Digital Currency Group files motion to dismiss New York attorney general’s lawsuit: ‘A thin web of baseless innuendo’
The crypto firm Digital Currency Group has filed a motion with the New York Supreme Court to dismiss a lawsuit filed last October by the state’s attorney general, Letitia James.
The lawsuit accuses DCG of defrauding more than 230,000 investors of more than $1 billion from a program its lending subsidiary, Genesis, offered together with Gemini, a crypto firm led by the Winklevoss twins. The lawsuit also named DCG founder and CEO Barry Silbert as a defendant, alleging that he tried to conceal more than $1.1 billion in losses from investors and Gemini during the 2022 collapse in crypto markets.
In Wednesday’s motion, attorneys for DCG described the allegations as a “thin web of baseless innuendo” and accused the attorney general’s office of searching for a “headline-worthy scapegoat.” They argue that DCG acted under the advice of top accountants and investment bankers, including for a controversial $1.1 billion promissory note issued to Genesis, and that the company did nothing wrong.
“The OAG wrongfully seeks to portray DCG’s good-faith support of a subsidiary as participating in fraud,” the attorneys wrote.
Crypto collapse
Founded in 2015, DCG rose to become one of the most influential crypto firms in the U.S. through its venture portfolio and collection of subsidiaries, including Genesis, the mining firm Foundry, and the crypto publication CoinDesk. Genesis became intertwined with the global digital asset ecosystem, lending assets to trading firms like Three Arrows Capital and FTX’s Alameda Research, as well as Gemini, the crypto exchange founded by the Winklevoss twins.
Gemini created the Earn program in 2021 amid the crypto bull market, as companies like Celsius and BlockFi allowed customers to park their crypto assets in return for high yields that dwarfed offerings from traditional banks. In the background, Gemini partnered with Genesis to lend out the customer assets, which in turn lent the cryptocurrency to firms like Three Arrows Capital and Alameda Research.
The program collapsed in 2022 following the failure of Genesis’s counterparties, with Genesis halting withdrawals in November 2022 and soon filing for bankruptcy. Genesis and Gemini faced lawsuits from both the Securities and Exchange Commission and the New York Office of the Attorney General, with the latter accusing DCG and Genesis of misrepresenting their financial state to Gemini and the public. James pointed specifically to a $1.1 billion promissory note that DCG issued to Genesis in the wake of the collapse of Three Arrows Capital, which it argued was part of a “scheme” to defraud investors.
In its motion to dismiss, DCG argues that it was not involved with many of the charges included in the lawsuit, including that Gemini misrepresented the risks of the Earn program to its customers. The attorneys further argue that the attorney general’s accusations of fraud against DCG hinge on “retweets” by DCG of messages tweeted by others about the financial state of the company, but that federal statute prohibits liability for retweeting content posted by others.
The attorneys argue that the promissory note was “entirely valid” and “properly vetted and endorsed” by DCG’s board of directors and advisors, and that statements that DCG made about its business operating “normally” were too vague to be the basis for a fraud claim.
Finally, the attorneys cite New York’s Martin Act, the statute that provides the OAG with its regulatory authority and states that fraud must come from business activity related to securities or commodities. In the motion, the attorneys argue that Gemini Earn was not a security and that DCG did not promote the product.
While the lawsuit between DCG and James will continue, Genesis settled with the office in February as part of its bankruptcy proceedings. DCG and Genesis are currently enmeshed in their own dispute over the DCG subsidiary’s bankruptcy plans.
“We will continue to vigorously fight these claims and we look forward to putting this issue behind us as we focus on the massive growth opportunity in our industry in 2024 and beyond,” a DCG spokesperson said in a statement shared with Fortune.
A spokesperson for the OAG did not immediately respond to a request for comment.
Source link
