NY AG Sues Gemini, Genesis, and DCG for Fraud

By Eden Rohrer, Aiden O’Leary, and Josh Durham

On 19 October 2023, New York Attorney General Letitia James filed a lawsuit against cryptocurrency companies Gemini Trust Company, LLC (Gemini), Genesis Global Capital, LLC (Genesis), Digital Currency Group, Inc. (DCG), and several of their affiliates and controlling persons, in relation to Gemini’s digital asset investment program called Gemini Earn (Earn). In addition to claims that Earn constituted the offering of an unregistered security, which we have seen recently in other SEC and state regulator enforcement actions, the lawsuit also claims that the defendants allegedly defrauded investors by concealing the program’s risks and misleading investors about the financial stability of Genesis.

AG James alleges that the defendants operated Earn and portrayed it as a low-risk investment program. Gemini, which is a large cryptocurrency exchange, partnered with Genesis (a large institutional cryptocurrency lender) to administer Earn. Gemini allegedly told customers they could expect yields up to 8.05% by permitting Gemini to deposit their digital assets with Genesis, which would then lend them out to third parties. Genesis’ loan book was nevertheless allegedly risky, with one borrower, at one point, accounting for nearly 60% of outstanding loans. AG James claims that Genesis’ loan book eventually became under collateralized, resulting in more than US$1 billion in Earn investor losses. Following the default of Genesis’s largest borrower, Genesis became insolvent and unable to repay Gemini’s Earn investors.

Following the default, Genesis allegedly continued to mislead investors, concealing its losses with a US$1.1 billion dollar promissory note from its parent company DCG. AG James asserted that Genesis’ CEO also made public statements assuring that it was well capitalized, while also suppressing disclosure of Genesis’ quarterly income and cash flow statements. AG James lastly claims that Earn was an unregistered security, as Gemini and Genesis pooled investors’ assets to fund Genesis’ lending business with billions of dollars in cryptocurrency loan originations. Notably, the SEC filed a similar suit against Genesis and Gemini related to Earn for the unregistered offer and sale of securities in January 2023. The complaint alleges that when Genesis suspended withdrawals on 16 November 2022, it owed more than US$1 billion to more than 232,000 Earn investors, including at least 29,000 New Yorkers.

We will continue to monitor this case, and any related cases, and will provide important updates as they arise.