DCG, Top Executives Renew Push to Get New York AG’s Civil Fraud Suit Dropped

Lawyers for cryptocurrency firm Digital Currency Group (DCG) and two of its top executives – CEO and founder Barry Silbert and Soichiro “Michael” Moro, the former CEO of DCG’s wholly-owned trading arm Genesis – have made a final effort to convince a judge to toss out New York Attorney General (NYAG) Letitia James’ civil fraud suit against them.

The court documents filed last Friday are the latest volley in the legal back-and-forth between NYAG and the respondents, who – along with crypto exchange Gemini and the now-bankrupt Genesis – have been accused of defrauding investors by working together to cover up a gaping $1 billion hole in Genesis’ balance sheet caused by the wipe-out of Singapore-based crypto hedge fund Three Arrows Capital (3AC).

In her lawsuit, James alleged that Genesis and DCG made “false assurances” on Twitter that DCG had absorbed Genesis’ losses from 3AC’s implosion, which were crafted to put investors at ease and prevent them from calling in their open loans. But, instead of actually filling the billion-dollar hole with a cash injection, DCG allegedly just patched it over with a promissory note, pledging to pay Genesis $1.1 billion over ten years at 1% interest. According to James, DCG has “never made a single payment under the Note.”

Genesis and Gemini have settled with NYAG, but DCG, Silbert and Moro have fought the accusations of fraud, calling the suit “meritless.” Each filed a motion to dismiss the case in March, vehemently denying that the promissory note was a sham, arguing that the note was fully vetted and legally binding and that, in addition to the note, DCG transferred hundreds of millions of dollars and assets into Genesis to fill the hole in its balance sheet.

The social media posts about Genesis’ “strong” balance sheet weren’t lies meant to defraud, the lawyers argued, but simply “corporate puffery.”

In her response, James pushed back, arguing that the tweets weren’t “corporate puffery” but instead a “misrepresentation of existing facts” purposely crafted to mislead investors – a violation of New York’s strict anti-fraud law, the Martin Act.

Her response to the motions to dismiss attached a transcript of messages sent by Silbert, Moro and other employees during a late-night strategy meeting after 3AC’s collapse in June 2022.

In the latest set of court documents, lawyers for DCG agree that the late-night strategy meeting took place, but argue that it’s not evidence of any conspiracy: instead, they say, those communications are evidence of the company’s “lawful, good-faith efforts…to support a subsidiary.”

“DCG did what a responsible parent company should do, offering advice, providing financial support, and, in certain instances, reviewing and commenting on Genesis’s communications,” DCG’s lawyers wrote.

In a June 28, 2022 email attached to Silbert’s filing, Silbert wrote to Moro and other employees:

“It is certainly our hope and intention to help Genesis address the equity hole — hopefully by 6/30. To that end, the Genesis team should be working 24/7 with the DCG and DCGI teams to figure out all possible ways to do so…There are probably lots of different ways to do so, each with their own ramifications that we just need to all understand before we start moving assets around.”

The email, Silbert’s lawyers argue, demonstrates that efforts to fill the billion-dollar hole were genuine.

DCG’s lawyers restated their claim that the promissory note at the heart of the case was an “entirely proper financial transaction…[and] one of the most valuable assets in the Genesis estate, one that will provide an enormous benefit to Genesis’ creditors far beyond what they would have received had DCG not acted so supportively without any obligation to do so.”

The promissory note, DCG’s lawyers say, allowed Genesis to weather the storm caused by 3AC’s collapse – it wasn’t until FTX imploded that Genesis was forced to halt withdrawals.

Lawyers for Silbert similarly agreed that he “discussed ways to support Genesis in the wake of the 3AC default, and ultimately signed the Promissory Note in order to do so” but denied that there was anything fraudulent about his actions.

The fact that Silbert ultimately signed the promissory note, his lawyers say, was evidence of his good faith and continued belief in Genesis’ viability despite its financial woes.