The New York Attorney General continues his crackdown on cryptocurrency-related companies, accusing three of the digital asset industry's biggest companies of lying to investors and concealing losses in a $1 billion fraud scheme in a lawsuit filed on Thursday.
The lawsuit targets Gemini Trust, an exchange run by twin brothers Tyler and Cameron Winklevoss, lender Genesis Capital and Genesis' parent company Digital Currency Group.
In her lawsuit, Attorney General Letitia James alleges that Gemini lied to investors about the risks of Gemini Earn, a program launched by Gemini and Genesis that promised investors high returns of up to 8% if they loaned their cryptocurrency to Genesis.
But Genesis has struggled since the collapse of FTX, the crypto exchange founded by Sam Bankman Freed, in November last year, when a collapse in the value of digital assets led to accounts being frozen and earning investors unable to get back hundreds of millions of dollars worth of crypto.
According to James' complaint, internal Gemini documents show that the firm's risk analysis team deemed Genesis to be highly risky — highly leveraged and with limited liquidity — just months after Earn was founded in 2021. Gemini also knew that Genesis' loans were at one point tied to Alameda Research, a now-bankrupt cryptocurrency hedge fund founded by Bankman Freed, who is currently facing a criminal trial on fraud charges.
But Gemini did not share information with investors, leaving at least 29,000 New Yorkers and hundreds of thousands across the country in the dark about the risks to their assets, James said.
The lawsuit alleges that Genesis and Digital Currency Group attempted to hide Genesis' losses from Gemini Earn investors and the public. According to the lawsuit, the companies concealed financial problems last year when Genesis entered into a $1.1 billion, 10-year promissory note with Digital Currency. The agreement was intended to give the false impression that Genesis was in a stronger position, encouraging investors to continue participating in the Gemini Earn program.
“This scam is another example of how bad actors are causing damage across the poorly regulated cryptocurrency industry,” James said in a statement. “My office will continue to work to stop fraudulent cryptocurrency companies and promote stronger regulation to protect all investors.”
Former Genesis CEO Soichiro Moro and Digital Currency CEO Barry Silbert are also named as defendants in the suit.
Gemini is on social media platform X (formerly Twitter), Praised and criticised The company said the lawsuit “confirms what we have alleged all along: that Gemini Earn users and other creditors were victims of a massive fraud and were systematically 'lied to' by these parties about 'Genesis's financial situation.'” But it “totally” disagreed with the decision to name Gemini in the lawsuit, saying it “makes no sense to blame victims who have been defrauded and lied to.”
A Digital Currency Group spokesperson said in a statement that the company would defend itself against the allegations. “DCG has always conducted its business lawfully and with integrity,” he said. In a separate statement, Silbert, the company's founder and CEO, said he was “shocked by these unfounded allegations.”
Genesis did not immediately respond to a request for comment.
This is not the companies' first lawsuit stemming from Gemini Earn. In January, the U.S. Securities and Exchange Commission accused Gemini and Genesis of offering unregistered securities and raising billions of dollars worth of digital assets from hundreds of thousands of investors without making required disclosures. Gemini is also facing multiple proposed class action lawsuits from Earn investors.
James seeks to bar Gemini, Genesis and Digital Currency Group from operating in the financial investment industry or conducting any business related to buying and selling securities in New York, and is also seeking compensation for investor losses.
The lawsuit follows other recent efforts by the Attorney General's office to regulate the cryptocurrency industry. James proposed legislation in May that would require public audits of crypto exchanges, limit conflicts of interest by banning certain ownership arrangements, create safeguards to prevent fraud, compensate victims, and increase oversight of the digital asset industry.
