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The New York attorney-general has sued crypto conglomerate Digital Currency Group, the Winklevoss twins’ exchange Gemini and collapsed crypto lender Genesis for allegedly defrauding investors of more than $1.1bn.
The suit, filed on Thursday, alleged the companies had lied to more than 230,000 investors over the safety of their crypto investments when prices of popular tokens such as bitcoin tumbled sharply last year.
Senior executives at DCG and Gemini have become embroiled in a sometimes public bitter dispute over the fallout of the crypto crash, which has left thousands of investors unable to retrieve their money.
The dispute has revealed the close links and extent of risky lending among some of the market’s biggest participants in the bubble crypto market of early 2022.
The NYAG suit also charged Genesis’ former chief executive Soichiro Moro and DCG’s chief executive Barry Silbert with trying to conceal the $1.1bn in losses from the public.
“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,” said Letitia James, New York attorney-general.
DCG and Genesis did not immediately respond to requests for comment. Gemini said the lawsuit confirms that it and its customers “were the victims of a massive fraud and systematically “lied to” by these parties about “Genesis’ financial condition”.
“With that said, we wholly disagree with the NYAG’s decision to also sue Gemini. Blaming a victim for being defrauded and lied to makes no sense and we look forward to defending ourselves against this inconsistent position,” it added.
The dispute stemmed from a crypto lending product run by Gemini, the cryptocurrency exchange, and run in partnership with Genesis, a subsidiary of DCG.
The latter is one of the world’s biggest and oldest crypto investors, backed by groups including SoftBank and Google’s venture firm Capital G.
Gemini offered customers an investment that could earn as much as 7 per cent interest a year, and lent customers assets to Genesis to boost the returns. Genesis loaned them to other investors, notably crypto hedge fund duo Three Arrows Capital of Singapore and Sam Bankman-Fried’s Alameda Research.
However, the failure of Bankman-Fried’s FTX last November sparked market turmoil as customers demanded a return of their assets. In January Genesis filed for bankruptcy and the Securities and Exchange Commission charged both Gemini and Genesis with offering unregistered securities to investors.
The NYAG alleged that the failure of Three Arrows last June contributed to a $1.1bn hole at Genesis, which executives covered up.
Silbert told DCG’s board that Genesis’ exposure to Three Arrows was “uncomfortably big” and that the lender was preparing for a bank run, the lawsuit claims. Days later, Genesis said in public that its “balance sheet is strong and our business is operating normally”.
But the lawsuit alleged that Genesis would not be able to absorb the Three Arrows loss while the lender also needed to report a strongly capitalised balance sheet at the end of the month. To cover the hole, DCG promised to pay Genesis $1.1bn over 10 years at 1 per cent interest, the lawsuit said.
“The promissory note was part of a scheme to defraud Gemini Earn investors and the public about Genesis’ financial condition and its ability to operate its business,” it added.
The Winklevoss twins have sought to recover their customers’ money, and in July sued DCG and Genesis, alleging that the companies engaged in fraud related to the promissory note, in order to cover up losses. DCG is contesting the suit.
The lawsuit seeks to “permanently stop” Gemini, Genesis, DCG and its executives from carrying out any securities or commodities-related activities in or from New York, as well as recoup investors’ money.
