New York Attorney General Files $1.1 Billion Crypto Fraud Lawsuit Against Gemini and DCG

Allegations of Deceptive Practices and Concealed Risks in Crypto-Lending Program

Oct 19, 2023 - 08:52
Oct 19, 2023 - 08:53
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New York Attorney General Files $1.1 Billion Crypto Fraud Lawsuit Against Gemini and DCG
New York Attorney General Files $1.1 Billion Crypto Fraud Lawsuit Against Gemini and DCG

New York's top law-enforcement officer, Attorney General Letitia James, has taken legal action against Gemini Trust Co. and Digital Currency Group (DCG), led by Barry Silbert, alleging a $1.1 billion fraud against customers. This lawsuit further compounds the legal challenges faced by both companies in the aftermath of the cryptocurrency market downturn last year.

The suit, filed on Thursday, claims that Gemini, a cryptocurrency exchange, and DCG's Genesis Global Capital unit failed to inform investors about the risks associated with a crypto-lending initiative they launched in 2021. This venture suffered a significant setback last year amid a series of high-profile bankruptcies, including FTX, led by Sam Bankman-Fried.

Gemini, co-founded by Tyler and Cameron Winklevoss, is accused of misleading customers about the level of risk in its partnership with Genesis. Furthermore, it allegedly failed to disclose that at one point, nearly 60% of its third-party loans were extended to Bankman-Fried's crypto trading firm, Alameda Research. The suit also contends that Genesis and DCG attempted to conceal mounting losses.

These allegations from New York follow a lawsuit by the US Securities and Exchange Commission (SEC) in January against Genesis and Gemini regarding their failed joint venture in crypto-lending, known as Gemini Earn. Additionally, the three companies have engaged in reciprocal lawsuits amid challenges faced by the sector. Genesis, which filed for bankruptcy in January, subsequently sued its parent company DCG in an attempt to recover approximately $620 million in outstanding loans. Gemini has also taken legal action against DCG and Silbert, seeking to recover damages and losses allegedly incurred due to fraud and deception related to Gemini Earn.

The alleged misconduct by these companies is, according to James, "yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry." She emphasized her commitment to combating deceptive cryptocurrency companies and advocating for stronger regulations to safeguard investors.

The state of New York is seeking to prohibit Gemini, Genesis, and DCG from participating in the financial investment industry within the state. Attorney General James is also pursuing restitution for investors and the disgorgement of the companies' allegedly ill-gotten gains.

As of now, representatives for Gemini, Genesis, and DCG have not provided immediate responses to requests for comment.

Gemini Earn, which claimed to offer up to 8% interest for Gemini customers, allowed Genesis to lend their cryptoassets to third parties. However, more than $1 billion was invested in Three Arrows Capital, a hedge fund that collapsed in mid-2022, resulting in a significant financial gap for Genesis. Around the same time, Genesis also experienced losses exceeding $100 million from another borrower, Babel Finance, as stated by James.

The suit alleges that Genesis failed to conduct adequate audits of Three Arrows and deceived Gemini by falsely asserting that it regularly reviewed its borrowers' financial statements. The state's investigation revealed that no such audit had been performed for over two years.

In July 2022, the board of managers at Gemini contemplated discontinuing the Gemini Earn program due to the risks associated with Genesis. One board member likened the company's financial situation to that of Lehman Brothers, according to James. However, Gemini allegedly neglected to provide its investors with meaningful warnings about these risks.

Silbert and former Genesis CEO Michael Moro, both named as defendants in the suit, are accused of repeated deception of investors, as well as Gemini, regarding financial difficulties. Genesis is alleged to have concealed from Gemini the existence of a $1 billion promissory note created to mask the extent of its losses, according to the complaint.

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