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SEC Charges Gemini Trust Company and Genesis Global Capital

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author
February 23, 2023 at 4:17pm

On January 12, 2023, the SEC charged Genesis Global Capital and Gemini Trust Company with the sale of unregistered securities through the Gemini Earn crypto lending program. Gemini’s alleged violations of securities laws came to light after Gemini halted Gemini Earn withdrawals in November 2022. At the time, the SEC alleges it held approximately $900 million in investor assets from 340,000 Gemini Earn investors.

The Gemini Earn program lent investor funds to the cryptocurrency lending desk Genesis. Genesis then executed loans in an endeavor to generate a return for Gemini Earn customers. Prior to the crypto bust of 2022, crypto lending may have looked like an excellent investment. Crypto loans boasted exceptionally high returns–significantly more than what an investor would expect from a traditional security. According to the SEC complaint, Gemini Earn advertised a return of 8.05%.

The SEC alleges that Gemini charged an agent fee for arranging loans with Genesis, which could be as high as 4.29%. According to the complaint, it was up to Gemini’s sole discretion to determine how much to charge for the agent fee. The Earn program allegedly earned Gemini $2.7 million.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.

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The SEC Allegations

SEC Chair Gary Gensler stated, “We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. …Crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors…It’s not optional. It’s the law.”

Tyler Winklevoss, a co-founder of Gemini, referred to the SEC suit as a “manufactured parking ticket.”

The SEC points out that the Gemini website itself refers to Gemini Earn as an investment: “There is always a risk in investing, and each customer needs to assess their own risk tolerance before making any investment decisions.”

The Complaint also states: “Gemini’s website also claimed that Gemini Earn investors could ‘receive more than 100x the average national interest rate, among the highest rates on the market’ and that Gemini Earn ‘offer[s] more flexibility than other yield-generating cryptocurrency investments.’”

Gemini Class Action Lawsuit

Gemini is facing a class action lawsuit from customers who now believe their Earn assets should have been registered as securities. The suit further alleges that Gemini did not disclose the risks associated with its Earn program.

View from the street of the One World Trade Center

What Makes a Security an Investment?

Regulators use the Howey Test to determine if something meets the definition of security. The Howey Test defines a security as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Genesis allegedly entered into an agreement with Gemini to give Gemini customers an “opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest.” Genesis allegedly used their discretion to determine how to invest Gemini Earn crypto assets. Therefore, investors were allegedly investing money in a common enterprise they believed would make a profit based on Genesis’s efforts.

Cryptocurrency still has some confusing grey areas when it comes to regulations, and not all cryptocurrencies are securities. For instance, the SEC determined that Bitcoin functions exclusively as a currency and is therefore not a security. However, many cryptocurrencies are designed to generate a profit. Retail customers may purchase crypto tokens in hopes that the team backing the token will have success with an Initial Coin Offering (ICO), just as shareholders might for an IPO. The SEC has stated that many ICOs are securities that need to register.

Why Do Securities Register with the SEC?

Securities laws require investments to register with the SEC. Registration discloses important financial information concerning the company offering the security. Registering documents also include information about the company’s management and a description of the security. The registration process is meant to prevent companies from hiding essential information from investors.

Because Gemini allegedly structured the Gemini Earn lending program as an investment, Gemini should have registered with the SEC. If Gemini Earn had registered, investors may have known more about how the program intended to make money, could have evaluated the risks posed by that strategy in greater detail.

How Did Genesis Use Gemini Investors’ Money?

Genesis’s use of Gemini customer funds may have given investors pause.

Problems with repayment stemmed from loans Genesis made to cryptocurrency firms. Genesis loaned money to Alameda, the research company with ties to crypto exchange FTX. FTX collapsed in November 2022, precipitating Gemini’s halting of withdrawals. Genesis also loaned money to Three Arrows Capital, a crypto hedge fund that went bankrupt after various crypto assets declined in value throughout 2022. As a result of these defaulted loans, Genesis paused redemptions in November of 2022 and filed for bankruptcy in January 2023.

 

Can Genesis Investors Recover?

Gemini founders have indicated that they believe their parent company, Digital Cryptocurrency Group, should be responsible for paying Gemini’s outstanding client withdrawal requests. The heads of the two companies have yet to reach an agreement that would make Gemini investors whole.

If your stock broker recommended Gemini Earn, you may be able to recover losses through FINRA arbitration. Investors who suffer losses after a brokerage firm recommends overly risky investments typically use arbitration to recover their funds. Speaking to a securities lawyer can help you determine if you have a case. Call (877) 600-0098 or email info@kurtalawfirm.com.