Oct 19, 2023 - Economy

Gemini, Genesis and DCG hit with civil fraud suit in continuing crypto saga

New York Attorney General Letitia James at a press conference last year for an unrelated case. Photo: Michael M. Santiago/Getty Images

Three firms caught in the FTX contagion allegedly lied to customers, each other and public about risk — the latest development in the crypto industry saga.

Driving the news: New York attorney general Letitia James announced Thursday that her office has sued Gemini Trust, Genesis Global and Digital Currency Group for defrauding some 230,000 investors of more than $1 billion.

  • The civil suit also charges former Genesis CEO Soichiro "Michael" Moro and DCG founder and chief Barry Silbert for trying to conceal the true financial condition of its lending unit, Genesis, to the Gemini exchange, its customers and the public.

The big picture: The allegations frame the Gemini, Genesis and DCG-relationship as suffering from some of the same issues as Sam Bankman-Fried's FTX and Alameda Research, including big debts, poor risk management and attempts to hide it.

Flashback: When FTX, a crypto exchange, and Alameda, its sister trading firm, filed for bankruptcy in November, it started a run of dominos.

  • It brought down Genesis and forced the Gemini exchange — founded by Tyler and Cameron Winklevoss — to halt customer withdrawals from its Earn program, on which the two companies partnered.
  • The Securities and Exchange Commission sued Gemini and Genesis over the product in January, saying it constituted an unregistered securities offering.

Details: The New York attorney general's lawsuit filed Thursday alleges that Gemini lied to customers in the program when it repeatedly assured them that Earn was safe.

  • James' office says that Gemini's internal analyses of Genesis showed that the program was risky from its start in February 2021 through its end in November 2022.
  • Gemini allegedly knew Genesis' loans were undersecured and that its loans were highly concentrated in one firm, Bankman-Fried's Alameda Research.
  • At one point Alameda accounted for nearly 60% of Genesis' outstanding loans to third parties, according to the suit.
  • Though Gemini revised Genesis' credit rating from investment grade (BBB) to junk (CCC), "it continued to market Earn as low-risk" and didn't disclose the change to its customers, the suit contends.

Between the lines: In July 2022, Gemini's board of managers allegedly discussed ending the program because of the risks associated with Genesis, with one member comparing its financial condition to that of Lehman Brothers before its collapse.

  • That summer, Gemini risk personnel withdrew their own investments from the Earn program, the suit alleges.

Zoom in: James' office also alleges that the $1.1 billion promissory note at the heart of the Gemini-DCG/Genesis dispute was used to conceal Genesis' "true financial health."

"This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry," James said in a statement.

  • James' office is seeking restitution for defrauded investors, including at least 29,000 New Yorkers, and disgorgement of any "ill-gotten" gains.

What they're saying:

  • Silbert said in a statement, "I am shocked by the baseless allegations in the Attorney General's complaint and intend to fight these claims in court."
  • Gemini shared a link to social media from the company account: "Blaming a victim for being defrauded and lied to makes no sense and we look forward to defending ourselves against this inconsistent position."
  • Axios reached out to Ankex, where Moro is now chief, via a messaging platform. The company kicked us out of the group chat.
  • DCG did not respond to a request for comment.

Go deeper: As crypto cratered, Gemini talked to customers about FDIC insurance

[Editor's note: This story has been updated with comments from some of the targets of the lawsuit.]

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