New York Expands Crypto Fraud Lawsuit Against Gemini And DCG

New York Attorney General Letitia James announced on Friday, February 9, that she is expanding her lawsuit against cryptocurrency companies Digital Currency Group (DCG), its lending unit Genesis Global Capital and the Winklevoss twins' Gemini exchange, alleging that they operated an illegal crypto scheme that defrauded investors of over $3 billion.

James first filed a lawsuit against DCG, Genesis and Gemini in October, accusing them of misleading investors in Gemini's Earn crypto lending product.

Gemini Earn allowed customers to lend their crypto holdings to Genesis in exchange for attractive interest rates.

However, following the collapse of Sam Bankman-Fried's FTX crypto exchange in November, Genesis froze withdrawals from the Earn program, denying its customers access their funds.

At the time, James alleged losses to Earn investors exceeded $1 billion. But as more investors came forward, the Attorney General concluded that the companies' "scam" was much larger, harming retail investors who lent funds directly to Genesis as well. 

Among the additional victims are a chiropractor and stay-at-home father who each entrusted Genesis with $2 million in Bitcoin based on assurances their money would be safe, the updated complaint shows.

In total, James' office believes over 230,000 investors lost money in the scheme.

Calls for Stricter Crypto Regulation  

“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,” James said.

The collapse of crypto lending platforms and exchanges over the past year has pushed the U.S. lawmakers to prioritize establishing a regulatory framework for digital assets.

James and other state Attorneys General have been pushing for consumer safeguards and transparency requirements.  

DCG Calls Lawsuit "Baseless"

DCG responded that James' lawsuit has no merit and that the company expects to prevail in court. 

"DCG has always conducted its business lawfully and with integrity, and DCG and Barry Silbert will be fully vindicated," the company said, referring to its CEO.

Genesis Files for Bankruptcy 

Genesis filed for Chapter 11 bankruptcy in January after failing to raise emergency funding to stay solvent.

The lending unit is shutting down after settling with James' office to pay fraud claims pending full repayment of customers through the bankruptcy process.

That proposed settlement requires approval from the bankruptcy judge overseeing the case. Genesis previously agreed to pay a $21 million fine to the Securities and Exchange Commission related to the collapse of the Earn program.  

Meanwhile, Gemini has sued DCG alleging breach of contract regarding the breakdown of their partnership with Genesis. The SEC also charged Genesis and Gemini with violating investor protection laws in operating Earn.

The expanding fraud case demonstrates the heightened legal scrutiny facing cryptocurrency firms from state and federal regulators after the recent crypto market crash.

James and other officials have ramped up investigations and enforcement actions in response to major crypto failures that burned consumers.

The outcomes of the lawsuits and bankruptcy proceedings against DCG, Genesis and Gemini will help determine accountability.