What does the legal document filed by Gemini against DCG say?

This week, there have been reports of financial disputes between Gemini and DCG, see “Gemini’s Ultimatum to DCG, Has the Deadline for DCG Founder Passed?” for details.

Today, we will summarize the content of the indictment filed by Gemini against DCG and its CEO Barry Silbert in the New York court, and understand DCG’s five charges and Gemini’s six major demands.

Gemini founder’s Twitter message

On June 7th, one of Gemini’s founders, Cameron Winklevoss, revealed on Twitter that after the warning was ineffective, Gemini filed a lawsuit against Digital Currency Group (DCG) and its CEO Barry Silbert in New York court. Gemini accused Barry Silbert of participating in fraudulent activities against creditors. According to Cameron, Barry not only played a core role in planning fraudulent behavior, but also participated in its implementation personally.

Cameron briefly stated the 12 core “charges” of DCG (actually an extension of five charges) in this tweet, and said that “the indictment tells the whole story.” So, what is the content of this 33-page indictment?

Indictment content

The indictment began by stating that “defendants DCG and Silbert participated in a fraudulent scheme, inducing various depositors to continue to lend large amounts of cryptocurrency and dollars to DCG’s subsidiary Genesis Global Capital, LLC (hereinafter referred to as “Genesis”), including Gemini users who are kept in custody and acted as agents by Gemini. This lawsuit aims to recover damages and losses caused by the defendants to Gemini, which are due to the false, misleading and incomplete statements and omissions made by DCG and Silbert to Gemini, and the role played by the defendants in encouraging and facilitating the fraudulent behavior of Genesis against Gemini.”

The style of this indictment is completely different from that of previous legal documents such as SEC and Coinbase. The style of related legal documents such as SEC and Coinbase is very conservative. Even if the accusations are sharp, the wording and legal terms are very professional. However, in this Gemini indictment, there are many plain words, sometimes even directly venting emotions: “(What Genesis said) is all lies.” “Did the defendants or Genesis disclose the huge risks that Genesis bears for a rapidly collapsing arbitrage trade? No. Did they immediately take measures to remove this risk, increase additional collateral requirements, and resolve escalating debt obligations? No.” “There are more lies below.”

Very emotional language

Following are the allegations made by Gemini:

1. Genesis did not thoroughly review the borrowers and concealed losses on their behalf

The lawsuit claims that DCG and Genesis induced Gemini’s Earn users to lend a large amount of money to DCG by claiming “strong risk management practices and a thorough review process of the re-lending parties”, but actually lent these managed funds to counterparties engaging in high-risk arbitrage trading and charged them high management fees. These funds could not be repaid in 2021, but Genesis did not disclose these losses or take immediate action to prevent them. They allowed the borrowers to maintain their debt for a whole year, continued to borrow from Gemini and charged huge management fees. At this point, the game had become a Ponzi scheme.

When Three Arrows Capital collapsed, the game could not continue. The lawsuit states, “Since then, a series of chain events have led to the current situation. Genesis violated its statements about risk management and careful examination of transaction counterparties… According to Genesis, the collateral held by Three Arrows Capital’s loan was equivalent to 80% of its exposure to 3AC; at the time, CEO Michael Moro was very clear that these losses would not affect Genesis’ business: “Our potential losses are limited and can be offset by our own balance sheet. We have rid ourselves of the risk and continue to move forward.”

However, in fact, the value of these collaterals was less than 50% of the outstanding debt. As details continued to emerge from the liquidation process of 3AC, the scale of Genesis’ losses became clear. When 3AC collapsed, it owed Genesis a staggering $2.36 billion (through 3AC’s debt to Genesis’ affiliated company in Singapore). Although Moro had asserted that 3AC’s loans had more than an 80% collateral requirement, Genesis was only able to realize $1.16 billion when liquidating 3AC’s position. In other words, by mid-July 2022, the value of the collaterals held by Genesis was ultimately less than 50% of the outstanding loan amount, resulting in a loss of about $1.2 billion when 3AC began liquidating. Genesis had little hope of recovering any substantive value from the liquidation of 3AC, as the founder of 3AC had disappeared, leaving the liquidators to search for assets to distribute to creditors. This amount has left Genesis financially short by hundreds of millions of dollars.

