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New York Attorney General Letitia James today sued the three companies behind Gemini Earn for allegedly defrauding investors.
The companies in question are Gemini Trust Company LLC, Genesis Global Capital LLC and the latter firm’s parent organization, DCG Inc. Former Gemini Chief Executive Soichiro Moro and current DCG head Barry Silbert are also named as defendants. The lawsuit charges they defrauded 230,000-plus investors of more than $1 billion.
“These cryptocurrency companies lied to investors and tried to hide more than a billion dollars in losses, and it was middle-class investors who suffered as a result,” James said in a statement.
Gemini runs a cryptocurrency exchange of the same name. DCG, in turn, is an investment firm that operates several digital asset companies. One of those companies is Genesis, which provides cryptocurrency lending and trading services.
At the heart of the lawsuit in New York is a service called Gemini Earn that Gemini and Genesis launched about two three ago. It allowed users to lend their digital assets to third parties and earn interest.
Gemini, the lawsuit charges, marketed the lending service as a low-risk investment. In reality, the company’s internal analyses allegedly determined that this wasn’t the case. Gemini found risks in the balance sheet of Genesis, the firm with which it launched Gemini Earn, but didn’t flag the issue to investors.
A year into the partnership, Gemini revised its internal estimate of Genesis’ credit crediting from investment grade to junk grade. It also found issues in the latter company’s lending business. At one point, nearly 60% of the loans on Genesis’ books were issued to Alameda Research.
Today’s lawsuit also brings a set of charges against Genesis itself. The company is accused of attempting to conceal more than $1.1 billion in losses from Gemini, Gemini Earn investors and the public. Genesis is believed to have worked together with its parent company, DCG, to hide the state of its balance sheet.
A sizable portion of Genesis’ $1.1 billion loss resulted from the collapse of a cryptocurrency fund called Three Arrows Capital that it counted as a customer. According to the lawsuit, the DCG subsidiary lost another $100 million or so when a second cryptocurrency company with which it had worked likewise imploded. Before the two loan defaults, Genesis allegedly failed to adequately audit its borrowers’ balance sheets for risks even though it claimed to have done so.
Genesis and parent company DCG reportedly teamed up to conceal the extent of the losses. The scheme involved a $1.1 billion promissory note that DCG issued to Genesis, the lawsuit charges. A promissory note is a document in which one party agrees to repay borrowed money to another party.
James is seeking to ban Gemini, Genesis and DCG from operating in New York’s investment sector. Another goal of the lawsuit is to secure a court order that would require the companies to compensate Gemini Pay investors for their losses and disgorge allegedly ill-gotten gains.
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