Washington DC, January 12, 2023 —
The Securities and Exchange Commission today indicted Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offering and sale of securities to retail clients under the Gemini Earn crypto-lending program. Through this unregistered offering, Genesis and Gemini raised billions of dollars worth of crypto assets from hundreds of thousands of investors. Investigations are ongoing into other violations of securities laws and other organizations and individuals in connection with the alleged wrongdoing.
According to the complaint, Genesis, part of a subsidiary of Digital Currency Group, entered into an agreement with Gemini in December 2020 to offer Gemini clients, including retail investors in the United States, the ability to lend their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. As of February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, with Gemini Earn investors offering their crypto assets to Genesis, with Gemini acting as an agent to facilitate the transaction. Gemini deducted a brokerage fee, sometimes as high as 4.29 percent, from the returns Genesis paid to Gemini Earn investors. As alleged in the complaint, Genesis then exercised its discretion as to how investors’ crypto assets should be used to generate revenue and pay interest to Gemini Earn investors.
The complaint further alleges that Genesis announced in November 2022 that it would not allow its Gemini Earn investors to withdraw their crypto assets as Genesis did not have sufficient cash due to volatility in the crypto asset market, to fulfill withdrawal requests. At the time, Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors. Gemini ended the Gemini Earn program earlier this month. To date, Gemini Earn’s retail investors have still not been able to withdraw their crypto assets.
The SEC’s complaint alleges that the Gemini Earn program constitutes an offer and sale of securities under applicable law and should have been registered with the commission.
“We allege that Genesis and Gemini offered unregistered securities to the public, circumventing disclosure requirements to protect investors,” said SEC Chairman Gary Gensler. “Today’s indictments build on previous actions to make it clear to the market and the investing public that crypto lending platforms and other intermediaries must comply with our well-established securities laws. This is the best way to protect investors. It promotes confidence in the markets. It’s not optional. It’s the law.”
“The recent collapse of crypto asset lending programs and the suspension of the Genesis program underscore the critical need for platforms offering securities to retail investors to comply with federal securities laws,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “As we have seen time and time again, the omission denies investors the fundamental information they need to make informed investment decisions. Our investigations into this area are very active and ongoing, and we encourage anyone with information on this matter or other possible securities law violations to come forward, including through our whistleblower program, as appropriate.”
The SEC’s lawsuit, filed in the US District Court for the Southern District of New York, alleges that Genesis and Gemini violated Sections 5(a) and 5(c) of the Securities Act of 1933. The lawsuit seeks perpetual injunctive relief Disgorgement of ill-gotten gains plus interest on prejudice and civil penalties.
The SEC investigation was conducted by Jonathan Austin and Ashley Sprague, with the supervision of Deborah Tarasevich and Stacy Bogert. The litigation is led by Edward Reilly and overseen by James Connor and Olivia Choe.
The Retail Strategy Task Force of the SEC’s Office of Investor Education and Advocacy and Enforcement previously issued an Investor Bulletin on interest-bearing accounts for crypto assets. Investors can find more information on crypto assets at Investor.gov.
The SEC’s whistleblower program was created by Congress to provide financial incentives for individuals to come forward and report potential violations of federal securities laws to the SEC. Under the program, eligible whistleblowers are eligible to recover between 10 percent and 30 percent of fines imposed in lawsuits filed by the SEC and related lawsuits filed by certain other regulatory and law enforcement agencies. Whistleblowers can report potential violations anonymously. The program prohibits retaliation by employers against employees who provide information to the SEC about possible security breaches. Individuals can contact the SEC Whistleblower Office, which administers the whistleblower program, at (202) 551-4790.