DCG will become ‘an insolvent zombie company,’ Ahluwalia says

Any time a CEO says “our balance sheet is strong” in crypto, jokes Santiago Santos, “it’s definitely not. Run away.”

Following the collapse of FTX, DCG’s CEO Barry Silbert attempted to reassure frazzled investors with a calming letter, suggesting things were copacetic despite the spreading market contagion. But Lumida Wealth co-founder and CEO Ram Ahluwalia says “things still didn’t make any sense” at the time.

“And now, of course, here we are,” he says. “The NYAG has filed a complaint against DCG and Barry Silbert personally.”

Speaking to Blockworks on the Empire podcast (Spotify/Apple), Ahluwalia says the digital asset conglomerate is now mired in a legal mess with serious implications, comparing the meltdown of DCG to the Enron scandal of the early 2000’s.

After the demise of Three Arrows Capital left DCG subsidiary Genesis in a negative equity position, the best move would have been to “let Genesis default and go into bankruptcy,” he says.

“But here’s what we learned in the NYAG complaint,” he says. “Barry [Silbert] himself was personally directing Genesis to refinance its loans,” according to Ahluwalia.

The lesson to be learned

Ahluwalia alleges that DCG did not let Genesis go into bankruptcy to “protect the mothership” because “Genesis would have called in the loans and not refinanced DCG — and DCG didn’t have the cash.”

The “root lesson to be learned,” Ahluwalia says, is “not to borrow from Genesis to go levered long on your own product.”

“That’s what the NYAG complaint shows,” he says, “that Barry Silbert personally directed Genesis to refinance its loans — and he set loan terms. That’s self-dealing.”

Ahluwalia says the legal issues at play are arguably worse than those of the infamous Enron scandal. While Enron was guilty of “self-dealing,” he says, “each one-off transaction was legal on the surface. It was the aggregation of all of that together, plus the intention to deceive that made that fraud.”

“What DCG did was beyond that,” he says. For example, the company “allegedly issued fraudulent balance sheet statements via Genesis to their customers. Enron didn’t do that.” DCG also hid accounting issues behind “technical word salad” and a $1.1 billion promissory note, he says.

According to Ahluwalia, Genesis and DCG “crossed a line in that deception, in a way that Enron did not.”

Enron “cost the public a lot more money,” Ahluwalia admits, but “in terms of the brazenness of it, it was more serious,” he says.

A zombie company

In the aftermath, Grayscale will likely be auctioned off, Ahluwalia suggests, due to the New York AG’s request that DCG be prohibited from acting as a securities and commodities business. He also expects DCG to be “mired in endless settlements and lawsuits.”

The conglomerate will effectively become “an insolvent zombie company,” he says. “They will never be able to raise venture capital.”

The company may likely persist in the form of “indentured servitude” to its creditors, Ahluwalia suggests. In the meantime, Grayscale might serve as a “cash cow” with DCG “leeching the cash flow off of Grayscale to make creditors whole,” he says.

“When that’s done, then the assets of DCG are auctioned off — and DCG is functionally dead.”

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