QUICK TAKE

• Digital Currency Group (DCG) and top executives Barry Silbert and Michael Moro seek to dismiss the New York Attorney General’s (NYAG) civil fraud lawsuit.
• NYAG alleges DCG and its executives conspired to cover up a $1 billion deficit in Genesis’ balance sheet.
• DCG’s lawyers argue that the allegations are unfounded and the actions taken were lawful efforts to support a subsidiary.

Lawyers representing Digital Currency Group (DCG), its CEO and founder Barry Silbert, and Soichiro “Michael” Moro, the former CEO of DCG’s wholly-owned trading arm Genesis, have renewed their efforts to dismiss the civil fraud lawsuit brought against them by New York Attorney General (NYAG) Letitia James. The legal battle, which has been ongoing since last year, revolves around allegations of fraudulent activities aimed at concealing a substantial financial hole in Genesis’ balance sheet.

In court documents filed last Friday, DCG’s legal team made a final push to convince the judge to drop the case. This marks the latest development in a series of legal exchanges between NYAG and the defendants, who, along with crypto exchange Gemini and the now-bankrupt Genesis, are accused of deceiving investors. The accusations stem from the fallout of the collapse of Singapore-based crypto hedge fund Three Arrows Capital (3AC), which left a $1 billion deficit in Genesis’ accounts.

Allegations of Fraud

The NYAG’s lawsuit claims that Genesis and DCG provided “false assurances” on social media, particularly on Twitter, suggesting that DCG had absorbed the losses incurred by Genesis due to 3AC’s implosion. These assurances, according to James, were intended to placate investors and dissuade them from demanding their loans back. Instead of injecting actual cash to cover the deficit, DCG allegedly issued a promissory note promising to pay Genesis $1.1 billion over ten years at an interest rate of 1%. James contends that DCG has not made any payments on this note.

Legal Defense

DCG, Silbert, and Moro have consistently denied the fraud allegations. They describe the NYAG’s lawsuit as “meritless” and have each filed motions to dismiss the case. In their defense, the lawyers argue that the promissory note was not a sham but a legally binding and thoroughly vetted financial instrument. They also highlight that DCG transferred substantial amounts of cash and assets to Genesis to help stabilize its balance sheet.

The defendants’ legal team insists that the social media posts praising Genesis’ financial health were not fraudulent but rather typical “corporate puffery.” This term refers to the common practice of making optimistic statements about a company’s prospects, which are not intended to mislead investors.

NYAG’s Rebuttal

In response to the motions to dismiss, Attorney General James has argued that the tweets were more than just corporate puffery. She claims they were deliberate misrepresentations of existing facts, designed to mislead investors, thereby violating New York’s stringent anti-fraud regulations, specifically the Martin Act.

James’ latest filing includes transcripts of late-night messages exchanged between Silbert, Moro, and other DCG employees during a crisis strategy meeting in June 2022, following the collapse of 3AC. These messages, according to James, serve as evidence of a fraudulent conspiracy.

Broader Implications

The case against DCG and its executives is significant for the broader cryptocurrency industry, highlighting the regulatory challenges and legal scrutiny that crypto firms face. The outcome of this case could set a precedent for how similar allegations are handled in the future and may influence the behavior of other companies in the sector.

Settlement and Ongoing Disputes

While Genesis and Gemini have reached settlements with the NYAG, DCG, Silbert, and Moro continue to contest the fraud allegations. Their latest legal maneuver underscores their determination to clear their names and protect their company’s reputation.

The NYAG’s office remains firm in its stance, emphasizing the need for accountability and transparency in the cryptocurrency industry. As the legal proceedings unfold, the crypto community watches closely, aware that the ramifications of this case could reverberate throughout the industry.

Conclusion

The battle between DCG and the NYAG reflects the growing pains of an evolving industry. As cryptocurrencies and blockchain technologies become more integrated into the financial system, regulatory bodies like the NYAG are intensifying their efforts to ensure compliance and protect investors. The outcome of this case will likely have a lasting impact on how crypto firms operate and how they are regulated in the future.