New York AG sues DCG, Gemini and Genesis in ‘sweeping lawsuit’

New York Attorney General Letitia James has filed a “sweeping lawsuit” against Gemini, Genesis and Digital Currency Group (DCG). 

The suit also targets DCG CEO Barry Silbert and ex-Genesis CEO Michael Moro. No Gemini executives were named in the suit.

The complaint alleges that Gemini and Genesis Capital conspired on two “fraudulent schemes” with their Gemini Earn product, resulting in investors losing more than $1 billion in November 2022 when withdrawals from the platform were suspended.

Genesis Capital’s parent company DCG “coordinated” with the companies to perpetuate the scheme, the complaint alleges. 

According to the complaint, Gemini falsely advertised Earn as “a highly liquid investment” and misled investors to believe that “Genesis Capital was creditworthy based on Gemini’s ongoing risk monitoring.” The attorney general says Genesis Capital, in reality, was actually at a high risk of default. 

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 under the Howey test.

“The Genesis Entities, [Michael] Moro, DCG, and [Barry] Silbert disguised $1.1 billion in losses through a months-long campaign of misstatements, omissions, and concealment,” the complaint reads. 

James’ 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. 

“The Genesis Entities, DCG, Moro, and Silbert falsely assured counterparties and the public that Genesis Capital was ‘well-capitalized’ and that DCG ‘absorbed the losses’ from the Genesis Entities,” the complaint reads. 

Gemini also “falsely assured the public” through public statements that the Genesis Capital loan book was overcollateralized, though it was not.

“On March 9, 2021, a risk management employee reporting directly to Gemini’s Head of Risk corrected a similar misstatement by stating: “[l]ending is ‘collateralized’ but not necessarily ‘overcollateralized,’” the suit claims.

In fact, according to the lawsuit, Gemini gave Genesis a junk rating. 

“Based on this credit rating, the risk management team projected that in a market downturn, ‘a 50-60% default rate for Genesis [Capital] [wa]s an appropriate assumption, given additional risks in Crypto industry vs traditional industry,’” the suit said.

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. 

This was never announced to investors, but the suit said “these were material facts for investors.” As such, “Gemini had an affirmative duty” to let investors know, the complaint alleged.

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, “aided and abetted Genesis in making fraudulent misrepresentations to Gemini with respect to Genesis’s financial condition and the support it received from DCG.”

DCG labeled the lawsuit a “publicity stunt” and claims the suit is filled with “misrepresentations.”

The NYAG complaint comes as ex-FTX CEO Sam Bankman-Fried’s criminal trial continues in Manhattan. He faces seven federal counts of fraud and conspiracy. 

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’ third-party loans were to Alameda, according to the complaint. 

“Gemini’s internal analyses of Genesis showed that the company’s financials were risky,” a statement from James’ office said. “The lawsuit alleges that Gemini knew Genesis’ loans were undersecured and at one point highly concentrated with one entity, Sam Bankman-Fried’s Alameda, but did not reveal this information to investors.”

“The NY AG’s lawsuit confirms what we’ve been saying all along — that Gemini, Earn users, and other creditors were the victims of a massive fraud and systematically ‘lied to’ by these parties about ‘Genesis’s financial condition,” Gemini said in a post on X Thursday morning. 

“With that said, we wholly disagree with the NY AG’s 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.”

In a statement Thursday, DCG said, “We 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’s 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.”

Silbert, in a separate statement emailed to Blockworks, said, “I am shocked by the baseless allegations in the Attorney General’s complaint and intend to fight these claims in court.  Honesty and integrity have always been my guiding principles. Last year, my and DCG’s 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.”

Updated Oct. 19, 2023 at 12:40 pm ET: Added comment from DCG and Silbert.

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.