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New class action against DCG and Silbert as Genesis tells judge they are nearing a deal with creditors

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(Kitco News) - Digital Currency Group (DCG) and their CEO Barry Silbert were the targets of a new lawsuit filed in Connecticut on Monday, even as their Genesis subsidiary had their first day in a New York bankruptcy court.

The law firm Silver Golub & Teitell LLP (SGT) has filed a class action lawsuit against DCG and Silbert in the United States District Court for the District of Connecticut, where both SGT and DCG are based, alleging violations of federal securities laws. SGT said their clients “seek to represent two putative classes of individuals and entities who loaned digital assets pursuant to lending agreements to DCG's wholly owned subsidiary Genesis Global Capital, LLC.”

The class period is from Feb. 2, 2021, when Genesis and Gemini began offering the Gemini Earn program to retail investors, and Nov. 16, 2022, the day Genesis halted loan redemptions, effectively freezing the assets of Earn participants and other customers.

The lawsuit “seeks to hold DCG and Silbert liable as "Control Person(s)" pursuant to the federal securities laws,” they wrote, noting that Silbert is DCG's chief executive officer and chairman of its board of directors and “maintains a controlling 40% equity interest” in the company.

SGT alleges that Genesis “engaged in an unregistered securities offering in violation of Section 5 of the Securities Act” when they entered into lending agreements that “fit the definition of securities” under the law.

The complaint also alleges securities fraud, claiming Genesis engaged in “a scheme to defraud prospective and current digital asset lenders by making false and misleading statement that intentionally misrepresented the financial condition of Genesis Global Capital” in order to maintain the flow of new digital assets to Genesis and to keep existing clients from pulling their assets out of the firm.

Meanwhile, in New York, lawyers for Genesis and their creditors met in court for the initial hearing of the crypto lender’s bankruptcy proceedings.

As expected, U.S. Bankruptcy Judge Sean Lane granted several first-day motions by Genesis, including the right to keep paying employees and critical vendors, and also agreed they did not have to reveal the names of their customers.

Sean O'Neal, the lawyer representing Genesis, said he had "some measure of confidence" that the firm could “resolve its disputes with creditors this week,” but would seek mediation if necessary.

"Sitting here right now, I don't think we're going to need a mediator," he said. "I'm very much an optimist."

Brian Rosen, a lawyer representing Genesis creditors with $1.5 billion of claims, said "we are getting closer" to an agreement. Chris Marcus, a lawyer for Gemini and other creditors, told the judge that he was "cautiously optimistic" the issues could be resolved without mediation but "there is some work to do."

Genesis previously disclosed that it owes at least $3.4 billion to over 100,000 creditors and estimates it has nearly $1.7 billion of claims against DCG.

O’Neal said that Genesis’ goal is to conclude the Chapter 11 restructuring process by May 19.

Genesis has proposed a reorganization plan to be overseen by an independent special committee of the company’s board of directors which includes the creation a trust to distribute assets to their various creditors, and a “dual track process” which would pursue “a sale, capital raise and/or equitization transaction that would enable the business to emerge under new ownership.” Should they fail to finalize a sale or raise sufficient capital, “creditors will receive ownership interests in Reorganized GGH.”

“An in-court restructuring presents the most effective avenue through which to preserve assets and create the best possible outcome for all Genesis stakeholders,” said Genesis Interim CEO Derar Islim when the filing was made. “We deeply appreciate our clients’ ongoing patience and partnership as we work towards an equitable solution.”

Genesis has struggled to raise fresh capital or reach a deal with its creditors since it halted withdrawals in November in the wake of the collapse and bankruptcy of crypto exchange FTX and sister company Alameda Research.

Then on Jan. 12, the U.S. Securities and Exchange Commission (SEC) filed charges against both Genesis and Gemini over the Gemini Earn program. Both the SEC and federal prosecutors in New York are also investigating the transfer of funds between DCG and Genesis and reviewing what the companies told investors about the transactions.

DCG has recently been forced to take actions to shore up its finances, including putting a halt to its quarterly dividend payments to shareholders.

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