SEC charges DCG and Genesis Global Capital for concealing info about 3AC in 2022

The US Securities and Exchange Commission (SEC) has ordered DCG to pay a $38 million civil fine and also comply with a cease-and-desist order to prevent future violations of securities laws. The punishment is tied to accusations that the crypto conglomerate and its former CEO, Soichiro “Michael” Moro, misled investors about the financial health of its operations. 

Even though the SEC will soon come under new leadership, the Gary Gensler administration has found time to bring pain to the implicated Digital Currency Group (DCG) and its subsidiary Genesis. 

The charges originate from the alleged negligence of public disclosures and financial maneuvers following the collapse of one of Genesis’ largest borrowers, Three Arrows Capital (3AC), in mid-2022.

How DCG ended up on the SEC’s radar

The SEC’s case against DCG is based on the company’s actions after 3AC defaulted on a $2.4 billion loan, which left Genesis with a considerable financial shortfall. The commission claims that DCG executives had prior knowledge that Genesis had suffered losses exceeding $1 billion but worked hard to make things look okay. 

Part of their efforts to trick investors included approving tweets and public statements that implied Genesis’ balance sheet was “strong” and claimed the risks associated with 3AC’s default had been mitigated.

DCG reportedly executed a $1.1 billion promissory note to push the narrative and artificially inflate Genesis’s balance sheet. According to the SEC, while the note created an accounting asset, it did not involve a tangible capital transfer, and its terms were not disclosed to investors. 

This way, Genesis could report positive equity as of June 30, 2022, even though it was in a precarious financial position at the time. So when the firm fully suspended withdrawals, citing an inability to meet redemption requests a few months later in November 2022, investors were blindsided. 

By January 2023, DCG had filed for bankruptcy, leaving investors and retail customers with huge losses.

The company’s CEO caught some blowback 

As part of the penalties of its investigation, the SEC also sanctioned Soichiro “Michael” Moro, DCG’s CEO at the time. 

According to the filing, Moro approved misleading statements and was party to crafting public communications that made light of the severity of Genesis’ financial troubles.

The SEC claims Moro personally approved tweets asserting that Genesis had “shed the risk” related to 3AC’s default and that its balance sheet was still robust. The commission maintains both claims were false and DCG could not account for Genesis’s significant financial exposure. 

Moro also signed the $1.1 billion promissory note on behalf of Genesis, further pushing the misleading narrative to investors.

He faces a fine of $500,000 and is barred from engaging in negligent conduct that misleads investors. 

DCG has had past scraps with regulators 

In 2023, New York Attorney General Letitia James sued Gemini, Genesis, and later its parent company, Digital Currency Group (DCG), over a Gemini crypto lending program named Gemini Earn.

The allegations claim they defrauded over 29,000 New Yorkers and hid $1.1 billion in losses.

Genesis, which filed for bankruptcy in 2023, disclosed $10 billion in liabilities and owed $3 billion to its top creditors, including Gemini and VanEck, before it completed its restructuring in August 2024. 

According to the lawsuit, Gemini was aware right from the program’s inception that Genesis loans were high-risk and concentrated among a small number of third parties—specifically Alameda Research, FTX’s sibling company. 

Genesis was caught in the FTX fiasco in November 2022 and was forced to file for bankruptcy two months later. Gemini Earn customers lost about $900 million.

The attorney general claims Gemini did not alert customers of its risk exposure and that Genesis and DCG failed to assess the quality of the loans they approved. Then, they attempted to conceal losses incurred in mid-2022 when hedge fund Three Arrows Capital and another smaller counterparty defaulted on loans amounting to $1.1 billion. 

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