New York State Attorney General Letitia James filed a suit on Oct. 19 against Gemini, a New York cryptocurrency exchange, and Genesis Capital, a cryptocurrency lender, together with founders Barry Silbert and former Genesis CEO Soichiro “Michael” Moro, charging them with “fraudulent schemes.”
An affiliated company, Digital Currency Group (DCG), was also charged in the suit.
According to the filing, the defendants launched an investment program called “Gemini Earn” in Feb. 2021 by which owners of cryptocurrencies could invest their crypto tokens with Genesis Capital as part of a high-yield investment program.
Promising investors lucrative returns, Gemini Earn was promoted online as a low-risk, highly liquid investment that could be redeemed upon demand, the prosecution stated.
Within months of its launch, Genesis Capital received several billion dollars from investors.
It then lent the cryptocurrencies out to other parties, earning profits from the high rate of interest it charged on those loans.
The program succeeded until borrowers, among them Three Arrows Capital, began defaulting on their loans in the spring and summer of 2022. In November 2022, Genesis Capital suspended all withdrawals from Gemini Earn, leaving 232,000 investors in the program with more than $1 billion in losses, according to the New York AG’s suit.
“Gemini solicited money from the public with false assurances that Earn was a highly liquid investment and that Genesis Capital was creditworthy,” the filing stated. “In reality, however, Gemini’s confidential risk reports found that Genesis Capital posed a high risk of default.”
In addition, “the Genesis Entities, Moro, DCG, and Silbert disguised $1.1 billion in losses through a months-long campaign of misstatements, omissions, and concealment,” prosecutors charged.
Representation of cryptocurrency Bitcoin is seen in this illustration taken on Nov. 29, 2021. Dado Ruvic/Reuters
‘Victims of a Massive Fraud’
In response to the charges, Gemini tweeted that “the NY AG’s lawsuit confirms what we’ve been saying all along - that Gemini, Earn users, and other creditors were the victims of a massive fraud and systematically ‘lied to’ by these parties about ‘Genesis’ financial condition.’”
“With that said, we wholly disagree with the NY AG’s decision to also sue Gemini,” the company stated. “Blaming a victim for being defrauded and lied to makes no sense and we look forward to defending ourselves against this inconsistent position.”
On Jan. 12, the Securities and Exchange Commission (SEC) charged Genesis Global Capital and Gemini Trust Company with selling unregistered securities to retail investors through the Gemini Earn crypto asset lending program.
Among other things, the SEC charged that “in November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets because Genesis lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market. At the time, Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors.”
Crypto Industry Challenges
This has been a difficult year for the crypto industry. Not only has the crypto market lost two-thirds of its value from its peak in November 2021, a number of firms within the industry have faced charges for violating securities laws.
The allegations from the New York AG come in the wake of charges of financial fraud that were filed by federal law enforcement against former FTX founder Sam Bankman-Fried, who is currently being tried before a jury in Manhattan. Several other former executives of FTX and its affiliates have already pled guilty to charges of fraud and money laundering.
FTX logo in an illustration taken on March 31, 2023. Dado Ruvic/Illustration/Reuters
FTX’s affiliated hedge fund, Alameda Research, was at one point the borrower for nearly 60 percent of Genesis’ outstanding third-party loans, according to the filing.
In addition to the FTX scandal, the SEC charged Binance, the world’s largest crypto exchange, and its founder, Changpeng Zhao, with 13 violations on June 5, including operating unregistered exchanges, misrepresenting trading controls, and selling unregistered securities.
“The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain,” according to an agency statement.
Kevin Stocklin
Reporter
Kevin Stocklin is an Epoch Times business reporter who covers the ESG industry, global governance, and the intersection of politics and business.
