Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 1 of 50
`
`UNITED STATES DISTRICT COURT
`DISTRICT OF CONNECTICUT
`
`
`
`
`
`WILLIAM MCGREEVY, ASHWIN
`GOWDA, TRANSLUNAR CRYPTO, LP,
`CHRISTOPHER BUTTENHAM, and
`ALEX SOPINKA, individually and on
`behalf of all others similar situated,
`
`
`
`
`
`
`
`Plaintiffs,
`
`
`
`DIGITAL CURRENCY GROUP, INC.,
`and BARRY SILBERT,
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`No.
`
`CLASS ACTION COMPLAINT
`
`JURY TRIAL DEMANDED
`
`v.
`
`Defendants.
`
`Plaintiffs William McGreevy, Ashwin Gowda, Translunar Crypto LP, Christopher
`
`Buttenham, and Alex Sopinka (collectively, “Plaintiffs”), individually and on behalf of all others
`
`similarly situated, allege the following against Digital Currency Group, Inc. (“DCG”) and Barry
`
`Silbert (“Silbert”) (collectively with DCG, “Defendants”), based on personal knowledge, the
`
`investigation of counsel, and information and belief. Plaintiffs believe substantial evidentiary
`
`support will exist for the allegations set forth herein after a reasonable opportunity for discovery.
`
`INTRODUCTION
`
`1.
`
`Plaintiffs bring this action against Defendants DCG and Barry Silbert seeking
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`damages for their liability as Control Persons as provided for by the federal securities laws.
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`Plaintiffs are digital asset lenders who engaged in digital asset lending transactions with
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`Defendant-controlled subsidiary company Genesis Global Capital, Inc. (“Genesis Global
`
`Capital”) from February 2, 2021 through November 16, 2022 (the “Class Period”).
`
`2.
`
`As a result of the violations of the federal securities laws described herein,
`
`Plaintiffs and members of the Classes have been denied access to their digital assets since
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 2 of 50
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`November 16, 2022 and face little prospect of recovering a meaningful amount of the digital
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`assets they lent to Genesis Global Capital.
`
`3.
`
`Defendant DCG is the parent entity of a conglomerate of subsidiaries which
`
`includes Genesis Global Capital. At all times alleged herein DCG was the 100% owner of
`
`Genesis Global Capital.
`
`4.
`
`Defendant Barry Silbert is the founder of DCG, Genesis Global Capital, and
`
`several other DCG subsidiary companies. Silbert is the controlling shareholder of DCG (owning
`
`40%), chief executive officer of DCG, and chairman of DCG’s board of directors.
`
`5.
`
`During the Class Period, Genesis Global Capital ran a borrow/lend business for
`
`the DCG conglomerate, attracting capital from digital asset owners by offering high rates of
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`return via interest on the lending transactions.
`
`6.
`
`Genesis Global Capital executed lending transactions with its customers such as
`
`Plaintiffs via agreements sometimes styled “Master Digital Asset Loan Agreement(s)” (the
`
`“MDAL Agreement”) and other times called “Master Borrow Agreement(s)” (collectively, the
`
`“Lending Agreements”) whereby lenders such as Plaintiffs provided digital assets to Genesis
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`Global Capital in exchange for interest payments and the eventual return of the digital assets.
`
`7.
`
`Genesis Global Capital pooled the digital assets it received pursuant to the
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`Lending Agreements and, at the direction of DCG and Barry Silbert, deployed the digital assets
`
`pursuant to certain strategies designed to generate revenue for the DCG conglomerate and Silbert
`
`and to pay lenders interest.
`
`8.
`
`Genesis Global Capital, subject to the direction and control of DCG and Silbert,
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`did not register the Lending Agreements with the U.S. Securities & Exchange Commission.
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`9.
`
`Because the Lending Agreements meet the definition of investment contracts and
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`notes under the federal securities laws, as offered and sold, the Lending Agreements constituted
`
`offers and sales of securities under the federal securities laws, including the Securities Act of
`
`1933 (the “Securities Act”), 15 U.S.C. §§ 77e, 77l(a)(1), 77o.
