Judge Rejects Majority of DCG's Motion to Dismiss NYAG's Civil Securities Fraud Lawsuit

Key Points:

• A New York judge has permitted the majority of the civil securities fraud case against Digital Currency Group (DCG) and its executives to move forward to trial.

• New York Attorney General Letitia James accuses DCG and its executives of misleading investors about Genesis' $1 billion loss tied to the collapse of Three Arrows Capital.

A New York judge decided on Friday that the bulk of New York Attorney General Letitia James' civil securities fraud case against crypto venture firm Digital Currency Group (DCG) and its executives can advance to trial.

In 2023, James filed a lawsuit against Digital Currency Group (DCG) and its CEO Barry Silbert, along with DCG's now-bankrupt lending arm Genesis Global Capital and its former CEO Michael Moro, and crypto exchange Gemini. The suit alleges that they colluded to conceal a $1 billion shortfall in Genesis' balance sheet, caused by the collapse of the Singapore-based crypto hedge fund Three Arrows Capital (3AC) in 2022.

James claims that DCG and Genesis falsely assured the public on social media that DCG had absorbed Genesis' losses from 3AC’s collapse. In reality, she alleges, they only covered the gap with a promissory note, which promised to pay Genesis $1.1 billion over 10 years at a 1% interest rate. While DCG insists the promissory note was valid, James' lawsuit asserts that DCG has "never made a single payment under the Note."

While Gemini and Genesis settled with the Office of the Attorney General (OAG), DCG, CEO Barry Silbert, and former Genesis CEO Michael Moro have fought the case vigorously. In spring, DCG and the executives filed motions to dismiss, arguing that the OAG had failed to present a valid claim, particularly contending that they were not selling securities and, therefore, should not be subject to New York State securities laws.

However, the judge ruled on Friday that the OAG had sufficiently shown, at least at this stage, that the Gemini Earn program — the now-defunct Gemini lending product at the center of James’ case — could be considered a security.

The judge did dismiss two claims against DCG, Silbert, and Moro: one under New York’s Executive Law accusing them of engaging in first-degree fraud and another alleging a conspiracy charge, ruling that these claims were redundant.

Despite the ruling allowing the case to move forward, DCG made it clear that they would continue to fight the lawsuit.

“As we’ve said from the outset, the allegations against DCG are based on a flimsy foundation of innuendo, misinterpretations, and unfounded conclusions,” a DCG spokesperson stated. “We’re encouraged by the dismissal of the New York Attorney General’s most extreme claims regarding alleged criminal fraud and conspiracy. We will keep fighting this meritless lawsuit while remaining focused on supporting the digital assets industry.”