New York Attorney General Letitia James filed a lawsuit against Gemini Trust Co. and Digital Currency Group (DCG), alleging a fraud of $1.1 billion, marking increased legal troubles amid last year’s crypto market downturn. The lawsuit, lodged on Thursday, accuses the crypto exchange Gemini and DCG’s Genesis Global Capital of not adequately informing investors about the risks tied to a crypto-lending program initiated in 2021. This venture saw a significant asset drop last year following several notable bankruptcies, including that of Sam Bankman-Fried’s FTX.
Core Allegations
Gemini, established by Tyler and Cameron Winklevoss, is accused of misleading customers regarding the risk level of loans within its joint venture with Genesis. It also failed to reveal that nearly 60% of its third-party loans were tied to Bankman-Fried’s crypto trading company, Alameda Research. On the other hand, Genesis and DCG allegedly attempted to hide escalating losses.
After the lawsuit, the US Securities and Exchange Commission (SEC) also took legal action against Genesis and Gemini over their unsuccessful joint venture, known as Gemini Earn. The three companies have since been embroiled in mutual lawsuits following the sector’s struggles. After filing for bankruptcy in January, Genesis sued its parent company DCG to recover around $620 million in outstanding loans, while Gemini pursued legal action against DCG and Barry Silbert for recovering “damages and losses” from alleged “fraud and deception” concerning Gemini Earn.
Company Reactions
DCG defended its practices, stating it has always operated “lawfully and with integrity” and vowed to challenge the state’s allegations. Gemini expressed disagreement with NY AG’s decision to sue them alongside Genesis and DCG, labeling it as blaming a victim for being deceived.
Financial Fallout
Gemini Earn aimed to yield up to 8% interest for its customers by allowing Genesis to lend their crypto assets to third parties. However, over $1 billion got funneled into Three Arrows Capital, a hedge fund that crumbled in mid-2022, creating a significant financial gap in Genesis’s accounts. Genesis suffered another loss of more than $100 million from another borrower, Babel Finance, around the same period.
Barry Silbert labeled the accusations “baseless” and emphasized his and DCG’s endeavor to support Genesis through the financial turmoil triggered by Three Arrows Capital’s collapse. Yet, the lawsuit contends that Genesis did not adequately audit Three Arrows and misrepresented its review practices to Gemini, which worsened the financial debacle
The lawsuit seeks to prohibit Gemini, Genesis, and DCG from the financial investment sector in New York, alongside demanding restitution for investors and the relinquishment of the companies’ alleged ill-gotten earnings.
