New York Attorney General Letitia James filed a complaint against crypto exchange Gemini, crypto lending firm Genesis, crypto investment company DCG and two executives: former Genesis CEO Michael Moro and DCG CEO Barry Silbert.

According to the complaint, Gemini lent funds to Genesis as part of its Earn program. These funds were ultimately lent out to counterparties including Three Arrows Capital and Alameda. When multiple bankruptcies in the space caused defaults to Genesis, it was left with a $1 billion hole. In covering up this hole, DCG claimed it had absorbed the losses when it had only made a promissory note to its subsidiary Genesis.

The NYAG took aim at both sides, claiming there were two fraudulent schemes. For Gemini, it claimed the exchange took money from the public claiming Earn was a highly liquid investment and that Genesis was creditworthy based on Gemini's risk monitoring. For the other entities — DCG, Genesis and the two named executives — it claimed that they "disguised $1.1 billion in losses through a months-long campaign of misstatements, omissions, and concealment."

Understating the risk

The NYAG claimed that Gemini made false assurances that Genesis' loans were overcollateralized. It provided data that showed Genesis' loans were between 60-90% collateralized between December 2020 and September 2022. It pointed to a claim in a Gemini press release in February 2021 that said Genesis' loans were overcollateralized.

The NYAG said Gemini’s risk management team determined in May 2021 that Genesis was highly leveraged and had low liquidity. Around February 2022, it projected that a market downturn could see a 50-60% default rate and said the financials were similar to companies with a credit rating of CCC — which, per Fitch Ratings, suggests a substantial credit risk with a real possibility of default.

Covering up the hole

The complaint provides multiple public statements by Genesis and Moro that said it had mitigated its losses and that the Genesis balance sheet was strong. It claimed that this was misleading because the Genesis' client funds had been impacted, its balance sheet was weak and that the risk hadn't been removed — it was simply hidden by the promissory note, which was stated as an asset on its balance sheet.

"The tweets were false, misleading, and omitted material facts. DCG did not simply “assume” the $1.1 billion, open-term liability related to Three Arrows, which could be called at any time; it replaced that liability with an illiquid ten-year Promissory Note," the complaint stated.

The NYAG stated that Genesis' CFO told employees not to disclose the promissory note to Gemini and that the company concealed and suppressed information that would have revealed the note or the losses.

On October 28, 2022, Silbert authorized Genesis to disclose the promissory note to Gemini, two weeks before Genesis suspended withdrawals.

The complaint supports previous claims made by Cameron Winklevoss that Gemini was misled about the financial health of Genesis, particularly in relation to the promissory note. "He chose not to fill the $1.2 billion hole," Winklevoss wrote on X in January 2023. "Instead he pretended to."

The NYAG also claimed that DCG borrowed more than $800 million from Genesis between January 2022 and July 2022. On July 25, 2022 a DCG executive said that DCG "literally" did not have the money to pay back a $100 million loan that had reached its maturity date. The loan maturity date was then pushed back to May 2023.

The complaint asks for the defendents to be restricted from being involved in the sales of securities and commodities in the state of New York and to pay damages, penalties, and to give up any profits made from the activities.

We have reached out to Gemini, Genesis and DCG and will update this article should we hear back.