Monday, June 24

New York Attorney General Sues Crypto Firms in $1 Billion Fraud Case

Continuing a crackdown on cryptocurrency companies, the New York attorney general accused three major players in the digital asset industry of lying to investors and concealing losses in a $1 billion fraud scheme, according to a lawsuit filed on Thursday.

The suit targets Gemini Trust, the exchange run by the twin brothers Tyler and Cameron Winklevoss; the lender Genesis Capital; and Digital Currency Group, the parent company of Genesis.

The attorney general, Letitia James, contends in the suit 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 lent their cryptocurrency to Genesis.

But Genesis struggled after the FTX cryptocurrency exchange, founded by Sam-Bankman Fried, imploded last November. It froze accounts amid a crash in digital asset values, leaving Earn investors unable to reclaim hundreds of millions of dollars’ worth of cryptocurrency.

According to Ms. James’s suit, internal documents at Gemini show that just months after Earn was started in 2021, the company’s risk analysis teams deemed Genesis very risky — highly leveraged with limited liquidity. Gemini also knew that Genesis loans were at one point tied up in Alameda Research, the now-bankrupt crypto hedge fund also founded by Mr. Bankman-Fried, who is now being tried 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 others across the country in the dark about the dangers to their assets, Ms. James said.

The lawsuit accuses Genesis and Digital Currency Group of trying to conceal Genesis’ losses from Gemini Earn investors and the public. The two firms hid the financial troubles last year when Genesis entered into a $1.1 billion, 10-year promissory note with Digital Currency, a deal intended to give the false impression that Genesis was on stronger footing and to encourage investors to keep participating in the Earn program, according to the lawsuit.

“This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry,” Ms. James said in a statement. “My office will continue our efforts to stop deceptive cryptocurrency companies, and to push for stronger regulations to protect all investors.”

Soichiro Moro, the former Genesis chief executive, and Digital Currency’s chief executive, Barry Silbert, were also named in the suit.

Gemini responded with a post on the social media platform X, formerly Twitter, that both applauded and condemned the lawsuit. The filing “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’s financial condition,’” the company said. But it “wholly” disagreed with the decision to name Gemini in the suit: “Blaming a victim for being defrauded and lied to makes no sense,” it said.

A spokesman for Digital Currency Group said in a statement that the company would fight the claims. “D.C.G. has always conducted its business lawfully and with integrity,” he said. The company’s founder and chief executive, Mr. Silbert, said in a separate statement that he was “shocked by the baseless allegations.”

Genesis did not immediately respond to a request for comment.

This is not the companies’ first lawsuit stemming from Gemini Earn. The Securities and Exchange Commission in January charged Gemini and Genesis with offering unregistered securities, raising billions of dollars’ worth of digital assets from hundreds of thousands of investors without the requisite disclosures. Gemini also faces multiple proposed class-action lawsuits from investors in Earn.

Ms. James is seeking to bar Gemini, Genesis and Digital Currency Group from operating in the financial investment industry or doing any business related to the sale and purchase of securities in New York. She is also seeking restitution for investor losses.

The suit 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 banning certain ownership arrangements, build safeguards to prevent fraud, and compensate victims and strengthen oversight of the digital asset industry.