Genesis claims that its parent company DCG intervened and assumed losses, but it’s just an empty promise

In order to appease Gemini and keep Gemini Earn’s loan to Genesis going, Genesis made false statements that DCG had absorbed the losses of the 3AC loan at the parent company level and therefore claimed that Genesis’ operations were “business as usual”.

Previously, CEO Michael Moro wrote on Twitter, “DCG has taken on some responsibility for Genesis’ dealings with the counterparty to ensure we have capital to support long-term operations and business expansion.” At the time, Matt Ballensweig, Genesis’ former CEO and joint head of trading and lending, promised to another Genesis depositor on July 18, 2022: “So far, all losses on 3AC have been absorbed by our parent company DCG, Genesis’ balance sheet is still healthy, and we continue to operate normally.” He added, “DCG directly absorbed the remaining losses.”

So how did DCG actually absorb Genesis’ losses? The answer is that DCG only wrote a promissory note.

Gemini said, “Behind the scenes, DCG and Genesis reached a fraudulent transaction: Specifically, on June 30, 2022, defendant Silbert on behalf of defendant DCG signed an unsecured promissory note for $1.1 billion payable to Genesis. This allowed Genesis to include DCG’s promissory note as an asset on its balance sheet, allegedly “offsetting” the $1.2 billion loss caused by the collapse of 3AC. However, in reality, the fair market value of the promissory note is only a small fraction of its $1.1 billion face value. The note will mature in 10 years, on June 30, 2032, and accrues interest at only 1%, far below the market rate for unsecured borrowing that DCG might need to pay.”

The complaint states that Genesis told its depositors that DCG had “assumed” or “absorbed” the losses of 3AC, meaning that Genesis had been compensated for all of its $1.2 billion losses. However, the promissory note did not accomplish this. The promissory note also did not improve Genesis’ immediate liquidity position. From a practical standpoint, the promissory note is simply a paper obligation, an accounting device designed to make Genesis look like it has equity and can actually fulfill its obligations to its depositors without requiring financial support from DCG that would be necessary to actually make up for Genesis’ losses. (That is, it did not use real money to repay Genesis’ losses.)

This led to Genesis publishing a series of financial statements, prepared with the knowledge and active participation of DCG, which showed that DCG had injected $1.1 billion in short-term receivables into Genesis to enable it to fulfill its obligations to depositors. (Another allegation below will be detailed.)

DCG personnel, including then COO Mark Murphy, were involved in the dissemination of these false statements, which were communicated to creditors as having been prepared “with the assistance of DCG and Genesis’ financial and accounting teams.” However, it subsequently became clear that DCG had not actually covered these losses with its own funds and Genesis remained severely undercapitalized.

3. DCG and Genesis conspired to forge financial reports to hide the truth from Gemini and creditors

As an extension of the empty promissory notes, DCG and Genesis also issued a series of false financial reports, accompanied by false and misleading statements about Genesis’ alleged DCG support. These reports and false statements “were designed to hide the truth from Genesis’ depositors.”

To illustrate this point, Gemini released a financial report in an email:

The complaint alleges that Genesis classified the assets on this note as “Other Assets” in “Current Assets.” As a general accounting principle in the United States, “current assets” refers to cash and other resources that are reasonably expected to be converted into cash within one year. Thus, the term specifically excludes amounts owed by related companies that will not be collectible within one year in the normal course of business. Within this asset,

by including the promissory note at its full face value in the “Current Assets” category, Genesis claimed to have $1.1 billion in cash that could be collected within one year. Not to mention that the value of the promissory note is only a small fraction of its nominal value and the promissory note itself is due to be repaid to DCG in 10 years’ time. The note is clearly not a current asset, but Genesis falsely classified it as such to induce Gemini to continue with the Gemini Earn program.

