New York Attorney General Letitia James is suing the Winklevoss twin-led exchange Gemini along with the crypto lending firm Genesis and its parent company, Digital Currency Group. The complaint, filed Thursday, alleges that the crypto firms defrauded more than 230,000 investors, including at least 29,000 New Yorkers, of more than $1 billion.
Gemini and Genesis have been locked in a cycle of lawsuits over an investment product called Gemini Earn, with litigation also levied by the Securities and Exchange Commission. The accusations from New York’s attorney general are just the latest in a series of legal woes for the crypto empires belonging to the Winklevoss twins and DCG head Barry Silbert.
“These cryptocurrency companies lied to investors and tried to hide more than a billion dollars in losses, and it was middle-class investors who suffered as a result,” James said in a statement shared with Fortune. “This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry.”
Gemini Earn
During crypto’s bull run, investment vehicles popped up and began offering enticing interest rates unmatched by traditional financial firms. Genesis, a subsidiary of the Digital Currency Group, which also includes the crypto publication CoinDesk and asset management company Grayscale, offered users interest payments to deposit crypto that was then loaned out to companies such as hedge funds.
In February 2021, Genesis partnered with Gemini, the crypto platform founded by Tyler and Cameron Winklevoss that includes exchange and investing services, to offer a product called Gemini Earn. With the service, Gemini users could loan cash and crypto at interest rates as high as 8% to Genesis, which in turn would lend out the assets, ostensibly generating returns.
According to the lawsuit, Gemini told investors that it vetted Genesis through a risk management framework, although its own internal risk analyses showed that loans to Genesis were risky. Genesis, of course, was lending out its assets to companies that would later collapse, including Three Arrows Capital and Alameda Research.
As the lawsuit details, Sam Bankman-Fried’s Alameda was at one time the borrower of nearly 60% of all outstanding loans from Genesis to outside parties. Bankman-Fried is currently in the middle of a criminal trial at a federal court in New York related to the collapse of FTX and Alameda.
While Gemini revised its estimate of Genesis’s credit rating from investment grade to junk in February 2022, it did not publicly reveal the update to investors, the lawsuit alleges. In July 2022, Gemini’s board of managers discussed ending Gemini Earn because of risks associated with Genesis, with some of Gemini’s risk personnel allegedly withdrawing their own investments from the program.
Customer losses
As crypto prices soared in 2021 and early 2022, Gemini Earn drew over 230,000 investors, with enough hailing from New York to catch the attorney general’s attention. The lawsuit details one victim, a retired 73-year-old grandmother who invested her life savings of $199,000 in Gemini Earn, allegedly spurred by its “marketing statements.”
Letitia James’s office has proven one of the most aggressive U.S. regulators toward crypto, including actions against the stablecoin issuer Tether and its associated company Bitfinex, as well as former Celsius CEO Alex Machinsky. In May, James also proposed enacting sweeping crypto legislation, although it put her office at odds with the state’s other powerful crypto regulator, the Department of Financial Services.
Gemini Earn has been a lightning road for lawsuits. After FTX collapsed in November, Genesis froze withdrawals, trapping users’ funds, including for Gemini Earn. Genesis filed for bankruptcy in January.
A week before Genesis filed for bankruptcy, the SEC sued both Genesis and Gemini, alleging that Gemini Earn constituted the unregistered offer and sale of securities. Then in July, after a months-long public dispute played out largely on Twitter, Gemini sued Genesis parent company DCG and CEO Barry Silbert, alleging “fraud and deception.”
With Gemini and Genesis continuing to hash out details over unfreezing the trapped funds from Gemini Earn, the lawsuit from James adds a new wrinkle to the operations of the two crypto heavyweights.
The complaint also charges Silbert and former Genesis CEO Soichoro Moro with trying to conceal more than $1.1 billion in losses from investors—Gemini as well as the public. According to the lawsuit, Genesis lied to Gemini about conducting regular reviews of its borrowers’ financial statements, alleging that Genesis still hadn’t received audited financial statements from Three Arrows Capital more than two years after asking for them. Genesis, the suit continues, also made misleading statements and concealed key information to hide its own financial condition.
In addition to restitution for investors and disgorgement penalties, the lawsuit is seeking to stop Gemini, Genesis, and DCG from engaging in business related to securities and commodities in New York.
Fortune reached out to Gemini, Genesis, and DCG at the time of publication but didn’t immediately receive responses.
