New York Attorney General Letitia James filed a lawsuit against crypto companies Gemini Trust Company, Genesis Global Capital and Digital Currency Group, Inc. (DCG) for defrauding 230,000 investors, including at least 29,000 New Yorkers, of more than $1 billion.

According to the press release from James's office, the lawsuit "seeks to ban Gemini, Genesis and DCG from the financial investment industry in New York, and seeks restitution for investors and disgorgement of ill-gotten gains."

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“This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry. My office will continue our efforts to stop deceptive cryptocurrency companies and push for stronger regulations to protect all investors,” James said.

Benzinga's Future of Digital Assets conference, scheduled for Nov. 14 in New York City, will address investors' need to protect their interests while making investments. This gathering is seen as pivotal for the digital assets community. The event will spotlight the latest trends, innovations and challenges in the digital asset realm.

What Happened: Genesis, its former CEO Soichiro Moro, its parent company, DCG, and DCG’s CEO Barry Silbert have been charged with defrauding investors and the public by trying to hide billions in losses faced by investors.

The lawsuit claimed Gemini falsified investors with a Gemini Earn program, an investment program launched in February 2021 and running along with Genesis. Reportedly, the program assured a low-risk investment contrary to the risky Genesis financials discovered in the investigation.

The lawsuit went on to blame Gemini for concealing its awareness regarding the under-secured loans of Genesis and focused on only one entity, Sam Bankman-Fried’s Alameda Research. In one instance, the borrower of 60% of all outstanding loans from Genesis to third parties was Alameda Research.

Concealed Facts Leading To Fraud: In February 2022, Gemini revised its estimate of Genesis’ credit rating from BBB (investment grade) to CCC (junk grade). 

The company chose to hide this fact from investors and continued to market Gemini Earn as a low-risk avenue for investment. Gemini risk personnel also withdrew their investments from Gemini Earn in the summer of 2022 while Gemini's board of managers compared its financials to that of Lehman Brothers before its collapse.

Three Arrows Capital (TAC), one of Genesis’ largest borrowers, defaulted on billions in loans in June 2022. At the same time, it lost more than $100 million from another borrower, Babel Finance. The investigation revealed TAC’s financial statements had not been received for more than two years and Genesis failed to audit its borrower.

To conceal the losses, DCG and Genesis entered a $1.1 billion promissory note wherein DCG agreed to pay Genesis $1.1 billion in the next 10 years for only a 1% interest rate. Two days after the TAC default, Genesis and DCG tweeted, “Despite continued heightened market volatility, the Genesis balance sheet is strong, and our business is operating normally.”

James has again pressed the U.S. for leading regulations on the cryptocurrency industry to protect investors from such fraudulent acts. It also focuses on stopping deceptive cryptocurrency companies operating in the industry.

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