In a lawsuit filed in Manhattan on Thursday, New York state prosecutors have accused prominent crypto firms Digital Currency Group (DCG) and Gemini of orchestrating a massive fraud, which allegedly defrauded over 230,000 investors of a collective $1.1 billion. The lawsuit points to a series of missteps, including the failure to effectively manage the risk tied to Sam Bankman-Fried’s bankrupt and purportedly fraudulent crypto trading company.
To carry out this alleged fraud, Digital Currency Group, along with its subsidiaries and affiliates, such as Genesis Global Capital and Genesis, is claimed to have deceived investors, fabricated financial documents, and concealed information from creditors.
Genesis, which was previously the flagship enterprise of crypto mogul Barry Silbert, once operated as an over-the-counter trading desk, a prime brokerage, and a lender, accumulating cryptocurrencies from its clients and lending them to other parties, generating profits from the interest it charged. This strategy was lucrative until crypto hedge fund Three Arrows Capital defaulted on its loans, causing considerable upheaval in the crypto world.
DCG stated that it has been cooperating with the New York state investigation in an open and transparent manner for several months.
Both Genesis and DCG have since acknowledged their significant exposure to Three Arrows Capital (3AC). However, New York prosecutors claim that Genesis failed to conduct a proper audit of 3AC for over two years and that, when 3AC collapsed, Genesis and its parent company DCG allegedly conspired to hide the crisis details from investors and the public.
Among those investors affected by this alleged deception were Gemini, co-founded by Cameron and Tyler Winklevoss, and its customers. Gemini offered a high-yield program known as Gemini Earn, which allowed retail customers to entrust their cryptocurrencies to Gemini under the guise of a “low-risk” model. Gemini would then provide this customer cryptocurrency to Genesis for further lending, taking a portion of Genesis’ interest. The program launched in February 2021 when interest rates were still low, and many investors were seeking yield.
One of Genesis’s major trading partners was Sam Bankman-Fried’s trading firm, Alameda Research. Prosecutors argue that this meant Gemini also had exposure to Alameda and allegedly knew about it.
In the same lawsuit, New York prosecutors accused Gemini of not addressing its “risky” exposure to Alameda Research through its relationship with Genesis. They claim that Gemini conducted risk analyses on Genesis’ loan book, showing a significant exposure to Alameda, reaching as high as 60% at one point, and lowered Genesis’ internal creditworthiness to junk status.
Despite these internal assessments, prosecutors allege that Gemini did not reduce its substantial exposure to Genesis and Bankman-Fried, even though a Gemini board member made comparisons of “Genesis’ financial condition to that of Lehman Brothers before its collapse.”
New York prosecutors are seeking to permanently ban Gemini, Genesis, DCG, Barry Silbert, and various executives from engaging in securities and commodities activities in New York, in addition to seeking restitution and disgorgement.
New York Attorney General Letitia James stated, “Hardworking New Yorkers and investors around the country lost more than a billion dollars because they were fed blatant lies that their money would be safe and grow if they invested it in Gemini Earn. Instead, Gemini hid the risks of investing with Genesis, and Genesis lied to the public about its losses.”
This isn’t the first time that James has taken action against crypto firms. Earlier this year, her office sued Alex Mashinsky, the former CEO of the bankrupt crypto exchange Celsius, alleging that he defrauded hundreds of thousands of investors. Mashinsky was charged with fraud by federal prosecutors in July and could face prison if convicted.
In response to the lawsuit, DCG expressed its intent to contest the claims, while Silbert emphasized his commitment to honesty and integrity.
Gemini, in its statement on Twitter, strongly disagreed with the lawsuit and asserted that they were victims of a massive fraud, echoing their previous claims about the Gemini Earn program.
Information for this briefing was found via CNBC and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
