New York sues Gemini Trust and Digital Currency Group over alleged $1.1bn fraud

Gemini Trust and Barry Silbert’s Digital Currency Group (DCG) were sued by New York’s top law-enforcement officer for allegedly defrauding customers of $1.1 billion (€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 programme 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 per cent of its third-party loans were to Mr 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.

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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 Mr Silbert, seeking to recover “damages and losses” from alleged “fraud and deception” related to Gemini Earn.

The alleged fraud by the companies is “yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry”, Ms 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.

DCG, in a statement, said it has always conducted business “lawfully and with integrity”, and that the company will fight the state’s allegations.

“We have actively co-operated for months with the attorney general’s investigation in an open and transparent manner,” DCG said. “We were blindsided by the filing of the complaint, and there is no evidence of any wrongdoing by DCG, Barry Silbert, or its employees.”

Gemini, in a statement posted on X, applauded the complaint against Genesis and DCG, but said that “we wholly disagree with the NY AG’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.” Representatives for Genesis didn’t respond to a request for comment.

Gemini Earn purported to generate as much as 8 per cent interest for Gemini customers by allowing Genesis to lend their crypto assets 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. About the same time, Genesis lost more than $100 million from another borrower, Babel Finance, James said.

In a separate statement, Mr Silbert called the allegations “baseless”.

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“Honesty and integrity have always been my guiding principles,” Mr Silbert said. “Last year, my and DCG’s goal was to help Genesis weather the storm caused by the collapse of Three Arrows and position Genesis for success going forward. It is unfortunate that this lawsuit omits that fundamental fact.”

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,” Ms James said. The state’s inquiry 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 programme due to the Genesis risks, with one board member comparing the company’s financial condition to Lehman Brothers, Ms James said in her statement. But Gemini “failed to provide its investors with any meaningful warnings about these risks”, she said.

The complaint noted that “Gemini’s chief operations officer, who also sat on Gemini’s enterprise risk management committee, withdrew his entire remaining Earn investment – totaling more than $100,000 – on June 16th and17th, 2022.”

The filing didn’t name the executive. Noah Perlman was Gemini’s chief operating officer from August 2020 until January, according to his LinkedIn profile. He then joined Binance, the world’s biggest crypto exchange, as its chief compliance officer. Mr Perlman didn’t immediately respond to a request for comment.

Other Gemini risk management personnel withdrew their own investments from Earn between June and September as well, according to the complaint.

During a meeting on October 20th last year, Mr Silbert informed Cameron Winklevoss “that Genesis Capital could not redeem Earn investors’ funds without Genesis Capital declaring bankruptcy”, the complaint said. “Gemini secretly granted Genesis Capital multiple extensions to return investor funds.”

Mr Silbert and former Genesis chief executive 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.

Mr James said that some investors lost their life savings.

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. – Bloomberg