In terms of this financial report, the value of this promissory note is one-third of its current assets.

The Gemini party also included other evidence, stating that Genesis had “beautified” this promissory note on receivables and loan term data, misleading Gemini to continue to open the Earn program for Genesis.

4. Defendant Barry Silbert (CEO of Genesis’ parent company DCG Group) personally deceived Gemini

This is also a point that Cameron previously mentioned on Twitter, and even sent an open letter. The indictment stated that the defendant Silbert personally made great efforts to deceive the creditors and continue to spread the lie that DCG had “absorbed” the loss of 3AC. For example, in mid-October, after learning that Gemini had given 30 days notice to terminate the Gemini Earn loan program, Silbert personally contacted Gemini’s founder Cameron Winklevoss and Silbert had a lunch meeting with Cameron in New York City on October 22, 2022. At that lunch meeting, Silbert said a lot to make Gemini not stop the Earn program, even though Silbert was already aware that Genesis was insolvent.

In fact, what Silbert did far exceeded this fraudulent omission. He told Gemini that although Genesis’ loan portfolio was “complex,” the crisis could be successfully resolved within a reasonable time. In other words, Silbert told Gemini that Genesis only faced a short-term mismatch in the loan portfolio time, covering up the huge loopholes and inability to fulfill obligations to Gemini and others on Genesis’ balance sheet, because DCG did not actually bear the loss of 3AC. Based on the reliance on Silbert’s false statement, Gemini decided to delay the termination of the Gemini Earn plan and did not explore the possibility of more rapid termination or other remedies, if Silbert stated the truth, Gemini would have taken these measures.

5. Other executives of DCG and Genesis also participated in fraudulent behavior and repeatedly concealed the truth from Gemini and other creditors

The entire period ticket plan shows that Barry, DCG and Genesis were all involved in this fraudulent behavior. Its design and execution require the full participation and cooperation of Barry, DCG and Genesis, and it can only be “effective” by hiding it from creditors.

Gemini provided more evidence. On July 19, 2022, then-COO Mark Murphy reiterated the false story previously shared with depositors in the “Three Arrows post-analysis” document sent by Genesis to Gemini. Murphy stated that DCG intervened and absorbed the loss of Genesis in its 3AC transaction, and stated that these losses had been offset on DCG’s balance sheet. He further stated that with DCG’s support, Genesis had sufficient capital for normal operations in the future. He assured depositors that Genesis was one of the most important components of the DCG empire, and DCG had major plans for Genesis’ future business, and promised to provide continued support for Genesis to continue to develop.

Genesis’s Managing Director and Co-Head of Trading and Lending, Matt Ballensweig, provided details about Genesis’s approximately $1.8 billion in loans to affiliated entities that had previously been disclosed in reports by Genesis. Ballensweig claimed at the time that Genesis had outstanding loans to DCG of approximately $922 million, deliberately omitting the $1.1 billion in term notes that Genesis was attempting to hide from its depositors. At the same time, Ballensweig falsely stated that DCG “assumed a $1.1 billion loan on June 30, 2022,” which was intended to lead depositors to believe that Genesis had been compensated for losses suffered as a result of the 3AC loan. This was entirely fictitious, but Murphy did not make any effort to correct Ballensweig’s false statement. Similarly, Ronald DiPrete, DCG’s Special Projects Lead and Chief Financial Officer, was copied on the email but also did not correct Ballensweig’s false statement.

Additionally, several high-ranking executives of DCG and Genesis were repeatedly copied on relevant emails but “took no action to correct the error.”

Gemini’s Claims

Gemini makes six claims in the complaint:

A. Actual damages, in an amount to be determined pursuant to the relief requested herein;

B. Punitive damages, in an amount to be determined at trial pursuant to the relief requested herein;

C. A declaratory judgment confirming Defendants’ liability for any future damages arising from the relief requested herein;

D. Reasonable attorney’s fees;

E. The costs of this action; and

F. Such other relief as may be deemed just and proper.

The outcome of this case will have significant implications for the cryptocurrency industry.

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