Bankrupt Crypto Lender Genesis Global Settles NY Fraud Lawsuit

Jonathan Randles, Bloomberg News

Ethernet cables are seen inside the DMM Mining Farm, operated by DMM.com Co., in Kanazawa, Japan, on Tuesday, March 20, 2018. Japan is moving toward legalizing initial coin offerings, even as countries such as China and the U.S. restrict the fundraising technique because of their risks for investors. A government-backed study group laid out basic guidelines for further adoption of ICOs, according to a report published on April 5. Photographer: Tomohiro Ohsumi/Bloomberg , Bloomberg

(Bloomberg) -- Genesis Global Holdco LLC has settled a lawsuit brought by New York’s top law enforcement official alleging the bankrupt crypto lender defrauded customers of its now-terminated Gemini Earn program, which was run jointly with Gemini Trust Co.

The settlement with New York Attorney General Letitia James is structured so that assets that could have otherwise gone to state authorities will instead be returned to former Earn customers and other Genesis creditors. The deal must be approved by a bankruptcy judge and follows a settlement Genesis struck resolving a separate complaint over the Earn program brought by the US Securities and Exchange Commission.

James sued Genesis, its parent company Digital Currency Group and Gemini last October, accusing the crypto firms of defrauding customers of $1.1 billion. The settlement disclosed Thursday in New York bankruptcy court only resolves allegations against Genesis, according to court documents.

The companies have denied wrongdoing and Genesis is settling the allegations without admitting liability. Genesis, which intends to liquidate, also agreed it will no longer do business in New York.

New York authorities have offered to sit behind Genesis creditors in the Chapter 11 repayment line, regardless of whether the bankrupt lender repays its debt in crypto or cash, according to court documents. Genesis has proposed returning Bitcoin and other tokens to clients whose digital assets have been frozen by the company’s bankruptcy, but a judge could require they repay creditors in cash.

Major Genesis creditors have also agreed to procedures that would value digital assets closer to their current market value, reflecting how crypto prices have increased considerably since Genesis filed Chapter 11 in January 2023. Other bankrupt crypto firms have valued digital assets at the time they filed Chapter 11.

Digital Currency Group is opposing Genesis’ proposed liquidation plan, arguing it would give some creditors an unfair windfall in Chapter 11. Genesis, which is being run independently in bankruptcy, on Feb. 14 will seek approval from Judge Sean Lane of the New York settlement and the liquidation plan.

The Earn program allowed customers to collect interest payments by loaning their digital assets, which the SEC alleged amounted to an offering of unregistered securities. James accused Gemini of failing to disclose the riskiness of lending to the Earn program and accused Genesis and Digital Currency Group of attempting to conceal more than $1 billion in losses following the collapse of crypto hedge fund Three Arrows Capital, allegations the companies have denied.

The case is Genesis Global Holdco, LLC, 23-10063, US Bankruptcy Court, Southern District of New York (Manhattan).