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New York Attorney General Letitia James has filed a \u201csweeping lawsuit\u201d against Gemini, Genesis and Digital Currency Group (DCG).\u00a0<\/p>\n
The suit also targets DCG CEO Barry Silbert and ex-Genesis CEO Michael Moro. No Gemini executives were named in the suit.<\/p>\n
The complaint alleges that Gemini and Genesis Capital conspired on two \u201cfraudulent schemes\u201d with their Gemini Earn product, resulting in investors losing more than $1 billion in November 2022 when withdrawals from the platform were suspended.<\/p>\n
Genesis Capital\u2019s parent company DCG \u201ccoordinated\u201d with the companies to perpetuate the scheme, the complaint alleges.\u00a0<\/p>\n
According to the complaint<\/a>, Gemini falsely advertised Earn as \u201ca highly liquid investment\u201d and misled investors to believe that \u201cGenesis Capital was creditworthy based on Gemini\u2019s ongoing risk monitoring.\u201d The attorney general says Genesis Capital, in reality, was actually at a high risk of default.\u00a0<\/p>\n James claims that Earn falls under the definition of an investment contract. The SEC also alleged back in January that the Earn program operated as an investment contract<\/a> under the Howey test.<\/p>\n \u201cThe Genesis Entities, [Michael] Moro, DCG, and [Barry] Silbert disguised $1.1 billion in losses through a months-long campaign of misstatements, omissions, and concealment,\u201d the complaint reads.\u00a0<\/p>\n James\u2019 office cites a series of posts on X, statements and other promotional material in which the companies allegedly deliberately misled the public about the nature and safety of their product.\u00a0<\/p>\n \u201cThe Genesis Entities, DCG, Moro, and Silbert falsely assured counterparties and the public that Genesis Capital was \u2018well-capitalized\u2019 and that DCG \u2018absorbed the losses\u2019 from the Genesis Entities,\u201d the complaint reads.\u00a0<\/p>\n Gemini also \u201cfalsely assured the public\u201d through public statements that the Genesis Capital loan book was overcollateralized, though it was not.<\/p>\n \u201cOn March 9, 2021, a risk management employee reporting directly to Gemini\u2019s Head of Risk corrected a similar misstatement by stating: \u201c[l]ending is \u2018collateralized\u2019 but not necessarily \u2018overcollateralized,\u2019\u201d the suit claims.<\/p>\n In fact, according to the lawsuit, Gemini gave Genesis a junk rating.\u00a0<\/p>\n \u201cBased on this credit rating, the risk management team projected that in a market downturn, \u2018a 50-60% default rate for Genesis [Capital] [wa]s an appropriate assumption, given additional risks in Crypto industry vs traditional industry,\u2019\u201d the suit said.<\/p>\n In September 2022, Gemini allegedly sought to terminate the Earn program. It proceeded to send a notice to Genesis in October to terminate the Earn agreements, which would mean the return of investor assets.\u00a0<\/p>\n This was never announced to investors, but the suit said \u201cthese were material facts for investors.\u201d As such, \u201cGemini had an affirmative duty\u201d to let investors know, the complaint alleged.<\/p>\n Gemini and Genesis parent company DCG have long butted heads, with Gemini filing its own lawsuit against DCG this summer alleging fraud. DCG, according to the suit, \u201caided and abetted Genesis in making fraudulent misrepresentations to Gemini with respect to Genesis\u2019s financial condition and the support it received from DCG.\u201d<\/p>\n DCG labeled the lawsuit<\/a> a \u201cpublicity stunt\u201d and claims the suit is filled with \u201cmisrepresentations.\u201d<\/a><\/p>\n The NYAG complaint comes as ex-FTX CEO Sam Bankman-Fried\u2019s criminal trial continues in Manhattan. He faces seven federal counts of fraud and conspiracy.\u00a0<\/p>\n Over the past three weeks of testimony, prosecutors have alleged that Bankman-Fried provided fraudulent financial statements to lenders and stole FTX customer money to cover loan payments. Almost 60% of Genesis\u2019 third-party loans were to Alameda, according to the complaint.\u00a0<\/p>\n \u201cGemini\u2019s internal analyses of Genesis showed that the company\u2019s financials were risky,\u201d a statement<\/a> from James\u2019 office said. \u201cThe lawsuit alleges that Gemini knew Genesis\u2019 loans were undersecured and at one point highly concentrated with one entity, Sam Bankman-Fried\u2019s Alameda, but did not reveal this information to investors.\u201d<\/p>\n \u201cThe NY AG\u2019s lawsuit confirms what we\u2019ve been saying all along \u2014 that Gemini, Earn users, and other creditors were the victims of a massive fraud and systematically \u2018lied to\u2019 by these parties about \u2018Genesis\u2019s financial condition,\u201d Gemini said in a post<\/a> on X Thursday morning.\u00a0<\/p>\n \u201cWith that said, we wholly disagree with the NY AG\u2019s decision to also sue Gemini. Blaming a victim for being defrauded and lied to makes no sense and we look forward to defending ourselves against this inconsistent position.\u201d<\/p>\n In a statement Thursday, DCG said, \u201cWe fully intend to fight the claims and look forward to being vindicated in this case. DCG has always conducted its business lawfully and with integrity. We have actively cooperated for months with the Attorney General\u2019s investigation in an open and transparent manner. We were blindsided by the filing of the complaint, and there is no evidence of any wrongdoing by DCG, Barry Silbert, or its employees.\u201d<\/p>\n Silbert, in a separate statement emailed to Blockworks, said, \u201cI am shocked by the baseless allegations in the Attorney General\u2019s complaint and intend to fight these claims in court.\u00a0 Honesty and integrity have always been my guiding principles. Last year, my and DCG\u2019s goal was to help Genesis weather the storm caused by the collapse of Three Arrows and position Genesis for success going forward. It is unfortunate that this lawsuit omits that fundamental fact.\u201d<\/p>\n Updated Oct. 19, 2023 at 12:40 pm ET: Added comment from DCG and Silbert.<\/em><\/p>\n Don\u2019t miss the next big story \u2013 join our\u00a0free daily newsletter<\/a>.<\/strong><\/p>\n
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