New York Attorney General Letitia James filed a sweeping lawsuit against cryptocurrency companies Gemini Trust Company (Gemini), Genesis Global Capital, LLC and its affiliates (Genesis), and Digital Currency Group, Inc. (DCG) for defrauding more than 230,000 investors, including at least 29,000 New Yorkers, of more than $1 billion. An investigation by the Office of the Attorney General (OAG) found that Gemini lied to investors about an investment program it ran with Genesis called Gemini Earn. Gemini repeatedly assured investors that investing with Genesis through their Gemini Earn program was a low-risk investment. However, OAG’s investigation found that Gemini’s internal analyses of Genesis showed that the company’s financials were risky. The lawsuit alleges that Gemini knew Genesis’ loans were undersecured and at one point highly concentrated with one entity, Sam Bankman-Fried’s Alameda, but did not reveal this information to investors.

The lawsuit also charges Genesis, its former CEO Soichiro Moro, its parent company, DCG, and DCG’s CEO Barry Silbert with defrauding investors and the public by trying to conceal more than $1.1 billion in losses, which were borne by investors. As a result of these misleading claims and deceptions, thousands of investors lost millions of dollars and, in some instances, lost their lifesavings. Through this lawsuit, Attorney General James seeks to ban Gemini, Genesis, and DCG from the financial investment industry in New York, and seeks restitution for investors and disgorgement of ill-gotten gains.

“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,” said Attorney General James. “Hardworking New Yorkers and investors around the country lost more than a billion dollars because they were fed blatant lies that their money would be safe and grow if they invested it in Gemini Earn. Instead, Gemini hid the risks of investing with Genesis and Genesis lied to the public about its losses. This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry. My office will continue our efforts to stop deceptive cryptocurrency companies and push for stronger regulations to protect all investors.”

Impact on Investors 

Gemini, Genesis, and DCG’s fraud led to roughly $1 billion in losses for more than 230,000 investors, including at least 29,000 New Yorkers. One of the New York investors harmed by Gemini Earn was a retired 73-year-old grandmother, who invested her and her husband’s lifesavings of over $199,000 in Gemini Earn because they believed Gemini’s marketing statements that it was a safe and secure choice. The investor had hoped to use this money to pay for her grandchild’s education, but lost it all because of this fraud.

Another Gemini Earn investor, a 56-year-old New Yorker, invested and lost approximately $20,500 in Gemini Earn, virtually all his savings. He chose Gemini Earn because he researched the product and came to believe, based on Gemini’s statements, that Gemini Earn was more secure than other interest-bearing cryptocurrency investments.

Gemini Fraud

Gemini is a New York-based digital asset platform that allows investors to buy and sell cryptocurrencies. In February 2021, Gemini launched an investing program with Genesis called Gemini Earn, in which Genesis generated profits for investors by lending assets to third parties and returning a portion of those profits to investors. When launching Gemini Earn, Gemini told investors that it had vetted Genesis through a risk management framework and that it was a trusted company. However, OAG found that Gemini’s internal risk analyses of Genesis showed that loans to the company were risky.

The lawsuit alleges that from the start of the Gemini Earn program in February 2021 through November 2022, Gemini’s internal risk analyses showed that Genesis’ loan book was risky and highly concentrated in a small number of counterparties. At one point, Sam Bankman-Fried’s Alameda was the borrower for nearly 60 percent of all outstanding loans from Genesis to third parties. Only a year into the program, in February 2022, Gemini revised its estimate of Genesis’ credit rating from BBB (investment grade) to CCC (junk grade) but did not publicly reveal to investors that it downgraded its rating and continued to market Earn as low-risk.

The OAG investigation also found that in July 2022, Gemini’s board of managers discussed ending the Gemini Earn program because of the risks associated with Genesis, and one board member even compared Genesis’ financial condition to that of Lehman Brothers before its collapse. In addition, in the summer of 2022 Gemini risk personnel withdrew their own investments from Earn. Gemini nevertheless failed to provide its investors with any meaningful warnings about these risks.

Genesis and DCG Fraud

While Gemini failed to inform and protect investors of the risks associated with investing with Genesis through the Gemini Earn program, the lawsuit alleges that Genesis tried to conceal more than $1.1 billion in losses from its investors, Gemini, and the public. In June 2022, one of Genesis’ largest borrowers, Three Arrows Capital, defaulted on billions in loans. Around the same time, Genesis lost more than $100 million from another borrower, Babel Finance. In total, Genesis had lost more than $1.1 billion.

The lawsuit charges that Genesis failed to adequately audit its borrower, Three Arrows Capital. In addition, Genesis lied to Gemini when it claimed to regularly review its borrowers’ financial statements. Instead, OAG found that Genesis had not received audited financial statements from Three Arrows Capital for more than two years.