`
`10.
`
`Because no applicable exemption from registration applied, Genesis Global
`
`Capital’s failure to register its securities offerings violated the federal securities laws, including
`
`Section 5 of the Securities Act.
`
`11.
`
`Independent of the federal securities laws’ registration requirements, the federal
`
`securities laws prohibit parties from defrauding or deceiving, including through
`
`misrepresentation of material information, someone in connection with the purchase or sale of
`
`security.
`
`12.
`
`During the Class Period DCG and Silbert deployed the digital assets Genesis
`
`Global Capital received from lenders in ways designed to line DCG’s and Silbert’s own pockets.
`
`13.
`
`For example, DCG and Silbert directed Genesis Global Capital to use lenders’
`
`digital assets to engage in transactions designed to benefit the DCG conglomerate, including the
`
`purchase of GBTC, a publicly traded security managed by DCG and Silbert’s Grayscale
`
`Investments subsidiary, to maximize the management fees collectable by the DCG conglomerate.
`
`14.
`
`DCG and Silbert also caused Genesis Global Capital to take on an unreasonable
`
`amount of counterparty concentration risk by lending almost 30% of Genesis Global Capital’s
`
`total loan book to a single party: digital asset hedge fund Three Arrows Capital. This too was
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`designed to benefit the DCG conglomerate by maximizing the management fees earned for
`
`managing GBTC.
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`15.
`
`Predictably, these practices had disastrous results. Three Arrows Capital declared
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`bankruptcy in June 2022, and after Three Arrows Capital liquidated its assets Genesis Global
`
`Capital was left with an uncollectable $1.1 billion debt, an impairment in value which Genesis
`
`Global Capital should have immediately recognized on its balance sheet regularly distributed to
`
`lenders such as Plaintiffs, members of the Classes, and their agents.
`
`16.
`
`Recognition of the impairment, however, would have meant Genesis Global
`
`Capital recognizing its own insolvency, which would have terminated all Lending Agreements
`
`and entitled lenders such as Plaintiffs and members of the Classes to the return of their digital
`
`assets. It also would have meant the end of the Genesis Global Capital’s business and DCG’s
`
`source of capital.
`
`17.
`
`Instead of recognizing the impairment, DCG and Barry Silbert directed and
`
`caused Genesis Global Capital to engage in a misleading sham transaction without any economic
`
`reality, designed to conceal its insolvency. At DCG and Silbert’s direction, Genesis Global
`
`Capital proceeded to “sell” the uncollectable $1.1 billion Three Arrows Capital debt to DCG in
`
`exchange for a 10-year promissory note (the “DCG Promissory Note”) with an interest rate of
`
`1% per year due in 2032. Importantly, no cash, cash equivalents, or any assets meeting the
`
`definition of a current asset changed hands in this transaction, which meant that Genesis Global
`
`Capital received zero capitalization from DCG. Instead, Genesis Global Capital magically erased
`
`the bad debt from its books and replaced it with a “good” debt.
`
`18.
`
`Genesis Global Capital proceeded to misleadingly include the $1.1 billion amount
`
`of the DCG Promissory Note on its balance sheet as a current asset and/or receivable, which
`
`falsely portrayed Genesis Global Capital as solvent when, in fact, it was insolvent.
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 5 of 50
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`19.
`
`Genesis Global Capital circulated balance sheets and other documents containing
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`misrepresentations as to its solvency to Plaintiffs, members of the Classes, and their agent in
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`order to induce the parties to continue to loan Genesis Global Capital digital assets and/or to
`
`prevent them from requesting redemptions of their loans.
`
`20.
`
`Importantly, Genesis Global Capital represented in every lending transaction it
`
`executed from July 1, 2022 forward that it was in fact solvent, when it was not.
`
`21.
