The development underscores the challenges the crypto industry continues to face almost a year after the bankruptcy of Sam Bankman-Fried’s exchange FTX, which led to a meltdown in the sector that overwhelmed several major firms.
Through the lawsuit, Attorney General James is seeking restitution for investors and “disgorgement of ill-gotten gains,” along with a ban on all the three cryptocurrency firms from the financial investment industry in New York.
At the heart of the lawsuit is a program that Gemini ran in partnership with Genesis, dubbed “Gemini Earn”. The program allowed customers to lend crypto assets such as bitcoin to Genesis.
Gemini, run by the Winklevoss twins best known for their legal battle against Meta Platforms‘ Mark Zuckerberg, had billed the program as a “low-risk investment” even when its internal analyses had found Genesis was on risky financial footing, James alleged.
Gemini knew Genesis’ loans were undersecured and at one point highly concentrated with one entity, Bankman-Fried’s crypto hedge fund Alameda that later went belly up, James said.
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Gemini did not reveal any of this information to the investors of Gemini Earn, she added. Gemini posted on messaging platform X, formerly known as Twitter, that the lawsuit “confirms what we’ve been saying all along”, but disagreed with the decision to also sue Gemini.
Genesis and Gemini have clashed several times over the past few months, including over Gemini Earn. Gemini is also the largest creditor of Genesis, which filed for bankruptcy protection in January.
DCG said it was blindsided by the attorney general’s complaint and the company’s CEO Barry Silbert said the lawsuit had “baseless allegations”.
“We fully intend to fight the claims and look forward to being vindicated in this case … we have actively cooperated for months with the attorney general’s investigation,” DCG added.
DCG assumed certain liabilities of Genesis last year to mitigate the hit to the unit from its exposure to bankrupt crypto hedge fund Three Arrows Capital.
“Last year, my and DCG’s goal was to help Genesis weather the storm caused by the collapse of Three Arrows … it is unfortunate that this lawsuit omits that fundamental fact,” Silbert said.
