CRIMINAL CRYPTO CAPITALI$M
Gemini, DCG Sued by NY for Alleged $1.1 Billion Crypto Fraud

Erik Larson
Thu, October 19, 2023 



(Bloomberg) -- Gemini Trust Co. and Barry Silbert’s Digital Currency Group were sued by New York’s top law-enforcement officer for allegedly defrauding customers of $1.1 billion, escalating legal woes for two companies hit hard by last year’s plunge in cryptocurrency markets.

The lawsuit filed Thursday by New York Attorney General Letitia James accuses Gemini, which operated a crypto exchange, and DCG’s Genesis Global Capital unit of failing to disclose to investors the risks of a crypto-lending program they started in 2021. The venture’s assets collapsed last year amid several high-flying bankruptcies, including Sam Bankman-Fried’s FTX.

Gemini, founded by Tyler Winklevoss and Cameron Winklevoss, lied to customers about how risky loans were in its venture with Genesis and failed to disclose that at one point, almost 60% of its third-party loans were to Bankman-Fried’s crypto trading firm Alameda Research, the state claims. Genesis and DCG were accused in the suit of trying to conceal spiraling losses.

The claims by New York come after the US Securities and Exchange Commission in January sued Genesis and Gemini over their failed crypto-lender joint venture, known as Gemini Earn. Meanwhile, the three firms have also engaged in suing each other in the wake of sector woes. Genesis, which filed for bankruptcy in January, later sued its parent DCG seeking to recover about $620 million in outstanding loans. Gemini has also sued DCG as well as Silbert, seeking to recover “damages and losses” from alleged “fraud and deception” related to Gemini Earn.

Read More: Winklevoss’s Gemini Sues Crypto Conglomerate DCG for Fraud

The alleged fraud by the companies is “yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry,” James said in a statement. “My office will continue our efforts to stop deceptive cryptocurrency companies, and to push for stronger regulations to protect all investors,” said the attorney general, who has sought to position herself as a leading crypto enforcer.

The state said it wants to ban Gemini, Genesis and DCG from the financial investment industry in New York. James also is seeking restitution for investors and disgorgement of the companies’ allegedly ill-gotten gains.

Representatives for Gemini, Genesis and DCG didn’t immediately respond to requests for comment.

Gemini Earn purported to generate as much as 8% interest for Gemini customers by allowing Genesis to lend their cryptoassets to third parties. But more than $1 billion was invested in Three Arrows Capital, a hedge fund that failed in mid-2022, leaving a hole in Genesis’s balance sheet, according to the lawsuit. Around the same time, Genesis lost more than $100 million from another borrower, Babel Finance, James said.

Read More: Three Arrows Liquidators Seek $30 Million From Superyacht

Genesis is accused in the suit of failing to adequately audit Three Arrows and lying to Gemini when it claimed “to regularly review its borrowers’ financial statements,” James said. The state’s probe found that no such audit had been performed for more than two years, she said.

In July 2022, Gemini’s board of managers considered ending the Gemini Earn program due to the Genesis risks, with one board member comparing the company’s financial condition to Lehman Brothers, James said in her statement. But Gemini “failed to provide its investors with any meaningful warnings about these risks,” she said.

Read More: Gemini Pulled Genesis Funds Before Crypto Lender Collapsed

Silbert and former Genesis Chief Executive Officer Michael Moro, both of whom are named as defendants in the suit, are accused of repeatedly lying to investors as well as to Gemini about the financial woes. Genesis allegedly hid from Gemini the existence of a $1 billion promissory note that was created to conceal the extent of its losses, according to the complaint.

James said that some investors lost their lifesavings.

Read More: Crypto Empire DCG Faces US Investigation Over Internal Transfers

--With assistance from Emily Nicolle and stacy-marie ishmael.

Bloomberg Businessweek