Winklevoss’ Gemini crypto firm lied about investing in junk, losing customers $1 billion, NY AG says

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As the storm clouds were gathering around the crypto industry in the summer of 2022, members of the board for Gemini, the crypto exchange founded by twin brothers Tyler Winklevoss and Cameron Winklevoss, gathered to discuss their partnership with Barry Silbert’s crypto-lending business Genesis Capital.

A month earlier, Three Arrows Capital had defaulted on $1 billion in loans from Silbert’s Genesis, which was also highly exposed to Alameda Research, FTX-founder Sam Bankman-Fried’s trading arm that would collapse soon after sending billions in customer money up in smoke. 

The Winklevoss twins’ Gemini had nearly $1 billion of its customers’ money tied up in Genesis. Gemini’s in-house risk analysis had just downgraded Genesis to CCC, or junk-rated, making it a very high-risk investment that they felt had a 50%-60% chance of going bust.

One of Gemini’s board members “compared Genesis Capital’s debt-to-equity ratio to that of Lehman Brothers prior to its collapse,” according to a lawsuit filed Thursday by New York State Attorney General Letitia James, alleging that the entire basis of the Gemini-Genesis partnership was a fraud that cost 230,000 customers over $1 billion. 

“If the market sneezes, you’re in the same situation again,” the lawsuit quoted the board member as saying at the late July 2022 meeting.

But instead of moving to unwind its position with Genesis and warn its customers that their investments may be in peril, Gemini chose to stay the course and continue handing hundreds of millions of dollars in customer money to Genesis, the lawsuit said.

In November, Genesis would be forced to freeze all withdrawals shortly after the collapse of FTX, trapping around $1 billion in Gemini customer money in its wake. Genesis has since filed for bankruptcy protection and Bankman-Fried is currently on trial for fraud and faces decades behind bars if convicted.

In its lawsuit, the New York attorney general’s office charges Genesis, its former CEO Soichiro Moro, its parent company, DCG, and DCG’s CEO Barry Silbert with defrauding investors and the public by trying to conceal more than $1.1 billion in losses.

The suit accuses Gemini of lying to its customers about the safety of their investments, reassuring them that their money was safe while in Genesis’ hands, even though the firm was aware of how unstable its partner had become.

The suit seeks full restitution for investors it says were defrauded plus a life-time bar against any of those involved from engaging in any business related to the purchase and sale of securities and commodities within or from New York.  The New York attorney general’s suit was not filed against Tyler and Cameron Winklevoss personally or accuse them of wrongdoing.

Representatives for Genesis, DCG, Silbert and Moro didn’t immediately reply to messages seeking comment. On X, the platform formerly known as Twitter, Gemini said it had always argued that it had been lied to by Genesis about its financial condition and was a victim in the case. The company said it was disappointed to have also been charged and planned to fight the charges.

Gemini’s relationship with Genesis had largely been through a product it had sold to its customers called Gemini Earn, in which their money would be pooled to lend to others in return for some additional interest payments.

Gemini had promised customers that it only put their money in safe investments and didn’t take risks, like many others in the crypto space. “Ask for permission, not forgiveness,” was one of the company’s hallmark slogans.   

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