WASHINGTON—The Securities and Exchange Commission on Thursday sued Genesis Global Capital LLC and Gemini Trust Company LLC over a $900 million crypto-lending program that allegedly violated investor-protection laws.
The SEC filed its civil lawsuit in Manhattan federal court alleging that Genesis should have registered the product, which would have required providing clients with detailed financial disclosures. The companies began marketing the program to individual investors in February 2021 and raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors, the SEC said.
Under the program, called Gemini Earn, customers of crypto exchange Gemini lent their crypto assets to crypto lender Genesis in exchange for interest payments as high as 8%. Gemini took a fee for arranging the loan, which sometimes reached as much as 4.29%, the SEC said.
The two companies have been feuding since Genesis abruptly paused withdrawals from the program on Nov. 16 after it couldn’t meet client redemption requests in the wake of crypto exchange FTX’s collapse. At the time, Genesis held about $900 million in assets from 340,000 Gemini Earn customers, according to the SEC.
The SEC’s lawsuit seeks fines and the return of profits that were illegally earned.
“We look forward to defending ourselves against this manufactured parking ticket. And we will make sure this doesn’t distract us from the important recovery work we are doing,” Tyler Winklevoss, co-founder of Gemini, said in a tweet in response to the SEC suit.
A spokeswoman for Genesis didn’t comment.
Since Genesis paused redemptions, Gemini has banded together with other creditors of Genesis, saying it wants to find a way for the crypto lender to return owed assets.
In recent days, Cameron Winklevoss, who co-founded Gemini with brother Tyler, has ratcheted up the pressure on Genesis and its parent company, Digital Currency Group. Cameron Winklevoss traded barbs with Barry Silbert, chief executive of DCG, on Twitter last week. Cameron Winklevoss accused Mr. Silbert of “bad faith stall tactics,” and called for Mr. Silbert’s removal as CEO of the firm in two recent open letters posted on Twitter. A DCG spokeswoman has called the Winklevoss letters a “desperate and unconstructive publicity stunt.”
Genesis laid off 30% of its staff last week and is considering filing for bankruptcy, The Wall Street Journal recently reported. The crypto lender suffered steep losses from loans it supplied to the now-defunct trading firm Alameda Research and crypto hedge fund Three Arrows Capital. Both Alameda and Three Arrows filed for bankruptcy last year. Alameda is the sister trading firm of FTX.
The lawsuit against Genesis and Gemini resembles another case that the SEC and several states filed over BlockFi Lending LLC’s product, which allowed crypto traders to earn a yield for lending their digital assets. The SEC alleged that BlockFi’s interest-bearing accounts were securities and that the firm should have registered the product. BlockFi paid a $100 million fine to settle the allegations. The company didn’t admit or deny wrongdoing.
The new lawsuit is the second recent regulatory complaint filed against Gemini. The Commodity Futures Trading Commission also sued the crypto exchange last year.
The CFTC said in its civil case that Gemini misled regulators as part of an effort to gain approval for bitcoin futures in 2017. Gemini denied the CFTC’s claims at the time and said it would fight the allegations in court. The litigation is ongoing.