Barry Silbert: Founder and CEO of Digital Currency Group Inc. (left) and New York State Attorney General Letitia James (right).
Getty Images (left) | Reuters(R)
New York state prosecutors said Thursday in a lawsuit filed in Manhattan that crypto companies Digital Currency Group and Gemini defrauded more than 230,000 investors out of a total of $1.1 billion. They cited a series of lapses, including Sam Bankman Freed's failure to properly manage the risks associated with its exposure to a bankrupt and allegedly fraudulent cryptocurrency trading company.
Prosecutors say that to carry out the alleged fraud, Digital Currency Group and its subsidiaries and affiliates, including Genesis Global Capital and Genesis, lied to investors, created false financial statements and defrauded creditors. He claimed that he withheld information from him.
Genesis was once the flagship of cryptocurrency magnate Barry Silbert's empire. The company, an over-the-counter trading desk, prime brokerage, and lender, collected cryptocurrencies from its customers, lent them to other parties, and profited from the interest it charged customers. It was very lucrative at one point, until crypto hedge fund Three Arrows Capital defaulted on a loan, throwing much of the crypto world into turmoil.
DCG said in a statement that it has been cooperating with the New York state investigation “in an open and transparent manner” for several months.
Genesis and DCG subsequently acknowledged significant exposure to Three Arrows (3AC). But New York prosecutors say neither Genesis properly audited 3AC for more than two years, and that when 3AC collapsed, Genesis and its parent company DCG colluded to leak details of the crisis to investors. He claimed that he was trying to hide it from the public.
Those investors included Gemini, founded by Cameron and Tyler Winklevoss, and its customers. Prosecutors say Gemini operated a high-yield program called Gemini Earn, which allowed retail customers to surrender their cryptocurrencies to Gemini in what they called a “low-risk” model. Gemini will then provide its customers' cryptocurrencies to Genesis for further financing and collect a portion of Genesis' interest. The program was launched in February 2021, when interest rates remained low and many investors were looking for yield.
One of Genesis' biggest trading partners was Sam Bankman Freed's trading firm Alameda Research. Prosecutors argue that by extension, Gemini also had contact with Alameda and knew he had contact with Alameda.
Cameron (left) and Tyler (right) Winklevoss.
Adam Jeffrey | CNBC
In the same lawsuit, New York prosecutors accused Gemini of failing to address “dangerous” exposures to Bankman Freed's Alameda Research through its relationship with Genesis. According to prosecutors, Gemini conducted a risk analysis of Genesis' loan book that showed significant exposure to Alameda (up to 60%) at an unspecified point and revised Genesis' internal credit score to junk status.
But despite this internal analysis, prosecutors say Gemini did not stop making significant exposures to Genesis and Bankman Freed, despite one member of Gemini's board of directors. “Comparing Genesis' financial situation with Lehman Brothers' financial situation before bankruptcy”
New York prosecutors seek to permanently bar Gemini, Genesis, DCG, Silbert, and various executives from engaging in securities and commodities business in New York, and from compensatory and disgorgement .
New York Attorney General Letitia James said in a statement: “Hard-working New Yorkers and investors across the country have been told blatant lies that their money will be safe and grow if they invest in Gemini Earn, resulting in the loss of $1 billion. We've lost more than that.” “Instead, Gemini hid the risks of its investment in Genesis, and Genesis lied to the public about its losses.”
This is not the first time James has targeted crypto companies. Earlier this year, her office sued Alex Mashinsky, the former CEO of bankrupt cryptocurrency exchange Celsius, for defrauding hundreds of thousands of investors. Mashinski was indicted by federal prosecutors in July on fraud charges and could face prison if convicted.
“We intend to fully contest the case and look forward to being vindicated in this case,” DCG said in a statement.
DCG CEO Barry Silbert said in a statement: “We are shocked by the baseless allegations in the Attorney General's complaint and intend to fight these allegations in court. Honesty and integrity That has always been my guiding principle.”
“We completely disagree with the NY AG's decision to also sue Gemini,” Gemini said in a statement on X (formerly Twitter). “It makes no sense to blame victims for being deceived or lied to, and we look forward to defending ourselves from this contradictory position.”
The lawsuit “confirms what we have said all along: Gemini, Earn users, and other creditors are victims of massive fraud,” the company added.
