New York State Attorney General Letitia James has initiated legal proceedings against three prominent cryptocurrency entities—Gemini, Genesis, and Digital Currency Group (DCG). The lawsuit alleges that these companies engaged in fraudulent activities, attempting to conceal losses amounting to $1.1 billion and repeatedly lying to over 230,000 investors. James, in a press release, accuses the companies of deceiving investors through false claims about the safety and growth potential of their investments.
The investigation uncovered that Gemini misled investors regarding the risks associated with its Gemini Earn program, designed to provide yield on crypto assets. Gemini collaborated with Genesis to facilitate this service. It is alleged that Genesis’ loans were “undersecured” at one point and concentrated within Alameda Research, the trading arm of the now-bankrupt FTX exchange. The lawsuit also names former Genesis CEO Soichiro Moro and DCG CEO Barry Silbert as defendants.
Gemini co-founder Cameron Winklevoss has alleged that DCG, Silbert, and other executives, along with Genesis, created false financial reports to mislead creditors and maintain an illusion of financial stability. The lawsuit claims that when faced with a potential crisis in mid-2022 due to defaults by hedge fund Three Arrows Capital, Genesis attempted to hide $1.1 billion in losses. Silbert allegedly assured DCG’s board that Genesis was preparing for a bank run but later publicly claimed that its “balance sheet is strong and our business is operating normally.”
The lawsuit aims to ban Gemini, Genesis, and DCG from the financial investment industry in New York. It seeks compensation for investors’ losses and disgorgement of the companies’ “ill-gotten gains.” Genesis, having declared bankruptcy earlier in the year, owed $735 million to members of the Earn program. The legal action has wider implications, potentially influencing the approval of a bitcoin exchange-traded fund (ETF) and casting a shadow on DCG subsidiary Grayscale’s application.
Gemini responded on social media, acknowledging that its users were victims of a massive fraud but expressing disagreement with being named in the lawsuit. DCG stated it was blindsided by the complaint, vowing to fight the claims. Silbert, shocked by the “baseless allegations,” emphasised his commitment to honesty and integrity. The legal battle between Gemini, Genesis, and DCG adds to the series of civil cases in the crypto industry, reflecting ongoing challenges and regulatory scrutiny.
The lawsuit follows a pattern of legal actions against crypto companies, with the SEC settling with Kraken and issuing warnings to Paxos earlier in the year. The broader implications of this case may extend beyond the immediate parties involved, potentially impacting the approval of crypto-related financial products and influencing the regulatory landscape. Attorney General James had previously proposed legislation to enhance oversight and regulation of the cryptocurrency industry, emphasising the need to protect investors from deceptive practices. The outcome of this legal battle will likely contribute to ongoing discussions about the regulation of the cryptocurrency space.