`
`These misrepresentations and omissions concerning the Genesis Global Capital-
`
`DCG transaction and Genesis Global Capital’s solvency violated of Section 10(b) of the
`
`Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, codified at 17 CFR
`
`240.10b-5, which prohibit defrauding or deceiving, including through misrepresentation of
`
`material information, someone in connection with the purchase or sale of security.
`
`22.
`
`The misrepresentations and omissions were material, as no reasonable lender
`
`would have loaned digital assets to Genesis Global Capital had they known of Genesis Global
`
`Capital’s true financial condition or the details of the $1.1 billion DCG Promissory Note.
`
`23.
`
`Plaintiffs, members of the Classes, and their agents reasonably relied on Genesis
`
`Global Capital’s misrepresentations and omissions as to Genesis Global Capital’s solvency in
`
`deciding to lend digital assets to Genesis Global Capital or to rollover existing loans with
`
`Genesis Global Capital into new terms.
`
`24.
`
`Thus, as a result of the misrepresentations and omissions, Genesis Global Capital
`
`received billions of dollars in new loans and loan roll-overs from Plaintiffs and members of the
`
`Classes Genesis Global Capital otherwise would not have.
`
`25.
`
`These misrepresentations and omissions came to light after Genesis Global
`
`Capital experienced a slew of withdrawal requests in November 2022 in the wake of the collapse
`
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 6 of 50
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`of digital asset trading platform FTX due to a general loss of confidence in the digital asset
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`markets. This “bank run” combined with Genesis Global Capital’s true financial condition meant
`
`that Genesis Global Capital did not have the assets to honor redemption requests.
`
`26.
`
`On November 16, 2022, Genesis Global Capital unilaterally stopped honoring
`
`redemption requests, meaning no lender could obtain their digital assets from Genesis Global
`
`Capital. Even then, Genesis Global Capital continued to misrepresent its financial condition,
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`calling the cause of its inability to honor redemptions a result of a “liquidity and duration
`
`mismatch” when in reality it was because of insolvency.
`
`27.
`
`On January 19, 2022, Genesis Global Capital, LLC and two affiliated entities
`
`filed for Chapter 11 Bankruptcy protection in the United States Bankruptcy Court for the
`
`Southern District of New York.
`
`28.
`
`As a result of the conduct described herein, Plaintiffs and members of the Classes
`
`defined below have suffered significant harm and are owed billions of dollars.
`
`29.
`
`Plaintiffs seek relief, on behalf of themselves and the proposed Classes, for the
`
`injuries they have sustained as a result of Defendants’ unlawful sale of unregistered securities, in
`
`violation of Section 5 and 12(a)(1) of the Securities Act, and fraud in connection with the sale or
`
`purchase of securities, in violation of Section 10(b) of the 1934 Exchange Act and Rule 10b-5
`
`promulgated thereunder pursuant to Section 15 of the Securities Act and Section 20(a) of the
`
`Exchange Act.
`
`PARTIES
`
`30.
`
`Plaintiff William McGreevy (“Plaintiff McGreevy”) is a resident of Kansas.
`
`Plaintiff McGreevy made several loans to Genesis Global Capital during the Class Period via the
`
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`6
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 7 of 50
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`Gemini Earn Program. A true and correct copy accounting of Plaintiff McGreevy’s digital asset
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`held by Genesis Global Capital is annexed hereto as Exhibit A.
`
`31.
`
`Plaintiff Ashwin Gowda (“Plaintiff Gowda”) is a resident of Texas. Plaintiff
`
`Gowda made several loans to Genesis Global Capital during the Class Period via the Gemini
`
`Earn Program. A true and correct copy of all of Plaintiff Gowda’s Genesis Global Capital
`
`lending transactions is annexed hereto as Exhibit B.
`
`32.
`
`Plaintiff Translunar Crypto LP (“Plaintiff Translunar”) is a limited partnership
`
`organized and existing under the laws of the State of Delaware and resident of the State of Texas.
`
`Plaintiff Translunar made several loans to Genesis Global Capital during the Class Period via the
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`Genesis Institutional Lending Program. A true and correct account of all of Plaintiff Translunar’s
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`Genesis Global Capital lending transactions is annexed hereto as Exhibit C.
