Winklevoss Twins-owned Gemini Trust crypto exchange sued for alleged $1 billion fraud

by Jonathan Adams
Cryptocurrency exchange

The crypto sector shake up, shake down, reset or comeuppance, depending on your point of view, continues. Since last year, there has been a raft of bankruptcies and legal cases involving some of the industry’s highest profile firms. The latest development is a lawsuit filed by the New York attorney general Letitia James.

The civil action accuses Gemini Trust, a crypto exchange run by Tyler and Cameron Winklevoss of Facebook fame, and two other “bad actors” of misleading over 230,000 investors over investment risk levels. The other two companies named are Genesis Capital, a bankrupt cryptocurrency lender, and its parent company Digital Currency Group (DGC).

The case focuses on the Gemini Earn product that Gemini and Genesis collaborated on, which was marketed to investors as offering a return of up to 8%. To achieve those returns, cryptocurrency holders had to lend their digital assets to Genesis, which in turn lent it out to its clients in the crypto sectors.

Genesis subsequently failed in January of this year, brought down by the market run that also toppled the crypto sector-exposed banks Silicon Valley Bank and Signature Bank, the specialist crypto lender BlockFI and the exchange FTX and its sister crypto trading operation Alameda Research.

The Gemini Earn program was heavily exposed to both Alameda, which the lawsuit accuses Genesis of being aware of, and its own parent group DCG. The action states that as much as 60% of third-party lending from the program was to just Alameda.

In September Genesis’s administrators sued DCG as both sides negotiated the repayment of more than $610 million of loans from the lender to its parent that matured in May.

Genesis is seeking to recoup $500 million that DCG borrowed under four loans as well as a fifth loan of 4,550 Bitcoin, worth about $117 million. Court papers indicate DCG owes a total of $1.7 billion to debtors, including Genesis.

Gemini is also suing DCG, acussing the company of “fraud and deception”, and denies any wrongdoing on its own part, portraying itself as an innocent victim. The Winklevoss Twins’ company released a statement on Twitter/X, praising the Attorney General’s action against the other two companies but maintaining its own innocence:

“We wholly disagree with the NY AG’s decision to also sue Gemini. Blaming a victim for being defrauded and lied to makes no sense and we look forward to defending ourselves against this inconsistent position.”

Why are Gemini, Genesis and DCG being sued?

The Attorney General accuses Gemini of misrepresenting its Lend program with Genesis to investors as much lower risk than it ever was. And that this was despite receiving warnings from internal auditors that the program’s lending was overexposed to a small number of debtors – a concentration of risk along a short chain that led to the domino effect of several crypto companies failing last year and in early 2023.

Genesis, DCG and the former chief executives of both stand accused of attempting to hide over $1 billion of losses and combined actions of all three companies alleged to amount to fraud.

On announcing the action being taken by her office, James stated:

“Hardworking New Yorkers and investors around the country lost more than a billion dollars because they were fed blatant lies … This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry.”

She is also clearly convinced that Gemini’s protestations it was a victim of the other two companies’ reckless lending and failure to protect the interests of investors. Her statement detailed the allegation that Gemini’s board of managers considered ending the Gemini Earn program due to the Genesis risks in July 2022.

One board member reportedly compared Genesis’s financial condition to Lehman Brothers. Gemini’s COO, who sat on Gemini’s Enterprise Risk Management Committee, is also said to have liquidated his own investment in the Earn program, worth more than $100,000, in mid-June 2022.

The case against Gemini states that other risk management personnel also withdrew their own investments from Earn between June and September 2022.

James’s statement said that despite the clear evidence of strong internal misgivings at the highest levels of Gemini, the company still “failed to provide its investors with any meaningful warnings about these risks.”

However, the legal action also alleges that Genesis did conceal a $1 billion promissory note from Gemini, created to mask the extent of its losses.

Is full regulation the only way back for the crypto sector?

James’ lawsuit is the latest effort among US officials to crack down on the trillion-dollar crypto industry, which for years has operated in the shadows of traditional financial regulation.

The sector has traditionally positioned itself as the antitode to the ills of traditional financial markets and fiat currencies – which crypto proponents accuse of being designed to maintain financial elites at the expense of everyone else. Central banks and their money-printing approach to tackling economic turmoil, reducing the value of cash savings through the inflation which results, are the traditional bogeymen of crypto evangalists.

However, the evidence of the crypto sector, especially over the past couple of years, indicates that it is no financial utopia. Those at the top have shown just as much propensity for self-enrichment at the cost of smaller investors, either through reckless risk taking or outright fraud, as counterparts in traditional financial services have been guilty of in the past.

In fact, there is a growing body of evidence that the crypto market is more prone to greed, fraud and deception at the expense of small investors than traditional financial institutions and markets have even been.

Over the years, the regulatory environment that mainstream financial services companies have had to operate within the constraints of has learned from past crises and crashes. Checks and balances have been introduced to try to prevent the possibility of them happening again.

While it would be naïve to presume mainstream financial markets will never again be brought down by recklessness in the pursuit profit, lessons have been learned.

It would also be naïve to presume that a non-regulated crypto market will not again fall victim to a sense of indestructability among those at the top leading to excessive risk taking of the kind that so often evolves into fraud as things start to go wrong.

Financial services companies that want to market to retail investors in developed economies, especially the USA will inevitably have to submit to a similar regulatory environment.

The sector’s argument is that it accepts and welcomes that reality but that regulators are dragging their heels on providing one. And until the crypto sector is regulated, it will be trapped in a grey zone, operating in the shadow of mainstream financial markets. The risk is that grey zone becomes a breeding ground for dubious individuals and companies.

The future is either a regulatory environment fit for purpose that both takes into account the specific nature of digital assets like cryptocurrencies and protects retail investors from the kind of unscrupulous behaviour that will always exist where money is involved.

Disclaimer: The opinions expressed by our writers are their own and do not represent the views of Trading and Investment News. The information provided on Trading and Investment News is intended for informational purposes only. Trading and Investment News is not liable for any financial losses incurred. Conduct your own research by contacting financial experts before making any investment decisions.

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