The New York Attorney General (NYAG) has filed a lawsuit against crypto exchange Gemini, crypto lending firm Genesis, crypto investment company DCG, and two executives, alleging that they conspired to fraudulently represent Genesis’ financial condition to hide a $1 billion hole in its finances.
Gemini lied to investors about the Earn program
According to the complaint, Gemini lent funds to Genesis as part of its Earn program, which offered investors high-interest rates on their crypto deposits.
These funds were ultimately lent out to counterparties, including Three Arrows Capital and Alameda. When multiple bankruptcies in the space caused defaults to Genesis, it was left with a $1 billion hole.
The NYAG claimed that Gemini made false assurances that Genesis’ loans were overcollateralized and that Genesis was creditworthy based on Gemini’s risk monitoring.
It provided data that showed Genesis’ loans were between 60-90% collateralized between December 2020 and September 2022. It also pointed to a claim in a Gemini press release in February 2021 that said Genesis’ loans were overcollateralized.
The NYAG said Gemini’s risk management team determined in May 2021 that Genesis was highly leveraged and had low liquidity.
Around February 2022, it projected that a market downturn could see a 50-60% default rate and said the financials were similar to companies with a credit rating of CCC — which, per Fitch Ratings1, suggests a substantial credit risk with a real possibility of default.
Genesis and DCG concealed $1.1 billion in losses
The complaint also charges Genesis, its former CEO Soichiro Moro, its parent company, DCG, and DCG’s CEO Barry Silbert, with defrauding investors and the public by trying to conceal more than $1.1 billion in losses, which investors bore.
The NYAG alleged that DCG claimed it had absorbed the losses when it had only made a promissory note to its subsidiary Genesis. The promissory note was stated as an asset on Genesis’ balance sheet but was illiquid and had a ten-year maturity.
The complaint provides multiple public statements by Genesis and Moro that said it had mitigated its losses and that the Genesis balance sheet was strong.
It claimed that this was misleading because Genesis’ client funds had been impacted, its balance sheet was weak, and the risk hadn’t been removed — it was simply hidden by the promissory note.
The NYAG stated that Genesis’ CFO told employees not to disclose the promissory note to Gemini and that the company concealed and suppressed information that would have revealed the note or the losses.
On October 28, 2022, Silbert authorized Genesis to disclose the promissory note to Gemini two weeks before Genesis suspended withdrawals.
The NYAG lawsuit reveals the risks and challenges of the crypto industry and the need for more regulation and oversight. The investors who were defrauded by this scheme deserve to get their money back and justice.
