New York attorney-general Letitia James has sued cryptocurrency companies Gemini Trust Company, Genesis Global Capital LLC and Digital Currency Group Inc (DCG) for allegedly “defrauding” investors.
According to a statement on Thursday, James filed a lawsuit against the firms for “defrauding more than 230,000 investors, including at least 29,000 New Yorkers, of more than $1 billion”.
The lawsuit follows an investigation by the Office of the Attorney General that found Gemini, the crypto company founded by Facebook co-founders the Winklevoss twins, had “lied to investors” about an investment programme, Gemini Earn, that it ran with Genesis, which filed for bankruptcy in January 2023.
Soichiro Moro, the former chief executive of Genesis, and the chief executive of the company’s parent company DCG, Barry Silbert, are also charged with “defrauding investors”, according to the statement.
The investigation found that Gemini discovered through its analyses that Genesis, which set up a bitcoin trading desk in 2013, had “risky” financials, meanwhile assuring investors that Gemini Earn was “low-risk”.
Gemini is a New York-based digital asset platform that lets investors trade cryptocurrencies on its platform.
Gemini Earn was launched in February 2021 and Genesis generated profits through the programme by lending assets and returning some of those profits to investors.
The cryptocurrency company allegedly knew the loans provided by Genesis were unsecured, which were at one point “highly concentrated” in Sam Bankman-Fried's cryptocurrency trading firm Alameda Capital, but did not disclose this to investors, the Attorney General said.
Bankman-Fried is on trial facing multiple charges of fraud and money laundering following the demise of his cryptocurrency exchange FTX.
The latest suit against Gemini and Genesis and their affiliates claims that the companies tried to conceal more than US$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,” the Attorney General's statement said.
Alameda borrowed nearly 60% of all outstanding loans from Genesis to other parties at one point, according to the statement.
Gemini revised its estimate of Genesis’s credit rating from BB to junk grade (CCC) in February 2022 but failed to reveal this to investors while marketing it as low-risk.
In July of that year, its management board discussed terminating the investment programme because of these risks, which one member of the board allegedly compared to Lehman Brothers before its collapse.
Gemini personnel then allegedly withdrew their investments from the programme, but investors were not informed of the risks.
One of Genesis's largest borrowers, Three Arrows Capital, defaulted on billions of loans in June 2022.
Around that time, the crypto company also lost more than US$100 million from another borrower, Babel Finance, racking up total losses of more than US$1.1 billion.
Attorney General James wants to ban Genesis, Gemini and DCG from the financial industry in New York.
“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,” the Attorney General said in the statement.