Home » Crime and Fraud • US business news » New York lawsuit accuses crypto firms of $1.1 billion fraud

New York lawsuit accuses crypto firms of $1.1 billion fraud

By Nithya Bose in Crime and Fraud, posted October 20, 2023

New York state prosecutors have accused two crypto firms of allegedly misleading investors, which led to $1.1 billion in losses.

The lawsuit filed in Manhattan claims Digital Currency Group and Gemini defrauded over 230,000 investors.

The prosecutors cited several mistakes that had been made, such as the failure to properly manage their exposure, especially to Sam Bankman-Fried’s now bankrupt and reportedly fraudulent crypto trading firm.

The alleged fraud involved misleading investors, creating false financial documents, and withholding information from creditors.

Genesis, once the flagship company of crypto mogul Barry Silbert's empire, was at the heart of the issue.

It acted as an over-the-counter trading desk, prime brokerage, and lender, collecting crypto from customers and lending it to others, earning profits from interest.

However, the situation unraveled when crypto hedge fund Three Arrows Capital defaulted on its loans.

The suit accuses Genesis and its parent, Digital Currency Group, of failing to audit Three Arrows Capital properly for over two years.

The firms reportedly conspired to conceal the crisis's details from investors and the public.

Gemini, founded by Cameron and Tyler Winklevoss, is also under scrutiny.

One product it sold, called Gemini Earn, promised customers high-yield but with a very low risk.

They launched this model in February 2021, while interest rates were still depressed so many investors were hunting for yield which made this very attractive.

Gemini gave Genesis the customer's crypto, which they lent out, and Gemini collected a part of the interest charged to clients.

However, prosecutors claim this led Gemini to have very risky exposure to Sam Bankman-Fried's Alameda Research through its relationship with Genesis.

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Internal risk analyses highlighted significant exposure to Alameda.

However, Gemini allegedly didn't reduce its exposure, even when one board member compared Genesis's financial condition to Lehman Brothers before its collapse.

New York prosecutors seek to permanently bar Gemini, Genesis, Digital Currency Group, Silbert, and various executives from securities and commodities work in New York.

Moreover, they’re seeking restitution and disgorgement.

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Letitia James, the New York attorney general, said: “Hardworking New Yorkers and investors around the country lost more than a billion dollars because they were fed blatant lies that their money would be safe and grow if they invested it in Gemini Earn.

“Instead, Gemini hid the risks of investing with Genesis and Genesis lied to the public about its losses.”

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