Continuing the crackdown on cryptocurrency companies, New York’s attorney general has accused three major players in the digital asset industry of lying to investors and hiding losses in a billion-dollar fraud scheme, according to a lawsuit filed Thursday.
The lawsuit targets Gemini Trust, the exchange run by twin brothers Tyler and Cameron Winklevoss; lender Genesis Capital; and Digital Currency Group, the parent company of Genesis.
Attorney General Letitia James contends in the lawsuit that Gemini lied to investors about the dangers of Gemini Earn, a program started by Gemini and Genesis that promised investors a high rate of return (up to 8 percent) if they essentially They lent their cryptocurrency. to Genesis.
But Genesis ran into trouble after cryptocurrency exchange FTX, founded by Sam-Bankman Fried, imploded last November. It froze accounts amid a drop in digital asset values, leaving Earn investors unable to claim hundreds of millions of dollars in cryptocurrency.
According to Ms. James’ lawsuit, Gemini’s internal documents show that just months after Earn was launched in 2021, the company’s risk analysis teams deemed Genesis to be very risky: highly leveraged and with limited liquidity. . Gemini also knew that the Genesis loans were at one point tied to Alameda Research, the now-bankrupt crypto hedge fund also founded by Bankman-Fried, who is now on trial on criminal fraud charges.
But Gemini did not share the information with investors, leaving at least 29,000 New Yorkers and hundreds of thousands of people nationwide in the dark about the dangers to their assets, James said.
The lawsuit accuses Genesis and Digital Currency Group of attempting to hide Genesis’ losses from Gemini investors, Earn, and the public. The two companies concealed financial problems last year when Genesis entered into a 10-year note worth $1.1 billion with Digital Coin, a deal intended to give the false impression that Genesis was on a stronger footing and encourage investors. to continue participating in Earn. program, according to demand.
“This fraud is yet another example of bad actors causing damage throughout the loosely regulated cryptocurrency industry,” James said in a statement. “My office will continue our efforts to stop deceptive cryptocurrency companies and push for stricter regulations to protect all investors.”
Soichiro Moro, former CEO of Genesis, and Digital Currency CEO Barry Silbert were also named in the lawsuit.
This is not the companies’ first lawsuit stemming from Gemini Earn. In January, the Securities and Exchange Commission accused Gemini and Genesis of offering unregistered securities, raising billions of dollars in digital assets from hundreds of thousands of investors without required disclosures. Gemini is also facing multiple class-action lawsuits proposed by Earn investors.
Ms. James seeks to prevent Gemini, Genesis and Digital Currency Group from operating in the financial investment industry or conducting any business related to the buying and selling of securities in New York. She also seeks restitution for investors’ losses.
The lawsuit follows other recent efforts by the attorney general’s office to regulate the crypto industry. In May, Ms. James Proposed legislation That would require public audits of crypto exchanges, limit conflicts of interest by prohibiting certain ownership arrangements, create safeguards to prevent fraud, compensate victims, and strengthen oversight of the digital asset industry.