`
`33.
`
`Plaintiff Christopher Buttenham (“Plaintiff Buttenham”) is a resident of Nevada.
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`Plaintiff Buttenham made several loans to Genesis Global Capital during the Class Period via the
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`Gemini Earn Program. A true and correct copy of all of Plaintiff Buttenham’s Genesis Global
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`Capital lending transactions is annexed hereto as Exhibit D.
`
`34.
`
`Plaintiff Alex Sopinka (“Plaintiff Sopinka) is a resident of Nevada. Plaintiff
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`Sopinka made several loans to Genesis Global Capital during the Class Period via the Gemini
`
`Earn Program. A true and correct copy of all Plaintiff Sopinka’s Genesis Global Capital lending
`
`transactions is annexed hereto as Exhibit E.
`
`35.
`
`Defendant Digital Currency Group, Inc. (“DCG”) is a corporation formed and
`
`existing under and pursuant to the laws of Delaware. DCG maintains its principal place of
`
`business in Stamford, Connecticut. Prior to moving to Stamford, Connecticut, DCG maintained
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`its principal place of business in New York, New York.
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 8 of 50
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`36.
`
`Defendant Barry Silbert (“Silbert”) is the founder and chief executive officer
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`(“CEO”) of DCG. Upon information and belief, he is a resident of Connecticut. Silbert has been
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`reported to own 40% of the equity of DCG. Silbert has consistent and daily management
`
`responsibilities for DCG’s and DCG’s subsidiaries’ operations, including Genesis Trading,
`
`Genesis Global Capital, and Grayscale Investments. For example, it has been reported that
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`Silbert prefers focusing on the capital allocation activities of DCG and its subsidiaries. Silbert’s
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`activities and responsibilities include making the decision not to register Genesis Global
`
`Capital’s issuance of notes and investment contracts with the SEC, and engaging in the
`
`transaction which led to the issuance of the DCG Promissory Note discussed below. Silbert has
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`repeatedly and publicly discussed his role in DCG and oversight of this subsidiaries.
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`JURISDICTION AND VENUE
`
`37.
`
`This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.
`
`§1332(d)(2)(A), because this case is a class action where the aggregate claims of all members of
`
`the proposed Classes exceed $5,000,000.00, exclusive of interest and costs, and the Plaintiffs and
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`most members of the proposed Classes are citizens of a state different from Defendant.
`
`38.
`
`Jurisdiction of this Court is further founded upon 28 U.S.C. § 1331 because the
`
`this complaint asserts claims under Sections 5 and 12(a)(1) of the Securities Act of 1933 (the
`
`“Securities Act”), 15 U.S.C. §§ 77e, 77l(a)(1), 77o.
`
`39.
`
`Jurisdiction of this Court is also founded upon Section 27 of the Securities
`
`Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78aa(a), which provides that federal
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`courts have exclusive jurisdiction over violations of the Exchange Act, including Sections 10 and
`
`20(a).
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 9 of 50
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`40.
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`Venue is proper in this judicial District pursuant to 28 U.S.C. §1391(b) and (c)
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`and 18 U.S.C. §1965, because Defendants transact business in, are found in, and/or have agents
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`in this District, and because some of the actions giving rise to this complaint took place in this
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`District.
`
`41.
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`The Court has personal jurisdiction over Defendants. Defendants transacted
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`business, maintained substantial contacts, and/or committed overt acts in furtherance of the
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`illegal scheme and conspiracy throughout the United States, including in this District. The
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`scheme and conspiracy have been directed at, and have had the intended effect of, causing injury
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`to persons residing in, located in, or doing business throughout the United States, including in
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`this District.
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`42.
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`The Court also has personal jurisdiction over Defendants under the nationwide
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`service of process provisions of Section 22 of the Securities Act, 15 U.S.C. § 77v.
`
`I.
