A second group of Genesis creditors says they were misled by the lender into thinking that their money would be safe, and are now out hundreds of millions of dollars. The group is made up of individuals who were direct clients of Genesis, rather than investors who came in through Gemini or another intermediary.
At least one member of the group pulled all of his money out of Genesis in late spring, following news that the lender had significant losses tied to Three Arrows Capital (3AC), the multi-billion-dollar hedge fund that went bankrupt in May.
However, the creditor, who declined to give his name because he is still in active negotiations with Genesis, ended up putting more than $10 million back into the company in the second half of last year.
He says he was lured back in by reassuring emails from Genesis salespeople and the delivery of monthly balance sheets that seemed to show in late summer and early fall that the firm’s financial position was stable. The creditor now says those financial documents were inaccurate and hid the firm’s growing financial problems.
“I have spoken to several people who pulled their money out of Genesis earlier this year, only to get back in,” said Andrew Parrish, a crypto entrepreneur and co-founder of tech firm Arch Public. Parrish says he’s been in regular contact with a number of Genesis creditors. “They led individual investors to believe everything was OK based on balance sheets that were incorrect.”
On Tuesday, Cameron Winklevoss, the co-founder of crypto exchange Gemini, released a letter via Twitter accusing Genesis of fraud. He called for the removal of Barry Silbert, who is the CEO of Genesis’s parent company Digital Currency Group (DCG). Gemini says it’s seeking to recover $900 million from Genesis on behalf of its clients who invested money through Gemini Earn, a high-yield savings account that Gemini pitched to average investors.
Gemini could officially declare Genesis in default and push to force the firm into bankruptcy as early as this week. In an email to clients, also on Tuesday, Gemini said that it had terminated its master loan agreement on January 8. Gemini’s terms of service say that it could declare a lender in default as soon as two days after a loan is terminated.
Genesis did not return a request for comment for this article.
In a statement provided to Protos, a DCG spokesperson called Winklevoss’s letter a “desperate and unconstructive publicity stunt” the purpose of which was to deflect blame from his own firm. “We are preserving all legal remedies in response to these malicious, false, and defamatory attacks,” the statement said. “DCG will continue to engage in productive dialogue with Genesis and its creditors with the goal of arriving at a solution that works for all parties.”
On November 10, days after the problems at FTX had emerged, Genesis sent its creditors a balance sheet that showed that the lender’s financial position had not materially changed from the month before. The balance sheet, which was reviewed by Protos, didn’t reflect any FTX-related issues but it did show that Genesis had $4.4 billion in deposits, of which less than half had been lent out.
In addition, the financial statement said Genesis held nearly $2.5 billion in current assets, such as cash and other liquid investments. The balance sheet was sent to clients with an email, like prior ones, that suggested everything at the firm was fine.
Internally, it was clear that was far from the case.
Game over: Employees thought Genesis only had days left to live
Two days earlier on November 8, Genesis had held an emergency evening meeting that included many of the firm’s managers, according to two sources with knowledge of the meeting. At that meeting, Genesis’s top executives disclosed for the first time the existence of the $1.1 billion promissory note DCG had made to Genesis in order to bail the lender after its problems with 3AC. After leaving that meeting, a number of Genesis employees texted each other, “Game over.” One long-time Genesis employee texted others that the firm only had “days or weeks left to live.”
Externally, the message was very different. On November 9th, Genesis tweeted that while it had a trading relationship with FTX, the firm’s “exposure to FTX has no impact on our ability to serve our clients.”
On November 10, the same day that Genesis emailed customers its balance sheet, the company tweeted that it had $175 million frozen at FTX, but that its “operating capital and net positions in FTX are not material to our business.” That day it also tweeted that it had no remaining loans outstanding to either FTX or Alameda.
Six days later, Genesis’s interim CEO Derar Islim held a brief call with creditors. In the call, Islim detailed the $1.1 billion promissory note to clients for the first time. He also said the firm was having trouble meeting withdrawals. On November 17, Genesis froze its accounts.
The balance sheet that Genesis sent on November 10, which was reviewed by Protos, showed that the company had $175 million in equity. That was up from $93 million at the end of June. According to the November balance sheet, Genesis had $1.6 billion in current assets in a category marked “other assets.” In accounting parlance, a current asset is one that is either cash, as liquid as cash, or can be converted into cash at full value within the next year.
That was a misstatement, according to a legal document Gemini filed on Tuesday in response to a class action arbitration brought against the firm by customers of Gemini Earn. In the response, Gemini states that it was told in July by Genesis representatives that the firm’s other assets included an intercompany receivable of $1.1 billion, which Gemini says it now understands to be the promissory note.
In a letter to shareholders on Tuesday, DCG’s Barry Silbert said the promissory note was due in 2032 and not callable before, meaning it did not fit the definition of a current asset. In addition, Silbert said DCG had borrowed another $500 million from Genesis at interest rates of 10% to 12%. Silbert said DCG has never missed a payment to Genesis.
The creditor who talked to Protos said he hasn’t received an interest payment since November from Genesis.
Late on Tuesday, Bitvavo said it had rejected an offer from Genesis to repay the Dutch exchange at 70% of the value of what it is owed. Last month, Protos reported that Bitvavo was owed as much as $300 million by Genesis.