NYAG Reaches $2 Billion Settlement with Bankrupt Crypto Firm Genesis Global Capital in Connection with Gemini Earn Crypto Investment Program | Practical Law

NYAG Reaches $2 Billion Settlement with Bankrupt Crypto Firm Genesis Global Capital in Connection with Gemini Earn Crypto Investment Program | Practical Law

The US Bankruptcy Court for the Southern District of New York approved a $2 billion settlement between NYAG and Genesis Global Holdco, LLC in connection with the Gemini Earn crypto investment program. The settlement creates a victims' fund to help investors that were defrauded by Genesis and prohibits Genesis from operating in New York. This is the largest settlement to date against a cryptocurrency firm in the state of New York.

NYAG Reaches $2 Billion Settlement with Bankrupt Crypto Firm Genesis Global Capital in Connection with Gemini Earn Crypto Investment Program

by Practical Law Finance
Published on 24 May 2024USA (National/Federal)
The US Bankruptcy Court for the Southern District of New York approved a $2 billion settlement between NYAG and Genesis Global Holdco, LLC in connection with the Gemini Earn crypto investment program. The settlement creates a victims' fund to help investors that were defrauded by Genesis and prohibits Genesis from operating in New York. This is the largest settlement to date against a cryptocurrency firm in the state of New York.
On May 17, 2024, the US Bankruptcy Court for the Southern District of New York (SDNY) approved a settlement between the New York Attorney General (NYAG) and Genesis Global Holdco, LLC (Genesis). This settlement establishes a victims' fund to help investors that were defrauded by Genesis and prohibits Genesis from operating in New York. The victims' fund will receive up to $2 billion, the largest settlement amount to date against a cryptocurrency firm in the state of New York. Genesis neither admits or denies the allegations in the lawsuit, which will continue against the remaining defendants as well as Genesis’ former business partner, Gemini Trust Company, LLC (Gemini).
In February 2021, Gemini, a cryptocurrency platform, and Genesis, a cryptocurrency lender, launched Gemini Earn, which was marketed as a high-yield investment program from which Gemini customers could profit by passively investing their cryptocurrency with Genesis. To invest in Gemini Earn, investors first had to buy or hold cryptocurrency on Gemini's cryptocurrency platform. According to the NYAG, from February 2021 through November 2022, Gemini Earn investors invested billions of dollars in cryptocurrency with Genesis, and Gemini earned more than $22 million in agent fees plus more than $10 million in commissions when investors purchased cryptocurrency to invest in Gemini Earn.
On November 16, 2022, Genesis announced it was suspending all withdrawals from Gemini Earn, which left 232,000 investors with more than $1 billion in losses. The NYAG alleged that:
  • Gemini solicited money from the public based on assurances that Gemini Earn was a highly liquid investment, a low-risk product, and that Genesis capital was creditworthy based on Gemini's ongoing risk monitoring, while Gemini's confidential risk reports reflected that Genesis posed a high risk of default.
  • The parties disguised $1.1 billion in losses through a months-long campaign of alleged misstatements, omissions, and concealments during which Genesis parent company Digital Currency Group, Inc. (DCG) executives and Genesis attempted to conceal losses by executing an illiquid promissory note under which DCG agreed to pay Genesis $1.1 billion "in a decade," as part of a scheme to defraud investors and the public.
In October 2023, New York Attorney General Letitia James filed a lawsuit in New York state court against Genesis, Gemini, and DCG alleging that more than 230,000 investors suffered over $1 billion in losses relating to suspension of withdrawals from the Gemini Earn program. The complaint was amended and expanded in February 2024, as the NYAG sought more than $3 billion in restitution (see Legal Update, NYAG Files Amended Complaint in Connection with Gemini Earn Crypto Investment Program). Although the settlement was put forward in February of 2024, it required review and approval by a bankruptcy court due to the fact that Genesis had filed for bankruptcy in January of 2023 (see Bankruptcy: Cryptocurrency Case Tracker: Genesis Global Holdco, LLC). According to the NYAG, under the settlement agreement:
  • The victims’ fund will receive distributions from the assets remaining in the Genesis estate after initial bankruptcy distributions to creditors.
  • If those creditors are not made whole based on today’s digital asset values, the victims’ fund will receive up to $2 billion from Genesis’ remaining assets.
  • The victims’ fund will then make distributions to compensate Genesis’ creditors for the full and fair amounts of their actual losses until the victims’ fund is depleted.
Note that this agreement is separate from the consent order entered into by the New York State Department of Financial Services (NYDFS) related to Gemini Earn (see Legal Update, NYDFS Secures Commitment from Gemini to Return $1.1 Billion to Earn Program Customers).
Over the past few years, NYAG Letitia James has been the most high profile and one of the most active state attorneys general in crypto enforcement. The Office of the Attorney General (OAG) has, under NYAG James, engaged in the following notable crypto enforcement actions:
  • In December 2023, secured more than $22 million from major crypto trading platform KuCoin for failing to register as a securities and commodities broker-dealer and for falsely representing itself as a crypto exchange.
  • In May 2023, secured $4.3 million from crypto platform CoinCafe for failing to register as a commodity broker-dealer and defrauding investors.
  • In January 2023, working with a multistate coalition, recovered $24 million from cryptocurrency platform Nexo for operating illegally.
  • In January 2023, brought an action against former CEO of bankrupt crypto lender Celsius for defrauding investors and concealing the company’s dire financial condition.
  • In October 2021, directed unregistered crypto lending platforms to cease operations for not registering with the state.
  • In September 2021, in conjunction with the Securities and Exchange Commission (SEC), recovered $479.9 million from GTV Media for failing to register cryptocurrency sales.
  • In September 2021, secured a $3 million court judgment against crypto platform Coinseed.
  • In February 2021, required stablecoin issuer Tether and affiliated exchange Bitfinex to end all trading activity in New York and required iFinex and Tether and their related companies to pay $18.5 million in penalties.
For further information on these actions as well as other crypto enforcement activity, see Cryptocurrency and Virtual Currency Regulatory Tracker.