New York Sued Gemini, Genesis and DCG Over Earn

New York Attorney General Letitia James filed a civil fraud lawsuit on October 19, 2023 against Gemini Trust, three Genesis entities, Digital Currency Group, former Genesis chief executive Soichiro “Michael” Moro and DCG chief executive Barry Silbert over the Gemini Earn crypto-lending program.

The complaint alleged two related schemes that left at least 232,000 Earn investors unable to redeem more than $1 billion in digital assets after Genesis Global Capital suspended withdrawals on November 16, 2022. The attorney general’s announcement described the affected population as more than 230,000 investors, including at least 29,000 New Yorkers. Those figures were government allegations at filing, not a judgment or a completed loss calculation.

The case mattered because it placed the collapse of a retail-facing yield product inside New York’s broad securities and anti-fraud enforcement framework. It also challenged the representations made by a state-chartered crypto platform and the accounting used inside one of the industry’s largest lending groups.

Earn connected customers to Genesis credit risk

Gemini and Genesis launched Earn in February 2021. Under the arrangement described in the complaint, customers transferred cryptocurrencies through Gemini to Genesis, which pooled the assets and used them in its institutional lending business. Gemini acted as agent and collected fees; Genesis determined which assets it would borrow and the yield available.

The attorney general alleged that Gemini marketed Earn as low-risk and redeemable at any time while its own confidential work identified increasing counterparty danger. The complaint said Gemini reduced its internal estimate of Genesis’s credit quality from BBB to CCC in February 2022, found an undercollateralized loan book and knew Genesis’s exposure was concentrated. At one point, it alleged, Alameda Research represented nearly 60% of Genesis’s outstanding third-party loans.

These assertions came from the state’s investigation and complaint. No court had tested the evidence or imposed liability on October 19.

A decade-long note sat at the center of the DCG claims

The second alleged scheme followed the June 13, 2022 default of Three Arrows Capital on billions of dollars in loans from a Genesis entity. The state said that default impaired Genesis’s ability to repay open-term liabilities. Its announcement placed Genesis’s total losses at more than $1.1 billion, including more than $100 million attributed to another borrower, Babel Finance.

On June 30, 2022, DCG issued Genesis a $1.1 billion promissory note due in ten years with 1% annual interest, according to the filing. New York alleged that Genesis misleadingly treated that long-dated note as a current asset in reports sent to Gemini and withheld explanatory financial-statement notes that would have revealed its terms. The defendants’ position had not been adjudicated.

The attorney general brought claims under New York’s Martin Act and Executive Law Section 63(12). The requested relief included restitution, disgorgement, damages and permanent restrictions on the defendants conducting securities- or commodities-related business in or from New York. Filing a complaint did not grant any of that relief.

Defendants disputed the state’s account

The dispute was public immediately. Reuters reported on October 19 that Gemini said the lawsuit supported its claim that Genesis and DCG had misled Earn users, but Gemini rejected the attorney general’s decision to sue Gemini as well. DCG said it had cooperated with the investigation and would contest the claims; Silbert called the allegations baseless and said DCG had tried to help Genesis withstand the Three Arrows collapse.

The strict event-day conclusion is therefore limited. New York opened a major civil enforcement case alleging that misleading risk statements and balance-sheet treatment contributed to more than $1 billion of unredeemed customer assets. The complaint supplied detailed allegations and demanded extensive remedies, but on October 19 it established neither liability nor the amount any customer would eventually recover.