New York Attorney General Letitia James filed a lawsuit on Thursday against cryptocurrency companies Gemini Trust, Genesis Global Capital and Digital Currency Group (DCG) for allegedly defrauding more than 230,000 investors, including at least 29,000 New Yorkers, of more than $1 billion.
James is seeking to ban Gemini, Genesis, and DCG from the financial investment industry in New York.
Gemini lent funds to Genesis, which is owned by DCG, as part of its Earn program, the suit said. The funds were later lent to counterparties such as trading firms Three Arrows Capital and Alameda Research, which ultimately went bankrupt. This left Genesis with a $1.1 billion hole. DCG also owns CoinDesk.
It also follows cases taken by the federal Department of Justice against Mashinsky and FTX founder Sam Bankman-Fried, who have both pleaded not guilty, and suits brought by the Securities and Exchange Commission against major crypto exchanges such as Coinbase and Binance.
James' lawsuit alleges Gemini knew Genesis’ loans were undersecured and at one point, highly concentrated with one entity, Bankman-Fried's trading firm Alameda Research, but did not reveal this information to investors.
James also charged Genesis' former Chief Executive Officer Soichiro Moro and DCG CEO Barry Silbert with defrauding the public by trying to conceal heavy losses that investors bore.
The defendants "disguised $1.1 billion in losses through a months-long campaign of misstatements, omissions, and concealment” by way of a promissory note, according to the suit.
Tweets sent by Genesis and DCG after the default of hedge fund Three Arrows Capital "were false, misleading, and omitted material facts," James' complaint stated. "DCG did not simply 'assume' the $1.1 billion, open-term liability related to Three Arrows, which could be called at any time; it replaced that liability with an illiquid ten-year Promissory Note."
"Even after Gemini decided to terminate Earn and provided formal notification to Genesis Capital, Gemini continued to take tens of millions of dollars’ worth of additional cryptocurrencies from Earn investors" to hand to Genesis, at the same time that Gemini employees were closing out personal positions, the suit alleged.
Gemini and Genesis "falsely claimed" they had necessary governmental licenses when, in fact, they should have registered under New York securities laws, the suit added.
“My office will continue our efforts to stop deceptive cryptocurrency companies and push for stronger regulations to protect all investors,” James said.
The move comes during the trial of Bankman-Fried, where it's also been alleged that crypto companies such as Paradigm, BlockFi and Genesis did not have access to audited financial statements prior to investing or loaning billions to his companies, including crypto exchange FTX, its U.S. arm, and Alameda.
Genesis Global Capital filed for bankruptcy in January. Gemini sued DCG and Silbert in July, making allegations that DCG then described as "defamatory" and a "publicity stunt."
In a statement emailed to CoinDesk, a DCG spokesperson said the company had been “blindsided” by the filing after months of cooperating with James’ probe.
“We fully intend to fight the claims and look forward to being vindicated in this case,” the spokesperson said. “DCG has always conducted its business lawfully and with integrity … there is no evidence of any wrongdoing by DCG, Barry Silbert, or its employees.”
Silbert said he was “shocked by the baseless allegations” in James’ complaint, adding that “honesty and integrity have always been my guiding principles.”
Gemini said on social media platform X (formerly Twitter) that it disagreed with the lawsuit against the firm. "We wholly disagree with the NY AG’s decision to also sue Gemini. Blaming a victim for being defrauded and lied to makes no sense and we look forward to defending ourselves against this inconsistent position," the post said.
A spokesperson for Genesis told CoinDesk that there is "no basis” for James’ claims, and that the move "risked significant harm to Genesis’ creditors" as Chapter 11 bankruptcy proceedings develop.
"Genesis has not violated the law and continues to focus on maximizing recoveries for creditors in its Chapter 11 cases," the spokesperson said. "We have been cooperating with all authorities and intend to continue doing so."
Jack Schickler contributed reporting.
UPDATE (Oct. 19, 11:59 UTC): Updates to add comments from Gemini.
UPDATE (Oct. 19, 11:49 UTC): Adds details throughout.
UPDATE (Oct. 19, 12:33 UTC): Adds further details from the lawsuit and extra context throughout.
UPDATE (Oct. 19, 17:10 UTC): Adds statement from DCG and Silbert.
UPDATE (Oct. 20, 06:02 UTC): Adds statement from Genesis.
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