Digital currency group pushes back against NYAG lawsuit

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Venture capital firm Digital Current Group has filed a motion to dismiss a criminal lawsuit filed against them by the New York Attorney General’s Office.

The legal battle between DCG and NYAG has been going on for months and is directly intertwined with disputes between two other high-profile cryptocurrency firms: the now-defunct brokerage firm Genesis and exchange and bank Gemini. The groups have been embroiled in a series of disputes dating back several years, including dramatic relationship changes and serious allegations of fraud. A particularly relevant twist to the whole situation is that the bankrupt Genesis was, and remains, effectively a subsidiary of the powerful DCG, which manages billions of dollars worth of assets and counts ETF issuer Grayscale as yet another subsidiary.

That said, unraveling the backstories of all the different players involved here is quite a task, especially considering the difficult environment that currently exists. Not only does the Attorney General’s lawsuit equally target DCG, Genesis, and Gemini, but Genesis and Gemini have also filed separate civil lawsuits. NYAG accused the companies in October 2023 of collectively defrauding investors out of more than $1 billion, and the related mutual accusations created a messy atmosphere. First of all, the best place is the recent revelations found in court documents related to this firing. In particular, it became known to the public through court documents in March this year that Genesis and Gemini had considered a merger in 2022.

In 2022, DCG CEO Barry Silbert had lunch with Gemini co-founder Cameron Winklevoss to discuss some of the motivations and logistics of merging the two companies. At the time, Genesis was at serious risk of bankruptcy, and its substantial partnership with Gemini meant that the fallout would likely damage other companies’ businesses. Gemini lent Genesis significant funds as part of its Gemini Earn program, but Genesis continued to incur losses. This fund was managed by hedge fund Three Arrows Capital as it went bankrupt in the aftermath of the FTX collapse, leaving Genesis in a $1 billion dilemma. As for the original source of these lost funds, NYAG accused the company of defrauding investors of these funds.

At the meeting, Silbert made a sales pitch that the two companies should combine and that “it would be a huge company and compete with Coinbase and FTX.” He added that even if Genesis and Gemini cannot reach an agreement on these terms, “there is much more that Gemini and Genesis can do together, and the two companies should lean in together, not separate.” Winklevoss was reportedly “interested” in the proposed deal, but it never happened. Conflict also arose with Genesis’ bankruptcy declaration.

A particular point of friction is found in the aforementioned Gemini Earn partnership, which made headlines in February of this year when Genesis won a court ruling against Gemini. Essentially, Genesis owned shares of the Grayscale Bitcoin Trust (GBTC) that were pledged as collateral to Gemini for the exchange of money between the two companies, but before the shares actually changed hands, Genesis declared bankruptcy. Because GBTC is unique among Bitcoin spot ETFs as an existing fund converted to an ETF, the stock’s value has surged to more than $1.2 billion by early 2024. DCG’s ownership of Grayscale and Genesis further complicated matters. Gemini objected to Genesis’ legal right to sell the shares it had pledged years earlier, which set off a lengthy civil lawsuit.

Although the matter was resolved through a series of settlements that allowed Genesis to sell and prevented Genesis and Gemini from admitting negligence, NYAG still filed a complaint, alleging that all parties involved were jointly guilty of substantial fraud. I did. There were over $1 billion in losses, and the Attorney General’s office was growing tired of the mutual accusations between the parties involved. Even if Genesis could make enough money through the sale to recoup its investors, that still wouldn’t solve the problem of criminal activity. A particular example of a hostile environment occurred when DCG, Genesis’ parent company, challenged NYAG’s own agreement with Genesis.

This brings us to the present. On March 7, Silbert and DCG filed a motion to dismiss the Attorney General’s lawsuit, arguing that the claims against the companies were completely baseless. In this case, the DCG legal team said, “The charges against DCG in this case are a thin web of baseless innuendo, blatant misunderstanding, and groundless conclusive statements. “The Office of the Attorney General (OAG) is seeking to falsely portray DCG’s well-intentioned support of its subsidiaries as engaging in fraud in order to find a scapegoat to make headlines for the losses caused by others.” They specifically allege that DCG acted in good faith by investing money in Genesis after the collapse of Three Arrows, investing hundreds of millions of dollars of additional capital in the subsidiary in the months leading up to bankruptcy, even though DCG had no obligation to do so. So”. The attorney general took a different view, saying that DCG’s net donations were concealing Genesis’ outflow of funds at a critical moment. DCG withdrew the money, Genesis declared a “liquidity crisis,” and users were withdrawing their cryptocurrencies. They will go bankrupt immediately, but the burden of proof is on them to prove that this was intentional fraud.

As of yet, there is no way to know what the judge will think about DCG’s proposed plea or motion to dismiss, or whether a settlement is possible if the motion to dismiss is denied. But one clearly good sign came out of the predicament. Gemini has announced plans to fully reimburse users suspected of being defrauded by the Gemini Earn partnership through in-kind assets. In other words, these users had their Bitcoin stolen in 2022, and Gemini promised to repay them, explaining Bitcoin’s price rise since then. This represents an additional $700 million to repay more than $1 billion in assets and is a clear sign of confidence in the company.

At the very least, this decision to reward users like this is an impressive demonstration of Gemini’s sincerity and good intentions. Gemini is named as a co-defendant in all legal documents filed by Silbert’s legal team in connection with the NYAG lawsuit, and stands to benefit greatly if the lawsuit is dismissed. This gesture of goodwill may not be enough to clear the air at DCG and Genesis, but it can’t hurt anyone’s chances of avoiding a total fiasco without a criminal conviction. Gemini failed to stop Genesis’ attempts to make money from selling GBTC, but Gemini remains a successful and prominent exchange. Clearly it was possible to float rewards of this size without relying on GBTC tranches.

How the lawsuit will play out in the coming months is anyone’s guess. When NYAG filed its first complaint since the initial settlement, it seemed clear that prosecutors were quite fed up with the caustic attitude of their former business partners. Nonetheless, Gemini’s compensation plan will certainly go a long way in proving users’ intentions to do the right thing. If nothing else, it shows that they are proactive in taking the issue seriously. We will have to watch the situation unfold carefully, but it seems clear that the mutual hatred and secretive attitude shown so far has not been rewarded. The broader digital asset space has periodically been filled with shaky businesses and outright scams, all of which eventually fell apart. Bitcoin, on the other hand, has had legitimate success. When the dust settles, the biggest winners may actually be the scammed users, who will see their expected payouts nearly double thanks to the strength of Bitcoin itself. It’s hard to imagine a scam working much better for these kinds of gains.