Genesis To Pay Penalty Exceeding $21 million to Settle SEC Charges Regarding Unregistered Crypto Lending Program, But Happen Following Bankruptcy Judgment

According to the SEC, Genesis loaned out crypto belonging to Gemini users and shared a portion of the profits with Gemini. Subsequently, Gemini deducted an agent fee, which at times exceeded 4%, before returning the remaining profit to its users

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The Securities and Exchange Commission made public today that Genesis Global Capital, LLC has consented to a conclusive ruling mandating the payment of a $21 million civil fine and the imposition of a permanent restraining order to resolve allegations of involvement in the unregistered offering and trading of securities via a crypto asset lending initiative called the Gemini Earn program. Pursuant to the agreement, the SEC will not collect any part of the penalty until all other legitimate claims, including those of retail investors in the Gemini Earn program, have been settled by the bankruptcy court.

In February 2021, Gemini, a prominent crypto exchange, joined forces with Genesis, a renowned crypto lender, to introduce a remarkable product called Earn. This innovative offering promised customers impressive yields of up to 8%. However, the Securities and Exchange Commission (SEC) has raised concerns regarding Genesis' actions.

According to the SEC, Genesis loaned out crypto belonging to Gemini users and shared a portion of the profits with Gemini. Subsequently, Gemini deducted an agent fee, which at times exceeded 4%, before returning the remaining profit to its users. SEC officials have filed a complaint in Manhattan federal court, asserting that Genesis should have registered this product as a securities offering.

“We charged Genesis with failing to register its retail crypto lending product before offering it to the public, bypassing essential disclosure requirements designed to protect investors,” said SEC Chair Gary Gensler. “Today’s settlement builds on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”

“The collapse of the Gemini Earn program underscores the unknown risks that investors are exposed to when market participants fail to comply with the federal securities laws,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As this enforcement action makes clear, no amount of hype and advertising can substitute for the investor-protection disclosures required by the federal securities laws.”

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Genesis and Gemini Trust Company, LLC (“Gemini”) were charged by the SEC on January 12, 2023. The SEC's complaint stated that the Gemini Earn program was an investment opportunity where Gemini customers, including retail investors in the United States, lent their crypto assets to Genesis in exchange for interest. However, in November 2022, Genesis announced that investors could not withdraw their assets due to insufficient liquid assets following market volatility. Genesis held around $900 million in crypto assets from 340,000 Gemini Earn investors at that time.

Genesis and two of its partners have recently taken the step of filing voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the Southern District of New York on January 19, 2023. Unfortunately, this has resulted in investors being unable to access or withdraw their crypto assets that were invested with Genesis through Gemini Earn.

The Securities and Exchange Commission (SEC) has also taken action by filing a complaint in the U.S. District Court for the Southern District of New York. The complaint accuses Genesis and Gemini of violating Sections 5(a) and 5(c) of the Securities Act of 1933. As part of the resolution, Genesis has agreed to a civil penalty and has consented to a final judgment that permanently prohibits them from violating Section 5 of the Securities Act.

Genesis ran a lending initiative that gathered billions in crypto assets from investors, as per the SEC. Customer redemptions were halted in November 2022 after FTX's crypto exchange collapse. As part of the settlement agreement announced on Tuesday, the SEC mentioned that it won't collect any penalties until all other claims, including those from retail investors, are resolved in bankruptcy court.

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All this is following the New York Attorney General Letitia James filing an amended complaint, expanding the lawsuit against Digital Currency Group, Inc. (DCG), DCG’s CEO Barry Silbert, and Genesis Global Capital, LLC and its affiliates’ former CEO Soichiro Moro. This comes after additional individuals and institutions were defrauded of an extra $2 billion.

The revised complaint stems from a surge in investors stepping forward subsequent to Attorney General James' legal action against Gemini Trust Company (Gemini), Genesis, and DCG in October 2023. The investigation by the OAG uncovered that these new investors were also victims of deception, being falsely assured that their investments in the Gemini Earn program were secure, resulting in losses exceeding $2 billion. Altogether, more than 230,000 investors were defrauded of over $3 billion by these companies.

“After months of false promises, we pulled the curtain back and revealed that DCG was lying to investors and defrauding them out of billions,” said Attorney General James. “The fraud and deceit were so expansive that many additional people have come forward to report similar harm. This illegal cryptocurrency scheme, and the horrific financial losses that real people have suffered, are yet another reminder of why stronger cryptocurrency regulations are needed to protect all investors.”

Attorney General James took legal action in October 2023 by filing a comprehensive lawsuit against cryptocurrency companies Gemini, Genesis, and DCG. The lawsuit alleged that these companies defrauded investors of over $1 billion. The lawsuit was the outcome of an investigation conducted by the OAG, which revealed that Gemini had misled investors regarding an investment program called Gemini Earn, which was operated with Genesis. Despite repeatedly assuring investors that investing in Genesis through Gemini Earn was low-risk, internal analyses showed that Genesis's financials were actually risky.

Furthermore, after suffering losses exceeding $1.1 billion due to loan defaults, Genesis, DCG, and their executives attempted to conceal these losses by entering into a $1.1 billion promissory note. This note stipulated that DCG would pay Genesis $1.1 billion over a decade at a mere one percent interest rate. The lawsuit alleged that DCG, through Genesis, utilized this promissory note as part of a fraudulent scheme to deceive investors and the public about Genesis's financial health and operational capabilities.

Ever since the lawsuit was filed, numerous investors have stepped forward to recount their encounters and the financial setbacks they faced as a result of the deceitful actions carried out by DCG through Genesis. Although the initial legal action primarily highlighted the losses suffered by retail investors involved in the Gemini Earn investment program, as more grievances emerged, it became evident that the intricate scheme also ensnared other investors who directly entrusted their funds to DCG's affiliate, Genesis.

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