Quick Look at Gemini’s Legal Filing Against DCG: 5 Charges and 6 Demands
Gemini's Legal Filing Against DCG: 5 Charges and 6 Demands Summarized
This article summarizes the content of the complaint filed by Gemini against Digital Currency Group (DCG) and its CEO Barry Silbert in a New York court, outlining DCG’s five charges and Gemini’s six major demands.
Gemini Founder’s Tweet
On June 7th, one of Gemini’s co-founders, Cameron Winklevoss, revealed on Twitter that, after unsuccessful warnings, Gemini had filed a lawsuit in New York against Digital Currency Group (DCG) and its CEO Barry Silbert. Gemini accused Silbert of being involved in fraudulent activities against creditors. According to Cameron, Silbert played a key role in planning the fraudulent behavior and was personally involved in its implementation.
In this tweet, Cameron briefly stated the 12 core “charges” against DCG (actually an extension of five allegations), and said that “the complaint tells the complete story.” So, what exactly is in this 33-page complaint?
Content of the Complaint
The complaint states from the beginning that “Defendants DCG and Silbert participated in a fraudulent scheme to induce various depositors to continue to lend large amounts of cryptocurrency and dollars, including Gemini users for whom Gemini acted as custodian and agent. This lawsuit seeks to recover damages and losses suffered by Gemini as a result of Defendants’ false, misleading, and incomplete statements and omissions and Defendants’ role in encouraging and facilitating Genesis’s fraudulent conduct against Gemini.”
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The style of this complaint is completely different from previous legal documents such as those from the SEC and Coinbase. The style of legal documents related to SEC and Coinbase is very conservative, even if the accusations are sharp, the words and legal terms used are very professional. However, in this Gemini complaint, there are many plain-spoken words, sometimes even directly expressing emotions: “All lies (said by Genesis).” “Did Defendants or Genesis disclose the enormous risk that Genesis was taking on a fast-collapsing arbitrage? No. Did they take immediate steps to address that risk, increase margin requirements, and address escalating debt obligations? No.” “There are more lies below.”
Emotionally charged language
Gemini was then presented with a list of charges by Genesis:
1. Genesis did not thoroughly vet borrowers and concealed losses for them
The lawsuit alleges that DCG and Genesis misled Gemini’s Earn users into lending large amounts to DCG through claims of “robust risk management practices and a thorough due diligence process” but actually lent the managed funds to counterparties engaging in high-risk arbitrage trades and charged them high management fees. When the funds could not be repaid in 2021, Genesis did not disclose the losses and allowed the borrowers to remain indebted for a year and continue borrowing from Gemini and collecting huge management fees. At this point, the game had become a Ponzi scheme.
When Three Arrows Capital collapsed, the game was up. “From that point forward, a cascade of events led to the present situation. Genesis breached its representations about risk management and careful vetting of counterparties…According to Genesis’s representations, the collateral held by Three Arrows Capital’s loans was equivalent to 80% of its exposure to 3AC; then-CEO Michael Moro was very clear that the losses would not affect Genesis’s operations: “Our potential losses are limited and can be offset on our own balance sheet. We have moved on from the risk and are continuing forward.”
However, in reality, the value of that collateral was less than 50% of the outstanding debt. As details continued to emerge from 3AC’s liquidation process, the scale of Genesis’s losses became clear. At the time of 3AC’s collapse, 3AC owed Genesis a staggering $2.36 billion (through 3AC’s debt to Genesis’s affiliated entity in Singapore). Despite Moro’s assertions that 3AC’s loans had over an 80% collateral requirement, Genesis was only able to realize $1.16 billion in liquidating the 3AC position. In other words, as of mid-July 2022, the value of the collateral held by Genesis fell short of the outstanding debt amount by nearly 50%, resulting in a loss of approximately $1.2 billion that Genesis had little hope of recovering from the 3AC liquidation as 3AC’s founder had disappeared, leaving the liquidators to search for assets to distribute to creditors. This amount put Genesis in the red for hundreds of millions of dollars.