`
`DIGITAL CURRENCY GROUP
`
`FACTUAL BACKGROUND
`
`
`43.
`
`Digital Currency Group was founded by Defendant Barry Silbert in 2015 with
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`two specific purposes: (1) to operate and control two companies which Silbert had already
`
`created and was actively operating: Genesis Global Trading and Grayscale Investments; and (2)
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`to make venture capital investments in digital asset and blockchain companies.1
`
`44.
`
`Today, DCG is the parent company of a conglomerate of digital asset and
`
`blockchain technology companies and DCG’s venture capital arm has invested in a number of
`
`companies in the digital asset and blockchain space. DCG describes itself as follows:
`
`
`1 https://techcrunch.com/2015/10/27/barry-silbert-launches-digital-currency-group-with-funding-
`from-mastercard-others/ (accessed Jan. 21, 2023).
`
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 10 of 50
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`Founded in 2015 by CEO Barry Silbert, DCG is the most active investor in the
`blockchain sector, with a mission to accelerate the development of a better financial
`system through the proliferation of digital assets and blockchain technology. Today,
`DCG sits at the epicenter of the industry, backing more than 175 blockchain-related
`companies in over 35 countries. DCG also invests directly in digital currencies and other
`digital assets. In addition to its investment portfolio, DCG is the parent company of
`Genesis (a global digital asset prime brokerage), Grayscale Investments (the largest
`digital currency asset manager), CoinDesk (a leading financial media, data, and
`information company), Foundry (a leader in bitcoin mining and staking) and Luno (a
`leading cryptocurrency platform with a large international footprint).
`
`45.
`
`In addition to its wholly-owned subsidiaries, DCG holds stakes in a portfolio that
`
`includes some of the most well-known and successful companies in the space including some of
`
`the more prominent exchanges such as Genesis Global Capital and Kraken.
`
`46.
`
`In 2021, at Barry Silbert’s direction DCG announced it was moving its principal
`
`place of business to Stamford, Connecticut. The move was completed in early 2022.
`
`47.
`
`A 2021 financing round valued DCG at more than $10 billion.
`
`II.
`
`BARRY SILBERT
`
`48.
`
`Barry Silbert is the founder, CEO, and Chairman of the board of directors of
`
`DCG.
`
`49.
`
`Barry Silbert owns approximately 40% of DCG and at all relevant times
`
`controlled the day-to-day activities of DCG and its wholly-owned subsidiaries Grayscale,
`
`Genesis Global Capital, and Genesis Global Trading, including the capital allocation strategies
`
`employed by these entities.
`
`50.
`
`Until 2021, Barry Silbert was CEO of DCG’s wholly-owned subsidiary business
`
`Grayscale and served as Chairman of Grayscale’s board of directors.
`
`51.
`
`As just one example of his total control of DCG and its subsidiaries, in or around
`
`2020, Silbert decided to move DCG and many of its subsidiary businesses, including Grayscale,
`
`from New York, New York to Stamford, Connecticut, where Silbert lived.
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`52.
`
`In April 2022, Forbes estimated Silbert’s net worth at $3.2 billion, up front 2021’s
`
`estimate of $1.6 billion.
`
`III. GRAYSCALE INVESTMENTS, LLC
`
`53.
`
`Grayscale Investments, LLC (“Grayscale”) is a subsidiary of DCG and is a digital
`
`asset management company that offers investment products that provide exposure to the price
`
`movement of various digital currencies. Grayscale’s most popular investment product is the
`
`Grayscale Bitcoin Trust, or “GBTC.”
`
`54.
`
`In 2022, at Silbert’s direction, Grayscale moved its principal place of business to
`
`Stamford, Connecticut.
`
`55.
`
`GBTC is a publicly traded investment vehicle managed by Grayscale that
`
`provides exposure to bitcoin’s price movements without the need to directly buy and hold the
`
`digital currency.
`
`56.
`
`57.
`
`GBTC is traded on OTCQX, a market for over-the-counter securities.
