US Securities and Exchange Commission Initiates Enforcement Actions Against Digital Currency Group and Genesis

Background

The US Securities and Exchange Commission (SEC) has initiated enforcement actions against Digital Currency Group (DCG) and its subsidiary Genesis on January 17. The regulator has ordered DCG to pay a $38 million civil penalty and comply with a cease-and-desist order to prevent future violations of securities laws.

The SEC’s Accusations

The SEC accused DCG and its former CEO, Soichiro “Michael” Moro, of misleading investors about the financial health of their operations. The charges stem from alleged negligence in public disclosures and financial maneuvers following the collapse of one of Genesis’ largest borrowers, Three Arrows Capital (3AC), in mid-2022.

DCG Fined $38 Million

The SEC’s case against DCG centers on the company’s actions following 3AC’s default on a $2.4 billion loan, which left Genesis with a substantial financial shortfall. According to the SEC, DCG executives knew that Genesis faced losses exceeding $1 billion but directed efforts to project an image of financial stability.

Alleged Misleading Statements

The SEC claims that DCG executives approved tweets and public statements that falsely characterized Genesis’ balance sheet as “strong” and claimed the risks associated with 3AC’s default had been mitigated. These efforts allegedly included approving tweets and public statements that falsely characterized Genesis’ balance sheet as “strong” and claimed the risks associated with 3AC’s default had been mitigated.

Execution of a $1.1 Billion Promissory Note

DCG executed a $1.1 billion promissory note to bolster this narrative and artificially inflate Genesis’ balance sheet. The SEC claims that while the note created an accounting asset, it did not involve a tangible capital transfer, and its terms were not disclosed to investors.

Consequences of the Maneuver

This maneuver allowed Genesis to report positive equity as of June 30, 2022, despite its precarious financial position. However, a few months later, in November 2022, the firm fully suspended withdrawals, citing an inability to meet redemption requests. By January 2023, DCG had filed for bankruptcy, leaving investors and retail customers with substantial losses.

Sanctions Against Former CEO

The SEC has also sanctioned Soichiro “Michael” Moro, who served as CEO during this tumultuous period. The filing accuses Moro of approving misleading statements and participating in crafting public communications that downplayed the severity of Genesis’ financial troubles.

Alleged Misleading Statements

According to the SEC, Moro personally approved tweets asserting that Genesis had “shed the risk” related to 3AC’s default and that its balance sheet remained robust. The regulator contends that these statements were false and failed to account for Genesis’ significant financial exposure.

Execution of the $1.1 Billion Promissory Note

Moro signed the $1.1 billion promissory note on behalf of Genesis, further perpetuating what the SEC describes as a misleading narrative to investors.

Sanctions

Moro was fined $500,000 and barred from engaging in negligent conduct that misleads investors. The SEC’s findings against Moro will also bind related investor actions.

Conclusion

The SEC’s enforcement actions against DCG and Genesis serve as a reminder of the importance of transparency and accuracy in financial reporting. The regulator’s findings highlight the need for companies to provide accurate and timely information to investors, and to avoid misleading statements that can harm investors and the broader market.

FAQs

Q: What is the SEC’s accusation against DCG and Genesis?

A: The SEC accused DCG and Genesis of misleading investors about the financial health of their operations.

Q: What is the alleged negligence in public disclosures and financial maneuvers?

A: The SEC claims that DCG executives knew that Genesis faced losses exceeding $1 billion but directed efforts to project an image of financial stability.