Genesis Claims Parent Company DCG Intervened and Absorbed Losses, But It Was Just a Blank Check
To appease Gemini and keep Gemini Earn’s loan to Genesis going, Genesis falsely claimed that DCG had absorbed the losses from 3AC’s loan at the parent company level, and therefore claimed that Genesis’s operations were “business as usual.”
Former CEO Michael Moro tweeted earlier, “DCG has taken on some of Genesis’s responsibility with the counterparty in question at the parent company level to ensure we have capital to support long-term operations and expansion.” Matt Ballensweig, then Genesis’s Managing Director and co-head of Trading and Lending, assured another Genesis depositor on July 18, 2022, “So far, all losses with respect to 3AC have been absorbed by our parent company DCG, Genesis’s balance sheet remains healthy, and we continue to operate as usual.” He added, “DCG has directly absorbed the remaining losses.”
So how did DCG actually absorb Genesis’s losses? The answer is that DCG simply wrote a promissory note.
Gemini claims, “Behind the scenes, DCG and Genesis engaged in a fraudulent transaction: Specifically, on June 30, 2022, Defendant Silbert on behalf of Defendant DCG signed an unsecured promissory note for $1.1 billion payable to Genesis. This allowed Genesis to list the DCG promissory note as an asset on its balance sheet, purportedly ‘offsetting’ the $1.2 billion loss it suffered from the collapse of 3AC. However, in reality, the fair market value of the promissory note was only a small fraction of its $1.1 billion face value. The note is due 10 years later, on June 30, 2032, and bears interest at only 1%, far below the market rate for unsecured loans that DCG might need to pay.”
The complaint states that Genesis told its depositors that DCG had “absorbed” or “taken on” the losses of 3AC, meaning that Genesis had been compensated for its entire $1.2 billion loss. But the promissory note did not do that. The note also did not improve Genesis’s immediate liquidity position. From a practical standpoint, the promissory note was just an accounting gimmick designed to make Genesis appear to have equity and actually be able to fulfill its obligations to its depositors without requiring DCG to provide actual financial support to make up for Genesis’s loss (i.e., not paying back Genesis’s losses with real money).
This even led to Genesis releasing a series of financial statements, which were prepared with the knowledge and active participation of DCG, showing that DCG had injected $1.1 billion in short-term receivables in Genesis to enable Genesis to fulfill its obligations to depositors. (Another accusation below will be detailed.)
DCG personnel, including then COO Mark Murphy, participated in the dissemination of these misstatements, and creditors were told that the statements were prepared with the assistance of “DCG and Genesis’ financial and accounting teams.” However, it subsequently became clear that DCG did not actually cover these losses with its own funds, and Genesis remained severely insolvent.
3. DCG and Genesis conspired to forge financial reports to hide the truth from Gemini and creditors
According to the indictment, as an extension of the short position, DCG and Genesis also issued a series of false financial reports, with false and misleading statements about Genesis’ alleged backing by DCG. These reports and misstatements “were intended to conceal the truth from Genesis’ depositors.”
To illustrate this point, Gemini released a financial report in an email:
The indictment says that Genesis listed the assets on this promissory note as “other assets” in “current assets.” As a general accounting principle in the United States, “current assets” refers to cash and other resources that are reasonably expected to be realized as cash within one year. Therefore, the term specifically excludes amounts owed by related companies that cannot be collected within one year in the normal course of business. In this asset,
By including the promissory note in its entirety in the “current assets” category, Genesis claimed to have $1.1 billion in cash that could be recovered within one year on its balance sheet. Not to mention that the value of the promissory note is only a small fraction of its nominal value, and the promissory note itself is due 10 years later (and repaid to DCG). The bill is clearly not a current asset, but Genesis falsely listed it as a current asset to induce Gemini to continue with the Gemini Earn program.
As for this financial report, the value of this promissory note is one-third of its current assets.