`
`GBTC shares can be acquired in two ways: (1) anyone with a brokerage account
`
`can buy GBTC shares in the over-the-counter securities markets; and (2) investors can subscribe
`
`to the underlying trust (the “Trust”).
`
`58.
`
`Subscribing to the Trust requires a minimum investment of $50,000 and is
`
`available only to accredited investors.
`
`59.
`
`Trust subscribers receive GBTC shares representing the value of Bitcoin held in
`
`the Trust equal to the amount invested by the subscriber.
`
`60.
`
`GBTC shares issued via subscriptions are subject to a six-month lockup period
`
`during which subscribers cannot sell their shares.
`
`61.
`
`GTBC subscribers are free to sell their GBTC shares once the lockup period ends.
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`62.
`
`Until February 2021, GBTC shares traded at a premium or in excess of the net
`
`value of the assets held by GBTC (the “Net Asset Value” or “NAV”). For example, on
`
`December 22, 2020, GBTC was trading at a 38.57% premium to its NAV.
`
`63.
`
`The premium was attributed to the fact that GBTC was the only way for
`
`institutional investors to get regulator-approved access to Bitcoin’s price movements, which
`
`caused demand to exceed supply.
`
`64.
`
`Traders sought to exploit the existence of the premium by subscribing to the Trust
`
`and selling their GBTC shares at a premium once the six-month lockup period expired (in what
`
`came to be known as the “Grayscale Trade”).
`
`65.
`
`GBTC stopped trading at a premium to NAV in February 2021 and flipped to a
`
`discount. 2
`
`66.
`
`Since February 2021, the discount of GBTC shares to GBTC’s NAV continued to
`
`increase:
`
`a. On November 30, 2021, GBTC shares were trading at a 12.05% discount
`
`to GBTC’s NAV.
`
`b. On January 31, 2022, GBTC shares were trading at a 25.11% discount to
`
`GBTC’s NAV.
`
`c. On June 1, 2022, GBTC shares were trading at a 29.97% discount to the
`
`GBTC’s NAV.
`
`d. On November 1, GBTC shares were trading at a 35.76% discount to the
`
`GBTC’s NAV.
`
`
`2 As of January December 23, 2022, GBTC shares traded at a discount of 45.74% to the trust’s
`NAV.
`
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`e. On November 16, GBTC shares were trading at a 39.29% discount to the
`
`GBTC’s NAV.
`
`f. On January 20, 2023, GBTC shares were trading at a 40.05% discount to
`
`GBTC’s NAV.
`
`67.
`
`Grayscale charges a 2% annual management to manage GBTC, meaning that
`
`Grayscale, DCG, and Silbert earn hundreds of millions of dollars annually and have an incentive
`
`to maximize the AUM of Grayscale.
`
`68.
`
`On December 31, 2021, Grayscale published a chart on Twitter of Grayscale’s
`
`AUM of $43.6 billion in and showing GBTC’s AUM as $30.417 billion.
`
`IV. GENESIS GLOBAL TRADING, INC.
`
`69.
`
`Genesis Global Trading, Inc. (“Genesis Trading”) was formed in 2005 and was
`
`initially operated by Barry Silbert as the bitcoin trading arm of Silbert’s company SecondMarket,
`
`which Silbert launched in 2004 as a private marketplace where accredited investors could buy
`
`and sell shares of private companies. Silbert served as CEO of SecondMarket until selling
`
`SecondMarket to Nasdaq in 2015.
`
`70.
`
`Silbert spun Genesis Trading out of SecondMarket prior to selling SecondMarket
`
`to Nasdaq and relaunched Genesis Trading as a standalone broker-dealer specializing in digital
`
`currencies on Thursday, April 16, 2015, over six months before Silbert announced the formation
`
`of DCG.
`
`71.
`
`In October 2015, in conjunction with the formation of DCG, Silbert caused
`
`Genesis Trading to become a wholly-owned subsidiary of DCG with Silbert serving as DCG’s
`
`CEO, Chairman, and controlling shareholder, thus controlling Genesis Trading.
