(Kitco News) - In the latest blow to the cryptocurrency exchange Gemini, which has been mired in a dispute with Digital Currency Group and its subsidiary Genesis Global Capital, the exchange and its co-founders have been hit with a new lawsuit that is looking to achieve class-action status.
According to documents filed in the Florida Southern District Court, plaintiff Joshua Berdugo has accused the exchange and its co-owners, Tyler and Cameron Winklevoss, of defrauding hundreds of thousands of investors by ''luring unsuspecting investors into purchasing unregistered securities.''
The new lawsuit was filed around the same time as the Securities and Exchange Commission (SEC) charged Gemini Trust Company and Genesis Global Capital with the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program.
At the heart of this new lawsuit and the charges from the SEC is the roughly $900 million in Gemini customer funds that are locked on Genesis after the crypto lender halted withdrawals following the bankruptcy filing by FTX.
The lawsuit claims "Gemini made repeated false and misleading statements to promote Gemini Earn." The complaint highlighted the fact that Gemini's website said it partnered with "vetted and accredited third party institutional-grade borrowers," when the exchange had actually only partnered with Genesis.
It also alleges that Gemini knew that Genesis had significant exposure to the now-bankrupt crypto hedge fund Three Arrow Capital and would not be able to honor redemptions, but failed to disclose that fact to Gemini Earn investors.
As proof of the deception, Berdugo highlighted specific tweets by the Winklevoss twins, including one posted on Nov. 9 in which Cameron Winklevoss stated Gemini had no material exposure to FTX or Alameda Research. Those comments were ''entirely misleading and/or false,'' Berdugo alleged.
Delayed action at the SEC
Following the SECs announcement of charges against Gemini and Genesis, former SEC enforcement chief Lisa Braganca said she is perplexed by the fact that the agency had been investigating Gemini Earn for some time but never raised concerns publicly or ordered the program halted.
During an interview with CNBC’s ‘Squawk Box’ host Andrew Sorkin on Friday, Braganca said the “SEC has known about this product for a long time. Based on a tweet from Tyler Winklevoss of Gemini, we know that Gemini had been under investigation for this product for some time, more than a year, and yet the SEC allowed this to continue for that period of time.”
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| SEC charges Gemini and Genesis with violating securities laws |
This inaction continued even as the crypto market crashed in November and Gemini halted redemptions for its Earn program. It took an additional two months, and a class action lawsuit filed against Gemini for its failure to continue making payments to its Earn product, for the SEC to initiate action.
“The SEC has been clear for years that something like this Earn program is a security, so it’s puzzling why they didn’t come to a resolution of this a long time ago, months and months ago,” Braganca said.
The former SEC enforcement chief suggested that there was plenty of blame to go around, pointing to moves made by Barry Silbert, who assured investors that Genesis was solvent, and the Winklevoss twins, who relied on Silbert’s assurances without doing the proper due diligence.
“Basically, Genesis has been operating in a non-solvent way since around June 2022,” she alleged. “When you’re dealing with these sums of money, and it’s customer money, I would think the Winklevoss twins had a little bit more obligation to dig deeper to see what’s really going on.”
