Private Suit Follows SEC Action Against Genesis Capital

In the wake of a similar suit brought by regulators, a group of investors has filed a class action complaint against Digital Currency Group (DCG), Inc. and its founder and controlling shareholder Barry Silbert. They allege the company sold unregistered securities and subsequently committed security fraud. 

As described in the filing, Silbert and DCG operated a borrow/lend business through DCGs subsidiary, Genesis Global Capital, Inc. Genesis would offer institutions and individuals lucrative lending agreements. The company would then use the digital assets it borrowed to lend to other parties who in turn paid a higher interest rate than Genesis did to its lenders. 

The core of this suit alleges that these loan agreements were investment contracts under the test set forth in S.E.C. v. W.J. Howey Co. and notes under Reves v. Ernst & Young. As such, they were securities and should have been registered as such. Since these agreements were investments on behalf of the lenders and contained the requisite motivations, distribution plans, and public expectations, said agreements, the complaint argues, they were securities.

However, even had the agreements been registered as securities, the plaintiffs argue Silbert and DCG’s subsequent behavior constituted securities fraud. They describe how Genesis lured thousands of individuals and institutions into agreements with high advertised interest rates. However, to meet those promised interest rates and still retain a profit, Genesis allegedly made a number of risky loans. 

Of particular note, Genesis loaned the digital asset hedge fund Three Arrows Capital billions of dollars in assets. When Three Arrows filed for bankruptcy in July 2022, it still owed $2.3 billion. Subsequent asset liquidation dropped this outstanding debt to $1.1 billion. 

Following Three Arrows’ demise, Celsius and FTX similarly declared bankruptcy. This sequence of events, the complaint says, created pressure on Silbert and DCG. To shore up Genesis, DCG bought Three Arrows’ outstanding debt from Genesis in exchange for a promissory note for $1.1 billion due in 10 years at an interest rate of 1%. This sale, the plaintiffs argue, was a sham because the loan was uncollectable, and the economic reality was that Genesis Global Capital was insolvent at the time of the transaction with its parent company DCG.

Throughout this period, the filing describes how Genesis executives assured investors that Genesis had the capital to continue to operate long-term. However, in November 2022, the market lost confidence in digital assets thanks in no small part to the aforementioned bankruptcies. When Genesis customers came to request their assets back, they announced on November 16, 2022 that they would not permit further redemptions or new loan originations due to withdrawal requests exceeding Genesis Global Capital’s liquidity. The plaintiffs argue this misrepresentation up and until the halt of operations constitutes securities fraud.

For the alleged violations to the Securities Act and Exchange Act, the plaintiffs seek an order certifying class action status for two proposed classes: those who invested in Genesis and those who invested, the unregistered security class, and were unable to withdraw funds in November 2022, the securities fraud class. They further seek compensatory and punitive damages, declaratory and injunctive relief, and accommodation for bringing this suit. They are represented by Silver Golub & Teitell LLP.