The OAG also found that Genesis, DCG, and their executives tried to conceal Genesis’ true financial condition from Gemini, Gemini Earn investors, and the public. To conceal these losses, DCG and Genesis entered into a $1.1 billion promissory note, in which DCG agreed to pay Genesis $1.1 billion in a decade at only a one percent interest rate. The lawsuit states that the promissory note was part of a scheme to defraud Gemini Earn investors and the public about Genesis’ financial condition and its ability to operate its business.

During the time that Genesis suffered these losses, Genesis, DCG, DCG’s CEO, Silbert, and Genesis’ CEO, Moro, conspired to falsely represent Genesis’ financial condition to the public and Gemini. Two days after the Three Arrows Capital default, Genesis and DCG tweeted, “Despite continued heightened market volatility, the Genesis balance sheet is strong and our business is operating normally.” In addition to making misleading public statements, Genesis’ executives repeatedly lied to Gemini risk management teams about the company’s financial condition.

When Gemini requested additional information about Genesis’ financial condition, Genesis continued to conceal and suppress information that would have revealed the promissory note and the true extent of its losses. For example, in July 2022, Genesis’ CFO directed Genesis personnel to tell its counterparties that the notes to Genesis’ balance sheet, which would have explained the promissory note and its impact on Genesis’ ​balance sheet, would not be available until the end of the year. However, in a Microsoft Teams chat she confessed to her co-workers that the “real reason” why Genesis would not provide these footnotes was because “[i]n the notes, we are required to disclose a lot of things [w]hich will highlight what happened.” In another Microsoft Teams chat, the same CFO explained to coworkers that without the notes, other companies would not know about the promissory note from the balance sheet alone.

Genesis not only made false statements to Gemini, but also presented false reports to conceal its losses. From July 2022 to November 2022, Genesis provided reports to Gemini that listed the value of Genesis’ “current assets.” A “current asset” is one that can be reduced to cash or cash equivalents within the course of one year. The reports misleadingly categorized the fraudulent promissory note as a current asset, even though it was payable ten years later.

Through this lawsuit, Attorney General James is seeking to permanently stop Gemini, Genesis, DCG, and its executives from engaging in any business related to the purchase and sale of securities and commodities within or from New York. In addition, Attorney General James seeks restitution for all defrauded investors and disgorgement of all ill-gotten gains.

Today’s lawsuit is the latest action taken by Attorney General James to rein in the cryptocurrency industry and protect investors. Attorney General James announced sweeping cryptocurrency legislation that will increase regulations of the cryptocurrency industry to protect New York investors. In June, Attorney General James recovered more than $1.7 million from CoinEx for failing to register as a securities and commodities broker-dealer and for falsely representing itself as a crypto exchange. Also in May, Attorney General James secured $4.3 million from Coin Cafe for failing to register as a commodity broker-dealer and defrauding investors. In March, Attorney General James also brought a lawsuit against KuCoin for failing to register as a securities broker or dealer or commodities broker-dealer with OAG. In January, Attorney General James and a multistate coalition recovered $24 million from the cryptocurrency platform Nexo for operating illegally. Attorney General James also sued the former CEO of Celsius for defrauding investors and concealing the company’s dire financial condition. In March 2022, Attorney General James issued a taxpayer notice to virtual currency investors and their tax advisors to accurately declare and pay taxes on their virtual investments.

In October 2021, Attorney General James directed unregistered crypto lending platforms to cease operations for not registering with the state. In September 2021, Attorney General James and the U.S. Securities and Exchange Commission recovered $479.9 million from GTV Media for failing to register cryptocurrency sales. Also in September 2021, Attorney General James secured a $3 million court judgment against Coinseed. In February 2021, Attorney General James required Bitfinex and Tether to end all trading activity in New York and required iFinex and Tether and their related companies to pay $18.5 million in penalties.

Attorney General James urges New Yorkers who have been affected by deceptive conduct in virtual asset markets to report these issues to OAG. Attorney General James also encourages workers in the cryptocurrency industry who may have witnessed misconduct or fraud to file an online whistleblower complaint with her office, which can be done anonymously.

This lawsuit is being handled by Assistant Attorneys General Geoffrey Andreu and John Ruth and Senior Enforcement Counsel Gabriel Tapalaga of the Investor Protection Bureau, with assistance from Principal Accountant Shalendra Ramadhin and Legal Assistant Eddie Aguilar, also of the Investor Protection Bureau, and Detective Investigator Frank Tirri of the Investigations Division. Complex data analysis was provided by Data Analyst Anushua Choudhury of the Division of Research and Analytics, which is led by Director Gautam Sisodi. The Investor Protection Bureau is led by Bureau Chief Shamiso Maswoswe and Deputy Bureau Chief Kenneth Haim and is a part of the Division for Economic Justice, which is overseen by Chief Deputy Attorney General Chris D’Angelo. The Division of Economic Justice is led by First Deputy Attorney General Jennifer Levy.

Source: New York Attorney General Letitia James