities Commission (ASC) issued a "Show Order" to Coinbase, giving the company 28 days to "show cause why they should not be directed to cease and desist from selling unregistered securities in Alabama."

The ASC said its action is a result of a task force made up of securities regulators of 10 cents, including Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin.

Barclays' Budish said the ASC's order appeared to specify that the potential cease-and-desist order would apply only to Alabama.

Meanwhile, other crypto stocks bucked the weakness in Coinbase shares by bouncing sharply into positive territory. Marathon Digital Holdings Inc.'s stock (MARA) had been down as much as 7.8% intraday, but reversed course to be up 9.7% in afternoon trading, while Riot Platforms Inc. shares (RIOT) reversed an earlier loss of as much as 9.2% to trade up 2.4%.

And the price of bitcoin rose 4.3% to $26,878, reversing an earlier selloff of as much as 1.7%.

For Coinbase's stock to fall on a day bitcoin rises is rare, as the correlation coefficient between the two since Coinbase went public on April 14, 2021 was 0.93, according to a MarketWatch calculation of FactSet data. A correlation coefficient of 1.00 means two securities move exactly in tandem.

Coinbase's stock has still run up 46.0% year to date, while bitcoin has soared 61.9% and the S&P 500 index has advanced 11.6%.

-Tomi Kilgore

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06-06-23 1538ET

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