`
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`72.
`
`Genesis Trading operated as a New York-based non-custodial, over the counter
`
`(“OTC”) market-maker in digital assets and brokerage, holding a virtual currency BitLicense
`
`with NY DFS, and registered as a broker-dealer with the Securities and Exchange Commission
`
`(“SEC”) and FINRA.
`
`73.
`
`In late 2017, Silbert and DCG organized Genesis Global Capital, LLC (“Genesis
`
`Global Capital”) under the laws of the State of Delaware to house the growing digital asset
`
`lending business of the DCG conglomerate Genesis Trading had been operating for Silbert and
`
`DCG.
`
`74.
`
`In April 2018, Silbert and DCG caused Genesis Trading to reassign all existing
`
`digital asset loan agreements to Genesis Global Capital.
`
`V.
`
`GENESIS GLOBAL CAPITAL, LLC
`
`75.
`
`From April 2018, Genesis Global Capital operated as the digital asset borrowing
`
`and lending desk for the Silbert and the DCG conglomerate, using high interest rates to attract
`
`lenders.
`
`76.
`
`Genesis Global Capital primarily borrowed digital assets via two programs: (1)
`
`directly from lenders via Genesis Global Capital’s “Institutional Lending and Borrowing
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`Business” (the “Genesis Institutional Lending Program”) who were able to meet the minimum
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`loan requirements; and (2) via the Gemini Earn program (the “Gemini Earn Program”)
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`established by the company Gemini Trust Company, LLC (“Gemini”), which had no minimum
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`loan requirement (collectively, the Genesis Institutional Lending Program and the Gemini Earn
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`program are referred to as the “Lending Program(s)”).
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`77.
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`In theory, Genesis Global Capital’s lending business model was simple: it
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`borrowed digital assets from parties in exchange for promises to pay the lenders interest and then
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 15 of 50
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`deployed those digital assets in ways which sought to earn returns that exceeded the interest
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`Genesis Global Capital had committed to paying its lenders.
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`78.
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`Genesis Global Capital typically loaned digital assets to third parties who
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`believed they would earn outsized returns with those funds via their own proprietary investment
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`strategies such as digital asset hedge funds such as the now-infamous digital asset hedge funds
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`Alameda Research, LLC, and Three Arrows Capital.
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`79.
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`However, because lending demand (desire to earn a yield from one’s own assets)
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`commonly exceeds borrowing demand (desire to pay for use of someone else’s assets),
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`businesses like Genesis Global Capital cannot typically deliver on promises of high yields by
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`simply re-lending funds to third parties at higher rates and capturing the “net interest margin” or
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`spread between Genesis Global Capital’s borrowing costs and lending rates.
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`80.
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`To bridge the revenue gap that the difference in lending and borrowing demand
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`creates typically means businesses like Genesis Global Capital must engage in risky, proprietary
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`strategies.
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`81.
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`At all times relevant herein, Barry Silbert, founder and controlling shareholder of
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`Genesis Global Capital parent DCG, had authority to, and did, exercise control of the operations
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`of Genesis Global Capital.
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`A.
`
`82.
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`GENESIS GLOBAL CAPITAL’S INSTITUTIONAL LENDING
`PROGRAM.
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`Genesis Global Capital’s Institutional Lending Program required participants such
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`as Plaintiff Translunar to make minimum loan amounts which varied according to the type of
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`asset being lent.
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`83.
`
`Genesis Global Capital represented the minimums as follows on its website: 100
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`BTC, 1,000 ETH, $2 million U.S. Dollars, and $1 million of certain alternative digital assets.
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`84.
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`Institutional Lending Program transactions were executed pursuant to a document
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`named the Master Borrow Agreement. The Master Borrow Agreement set forth the terms of the
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`loan, including the types of occurrences that constituted events of default and what could cause
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`termination of the agreement and required parties to make certain representations and warranties
`
`regarding the parties’ financial condition (e.g., that neither party is insolvent), and more.
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`85.
