New York Attorney General Sues Gemini Trust, Genesis Global, and DCG for Defrauding Customers

New York Attorney General Letitia James has filed a complaint against popular crypto exchange Gemini, crypto lending firm Genesis, and crypto investment company Digital Currency Group (DCG). 

The lawsuit also targets two executives, former Genesis CEO Michael Moro and DCG CEO Barry Silbert, alleging that the duo was involved in fraudulent schemes that defrauded customers, according to a report by Axios. 

The complaint argues that Gemini provided funds to Genesis as part of its Earn program, which were subsequently lent out to counterparties such as Three Arrows Capital and Alameda. 

However, when multiple bankruptcies occurred within the industry, resulting in defaults to Genesis, the company found itself facing a staggering $1 billion hole. 

The lawsuit accuses DCG of attempting to cover up these losses by falsely claiming to have absorbed them, when in reality, it had only issued a promissory note to its subsidiary Genesis.

The lawsuit also claims that Gemini made false assurances regarding the overcollateralization of Genesis’ loans. 

According to data shared by her office, between December 2020 and September 2022, Genesis’ loans were only 60-90% collateralized, contrary to Gemini’s claims. 

The complaint added that Gemini’s risk management team identified in May 2021 that Genesis was highly leveraged and had low liquidity. 

By February 2022, the team projected a potential 50-60% default rate in the event of a market downturn and compared Genesis’ financials to companies with a credit rating of CCC, indicating a significant credit risk.

Genesis Instructed Employees Not to Disclose Promissory Note to Gemini

Furthermore, the complaint reveals that Genesis’ CFO instructed employees not to disclose the promissory note to Gemini, and the company actively concealed and suppressed information regarding the note and the losses it represented. 

A promissory note is a written agreement between a borrower and a lender saying that the borrower will pay back the amount borrowed plus interest.

It was only on October 28, 2022, that Silbert authorized Genesis to disclose the promissory note to Gemini, just two weeks before Genesis suspended withdrawals.

The complaint supports previous claims by Gemini co-founder Cameron Winklevoss, who asserted that Genesis misled Gemini about its financial health, particularly concerning the promissory note. 

The New York Attorney General’s Office alleges that Silbert deliberately chose not to address the $1.2 billion hole but instead pretended to have resolved the issue.

Additionally, the lawsuit reveals that DCG borrowed over $800 million from Genesis between January and July 2022. 

The complaint seeks to restrict the defendants from engaging in the sale of securities and commodities in the state of New York. 

It also demands damages, penalties, and the forfeiture of any profits derived from their alleged fraudulent activities.

As reported, Digital Currency Group has reached a preliminary agreement with Genesis creditors to settle the claims by reimbursing 70-90% in USD equivalent to unsecured creditors.

According to a court filing last month, the in-principle deal reached with Genesis creditors offers up to 65%- 90% recovery on an in-kind basis depending on the denomination of particular cryptocurrencies.