SEC targets DCG and Genesis executives for fraud over 3AC collapse

Key Takeaways

The SEC charged DCG and Genesis executives with misleading investors about financial stability following the collapse of 3AC.
There were penalties and legal actions against DCG and Genesis for defrauding investors through misrepresentation, with DCG agreeing to settle SEC charges by paying a $38 million fine.

The SEC has filed charges the face Digital Currency Group (DCG), subsidiary Genesis Global Capital, and former Genesis CEO Soichiro “Michael” Moro, allege negligence and false statements that misrepresented Genesis' financial health to shareholders investment.

Founded in 2015 by Barry Silbert and headquartered in Stamford, Connecticut, Digital Currency Group (DCG) is a prominent company in the crypto space.

He owns Grayscale Investments, the largest digital asset manager globally, and previously owned CoinDesk, a major crypto media outlet that was sold to Bullish, a crypto exchange led by former President NYSE Tom Farley, in November 2023.

Genesis, founded in 2013 and credited with launching the first over-the-counter Bitcoin trading desk, faced serious financial turmoil after 3AC defaulted on loans worth $2.4 billion.

This default caused a ripple effect, leaving Genesis open to a shortfall of at least $1 billion.

Despite the heavy losses, DCG and Genesis made public statements claiming that the company's balance sheet was “strong” and that risks associated with 3AC had been “shredded.” The SEC alleges that these statements were grossly false and misleading.

In an effort to combat bankruptcy, DCG issued a $1.1 billion promissory note to Genesis on June 30, 2022.

This note broke Genesis' balance sheet and avoided negative equity at a critical reporting date, but the terms were not disclosed to investors.

The SEC alleges that this action misleads stakeholders about Genesis' financial condition.

Moro, who left Genesis in August 2022, also faces charges for his role in perpetrating those misrepresentations.

By November 2022, Genesis was overwhelmed with liquidation and cease and desist requests, leading to a Chapter 11 bankruptcy filing in January 2023.

The breach disrupted its partnership with the Earn Gemini Trust Company program, which allowed customers to earn high interest returns on digital asset investments.

About 230,000 Gemini customers were affected, with Gemini and Genesis later agreeing to a settlement to return digital assets to users.

In February 2024, New York Attorney General Letitia James filed a lawsuit against Genesis, DCG, and Gemini, alleging that the companies defrauded investors of more than $3 billion through the Earn program by misrepresenting its risks.

The SEC has fined DCG $38 million, while Moro has been fine $500,000.

Both cease and desist orders were issued under Section 17(a)(3) of the Securities Act.

Barry Silbert, who has remained at the helm of DCG despite these challenges, recently announced new initiatives to boost the company's focus.

In November 2024, he launched Yuma, a decentralized AI initiative that benefits from the Bittensor network, marking a possible return after the problems of the 2022 crypto crash.