`
`Genesis Global Capital made the following representations to lenders in every
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`Master Borrowing Agreement:
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`Each Party represents and warrants that it is not insolvent and is not subject to any
`bankruptcy or insolvency proceedings under any applicable laws
`
`Each Party represents and warrants there are no proceedings pending or, to its
`knowledge, threatened, which could reasonably be anticipated to have any adverse effect
`on the transactions contemplated by this Agreement or the accuracy of the representations
`and warranties hereunder or thereunder.
`
`86.
`
`Genesis Global Capital did not require lenders who loaned Genesis Global Capital
`
`digital assets via the Institutional Lending Program to establish that they were accredited
`
`investors via representation, warrantee, self-certification or other methodology in order to
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`participate in the Institutional Lending Program. If a lender could meet the minimums, they were
`
`permitted to participate.
`
`B.
`
`THE GEMINI EARN PROGRAM
`
`87.
`
`Genesis Global Capital also attracted capital via a program named Gemini Earn
`
`established by the Gemini Trust Company, LLC (“Gemini”), a company that offers a range of
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`digital asset services via the Gemini platform.
`
`88.
`
`Gemini Earn was launched on February 2, 2021, and was promoted as allowing
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`Gemini digital asset trading platform customers to “transfer existing crypto holdings, or easily
`
`purchase crypto to transfer into Gemini Earn and earn interest for any period of time. They can
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`also redeem their crypto at any time. As a New York-based Trust company with security
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`protocols on par with those offered by top financial institutions, Gemini's secure custody and
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`exchange solutions also integrate seamlessly with Gemini Earn.”
`
`89.
`
`The Gemini Earn Program promised Gemini Earn participants the hallmarks of a
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`traditional bank savings or checking account: interest on deposits that are freely withdrawable.
`
`90.
`
`However, unlike owners of traditional bank accounts who received insurance
`
`protection for their deposits via the Federal Deposit Insurance Corporation, Gemini Earn
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`customers receive no insurance protection for their digital assets (despite Gemini’s misleading
`
`references to FDIC insurance); and unlike banks, which face extensive restrictions on what
`
`customers deposits can be used for, there was no limitation on the borrowers’ use of Gemini
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`Earn customers’ digital assets.
`
`91.
`
`Notably, there was no minimum lending amount required for Gemini users to
`
`participate in the Gemini Earn Program and Genesis Global Capital did not require Gemini Earn
`
`Program participants to establish that they were accredited investors via representation, warrant,
`
`self-certification or other methodology in order to participate in the Gemini Earn Program.
`
`92.
`
`Gemini Earn Program transactions were executed pursuant to a document named
`
`the Master Digital Asset Loan Agreement. The Master Digital Asset Loan Agreement set forth
`
`the terms of the loan, including the types of occurrences that constituted events of default, what
`
`could cause termination of the agreement, and required parties to make certain representations
`
`and warranties regarding the parties’ financial condition (e.g., that neither party is insolvent), and
`
`more.
`
`93.
`
`Genesis Global Capital made the following representations to lenders in every
`
`Master Digital Asset Loan Agreement Genesis Global Capital executed:
`
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`Case 3:23-cv-00082-SRU Document 1 Filed 01/23/23 Page 18 of 50
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`Each Party represents and warrants that it is not insolvent and is not subject to any
`bankruptcy or insolvency proceedings under any applicable laws
`
`Each Party represents and warrants there are no proceedings pending or, to its
`knowledge, threatened, which could reasonably be anticipated to have any adverse effect
`on the transactions contemplated by this Agreement or the accuracy of the representations
`and warranties hereunder or thereunder.
`
`94. While the Gemini Earn program was “dressed up” as a high-interest digital asset
`
`bank account, it was actually a scheme designed by DCG, Silbert, and Genesis Global Capital to
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`attract retail investment in securities without complying with the federal securities laws.
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`SUBSTANTIVE ALLEGATIONS
`
`I.
`
`
`GENESIS GLOBAL CAP