New York AG Pushes Back Against DCG, Silbert’s Motion to Dismiss Fraud Case

New York Attorney General Letitia James is not backing down from her civil lawsuit against Digital Currency Group, its founder and CEO Barry Silbert, and Soichiro “Michael” Moro, the former CEO of DCG’s wholly-owned crypto trading arm, Genesis.

On Tuesday, James’ office filed a motion in opposition to DCG’s, Silbert’s and Moro’s motions to dismiss the case filed in March.

Along with crypto exchange Gemini, James’ office has accused Genesis, DCG, Silbert and Moro 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). At the time of its implosion, 3AC was Genesis’ second-largest borrower.

According to James’ October suit, Genesis and DCG made “false assurances” on Twitter that DCG had absorbed Genesis’ losses, designed to put investors at ease and prevent them from calling in their open loans. But instead of actually covering Genesis’ losses, DCG allegedly just wrote its subsidiary firm a promissory note – essentially an IOU meant to create the appearance of liquidity – pledging to pay Genesis $1.1 billion over ten years at 1% interest.

DCG, James’ suit alleges, “never made a single payment under the Note.” In November 2022, Genesis halted withdrawals and declared bankruptcy two months later.

DCG and Silbert have denied that the promissory note was a sham. In their motions to dismiss, lawyers for DCG and Silbert claimed that the note was fully vetted and binding, adding 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 tweets reassuring investors of Genesis’ “strong” balance sheet, they argued, were simply “corporate puffery” – not lies.

James’ latest motion argues that the tweets weren’t simple puffery: they were “misrepresentation of existing facts” made to “mislead the investing public” – a violation of New York’s strict anti-fraud law, the Martin Act.

Read more: Digital Currency Group Files for Dismissal of New York Attorney General’s Lawsuit

Midnight strategy meeting

In a transcript of a late-night June 15, 2022 Microsoft Teams chat attached to James’ motion, Silbert, Moro and various high-level Genesis executives strategized about how to respond to investors in the wake of 3AC’s collapse.

“I know I sound like a conspiracy theorist but I’m very concerned about any leakage of our overall net position,” then-Managing Director Matthew Ballensweig, wrote in the 16-person chat.

“I agree with the caution,” Moro responded.

Later that night, after some members of the team had a call to discuss the 3AC situation, another employee, Genesis’ managing head of trading Michael Paleokrassas, wrote to say:

“Not sure anyone is awake, but starting to see a steady flow of calls starting.”

The next morning, another employee said, “We’ve been defen[d]ing the castle all night and day on [the] phone with depositors, prospects, etc.”

Silbert chimed in, saying: “Is there anything we/DCG can do to further install confidence in genesis…the word on the street is that genesis is the 'blue chip' in this mess. We need to continue to perpetuate that of course.”

James’ suit alleges that these conversations were part of a “concerted misinformation campaign to conceal Genesis’ financial weakness to induce investors to continue supplying cryptocurrency to Genesis”

A representative for DCG declined to comment on the NYAG's latest motion, stating the company's stance on the matter "remains unchanged" from the position illustrated in DCG and Silbert's motions to dismiss, and calling the suit "meritless."

“Circle of Trust”

The newly-released Microsoft Teams chats expand on previous examples of Silbert, Moro and other employees strategizing internally to prevent word of Genesis’ problems from leaking to investors, while publicly tweeting that everything was fine, James' lawsuit alleged.

In Silbert’s own motion to dismiss, his lawyers attached emails and instant messaging threads showing his response to the fallout from 3AC’s collapse. In one, Silbert said “we are all focused on making sure that the trust and confidence in Genesis remains high because we can’t risk money leaving Genesis and depleting [DCG’s] liquidity.”

He added that “even though [DCG’s] liquidity is super super strong right now” the hole in Genesis’ balance sheet is “super confidential/sensitive stuff, so please don’t share with anybody” outside of “the circle of trust.”

Three days after that, on June 24, 2022, Silbert told colleagues: “We just can’t allow people inside or outside [to] question Genesis’ solvency.”

Martin Act Violations?

James’ motion of opposition re-asserts her office’s claim that “each of the DCG defendants” – meaning DCG, Silbert and Moro – were well aware of the allegedly fraudulent practices being committed to make Genesis look solvent, a violation of New York’s strict anti-fraud law, the Martin Act.

“The DCG Defendants were actively involved in Genesis’ day-to-day affairs…including attending daily meetings to discuss Genesis’ communications with its investors,” the motion alleges.

The Martin Act broadly prohibits any fraudulent business activities relating to the purchase, exchange, promotion, advertisement or sale of any securities or commodities.

The NYAG's office has pursued cases against a number of crypto companies and entities under this law, including its 2019 inquiry into Tether and Bitfinex.

UPDATE (June 10, 2024 at 15:35 UTC): Adds clarity that the suit against DCG, Silbert and Moro is a civil lawsuit.