Gemini also included other evidence that Genesis had “beautified” this promissory note on its receivables and loan term data, deceiving Gemini into continuing to open the Earn program for Genesis.
4. Defendant Barry Silbert (CEO of DCG Group, the parent company of Genesis) personally deceived Gemini
This is also a point that Cameron previously mentioned on Twitter, and he has even posted an open letter. The complaint stated that the defendant Silbert personally made great efforts to deceive the creditors and continue to spread the lie that DCG has already “absorbed” the losses of 3AC. For example, after learning in mid-October that Gemini had given 30 days’ notice to terminate the Gemini Earn loan program, Silbert personally contacted Gemini’s founder Cameron Winklevoss and Silbert held a lunch meeting in New York City on October 22, 2022. At that lunch meeting, Silbert said a lot, aiming to keep Gemini from stopping the Earn program, even though Silbert had already realized that Genesis was insolvent.
In fact, what Silbert did far exceeded this fraudulent omission. He told Gemini that although Genesis’ loan portfolio was “complex,” it could successfully resolve the crisis within a reasonable time. In other words, Silbert told Gemini that Genesis only faced short-term mismatches in its loan portfolio time, concealing the huge loopholes on Genesis’ balance sheet and the reality that it could not fulfill its obligations to Gemini and others, because DCG did not actually assume the losses of 3AC. Based on the reliance on Silbert’s false statements, Gemini decided to delay terminating the Gemini Earn plan and did not explore the possibility of faster termination or other remedies that Gemini would have taken if Silbert had stated the truth.
5. Other executives of DCG and Genesis also participated in fraudulent behavior and repeatedly concealed the truth from Gemini and other creditors
The entire period ticket plan shows that Barry, DCG, and Genesis were all involved in this fraudulent behavior. Its design and execution require the full participation and cooperation of Barry, DCG, and Genesis, and it can only “work” by hiding it from creditors.
The Gemini side provided more evidence. On July 19, 2022, the then-COO Mark Murphy reiterated the false story shared with depositors in the “Three Arrows Post-Analysis” document sent by Genesis to Gemini. Murphy stated that DCG intervened and absorbed the losses of Genesis in its 3AC transactions, and stated that these losses have been offset on DCG’s balance sheet. He further stated that with DCG’s support, Genesis has sufficient capital for normal operations in future businesses. He assured depositors that Genesis is one of the most important components of the DCG empire, and DCG has significant plans for Genesis’ future business, and promised to provide continuous support for Genesis to continue to develop.
Genesis’ Managing Director and Co-Head of Trading and Lending, Matt Ballensweig, provided details on Genesis’ approximately $1.8 billion in loans to affiliated entities, which had previously been disclosed in reports before Genesis. Ballensweig claimed that Genesis had outstanding loans to DCG of approximately $922 million, intentionally ignoring $1.1 billion of term notes that were attempted to be concealed from Genesis’ depositors. At the same time, Ballensweig falsely stated that DCG “took on $1.1 billion in loans” on June 30, 2022, in an attempt to make depositors believe that Genesis had been compensated for losses suffered due to the 3AC loan. This was entirely fictitious, but Murphy did not make any effort to correct Ballensweig’s false statement. Similarly, Ronald DiPrete, DCG’s Special Projects Head and Chief Financial Officer, was copied on the email, but he also did not correct Ballensweig’s false statement.
Meanwhile, multiple executives at DCG and Genesis were repeatedly copied on the relevant emails, but “took no action to correct the error.”
Gemini makes six demands in the complaint:
A. Actual damages, in an amount to be determined by the relief requested in this action;
B. Punitive damages, in an amount to be determined at trial based on the relief requested in this action;
C. A declaratory judgment confirming Defendants’ liability for any future damages arising out of the relief requested in this action;
D. Reasonable attorneys’ fees;
E. The costs of this action; and
F. Such other relief as is deemed just and proper.
The outcome of this case will have significant ramifications for the cryptocurrency industry and will be monitored closely.