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(Kitco News) - Crypto trust firm Gemini has made good on its promise to sue the Digital Currency Group (DCG) and its CEO Barry Silbert in relation to the failure of Genesis Global Capital – a DCG subsidiary – to pay back the funds owed to the Gemini Earn crypto lending platform.
Gemini filed a lawsuit against the DCG in a New York State court on Friday, alleging fraud on the part of the DCG and Silbert. The filing alleges that DCG and Silbert “engaged in a fraudulent scheme to induce a variety of depositors, including Gemini users” to lend “huge amounts of cryptocurrency and U.S. Dollars to DCG’s subsidiary Genesis Global Capital.”
The collapse of Terra/Luna in May 2022 resulted in significant losses for Genesis Global Capital, which had more than $2.36 billion invested with the Singapore-based cryptocurrency hedge firm Three Arrows Capital (3AC).
3AC had significant exposure to Terra/Luna, and when the stablecoin protocol collapsed, 3AC saw the value of their investments plummet, ultimately leading the firm to file for bankruptcy.
Genesis initially appeared as though it might be able to work through the difficulties brought about by the demise of Terra/Luna and 3AC, but the collapse of FTX in November only added to its troubles as the firm was owed $226.3 million by FTX. In January, Genesis filed for bankruptcy.
The latest filing by Gemini claims that both DCG and Genesis “falsely represented that DCG had absorbed the losses on the 3AC loans at the parent level” and claimed it was “business as usual.”
The firm previously gave the DCG and Silbert until Thursday to come to an acceptable settlement before it would resort to legal action.
Gemini also claims that following the collapse of FTX, Genesis “refused to honor its obligations and suspended all withdrawals of borrowed cryptocurrency.” The exchange said it has attempted to work toward solutions to return assets to the Gemini Earn lenders, but it has yet to find common ground with DCG or Silbert “despite paying public lip service to that goal.”
According to Gemini co-founder Cameron Winklevoss, “Barry [Silbert] was not only the architect and mastermind of the DCG and Genesis fraud against creditors, he was directly and personally involved in perpetrating it.”
“When Gemini notified Genesis it would be terminating the Earn program in October 2022, Barry reached out to set up a meeting to induce Gemini to continue Earn,” Winklevoss said. “He did this knowing Genesis was massively insolvent. Barry claimed that Genesis faced only a timing issue – a lie that hid the gaping hole on Genesis’s balance sheet. When Three Arrows Capital (3AC) collapsed in June 2022, it blew a $1.2 billion hole in Genesis’s balance sheet. Instead of coming clean, Genesis claimed that everything was business as usual because DCG had stepped in to absorb the losses.”
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Winklevoss said that, in a trick of accounting, DCG wrote Genesis “a sham 10yr promissory note w/ a measly 1% interest rate – worth just a fraction of its $1.1b face amount. Genesis was wildly insolvent. Barry, DCG, and Genesis all conspired to create false financial reports to hide the truth from Gemini and creditors.”
He noted that one report released by the DCG identified this 10-yr promissory note as a ‘current asset.’ Winklevoss called this “A total lie and complete misrepresentation.”
“Genesis’s loan-duration figures just pretended the promissory note didn’t exist, because that was the only way to hide it. They literally didn’t include it in the calculations,” he added. “This fraud goes to the very top. Barry Silbert and other DCG executives were directly involved in these lies and they lied again and again to conceal the truth from Gemini and other creditors.”
These events and the failure of the DCG to reach an acceptable settlement with Gemini led the exchange to file a lawsuit that alleges two counts: fraud and aiding and abetting fraud.
DCG and Silbert “aided and abetted Genesis in making fraudulent misrepresentations to Gemini with respect to Genesis’s financial condition and the support it received from DCG,” the suit said.
In response to the lawsuit, the Digital Currency Group posted the following statement on its Twitter page:
“This is yet another publicity stunt from Cameron Winklevoss to deflect blame and responsibility from himself and Gemini, which operated the Gemini Earn program. Any suggestion of wrongdoing by DCG or any of its employees is baseless, defamatory, and completely false.”
The DCG maintains that it is “committed to reaching an amicable solution for all parties to the Genesis bankruptcy,” and said “Senior DCG leadership has been working around the clock over the course of multiple months in active negotiation with representatives of the Official Unsecured Creditors Committee and Ad Hoc Committee to reach a deal. The mediation process is nearing a close and we expect to bring the Genesis Chapter 11 case to a conclusion soon.”
