Key Highlights:
- Digital Currency Group (DCG) penalized for negligence in misrepresenting the financial health of its subsidiary, Genesis Global Capital.
- The $38 million civil penalty follows an SEC investigation into misleading statements made during a financial crisis triggered by Three Arrows Capital’s default.
The U.S. Securities and Exchange Commission (SEC) has announced a $38 million fine against Digital Currency Group, Inc. (DCG) for misleading investors about the financial stability of its subsidiary, Genesis Global Capital, LLC. The penalty arises from violations of Section 17(a)(3) of the Securities Act of 1933.
Genesis Global Capital operated a crypto asset lending program, pooling retail investor funds to lend to institutional borrowers, such as crypto-focused hedge funds. The program’s financial model unraveled in mid-2022 following the default of its largest borrower, Three Arrows Capital (TAC), on $2.4 billion in loans.
Misconduct Details
- TAC Default and Financial Crisis
- In June 2022, TAC failed to meet a margin call, leaving Genesis with a $500 million shortfall, which grew to $1 billion as Bitcoin prices fell.
- Despite this financial crisis, Genesis and DCG publicly stated that the company’s balance sheet was strong.
- Misleading Public Communications
- Genesis tweeted on June 15, 2022, that its financial position was solid, a statement retweeted by DCG executives.
- A subsequent tweet on June 17 falsely claimed that Genesis had mitigated the risks associated with TAC’s default.
- Promissory Note Misrepresentation
- On June 30, DCG issued a $1.1 billion promissory note to Genesis, designed to artificially show positive equity on its balance sheet.
- The terms of the note, including a 10-year maturity and 1% interest rate, were not disclosed to investors, creating a misleading impression of DCG’s financial intervention.
- Failure to Exercise Care
- DCG executives were found negligent in ensuring transparency regarding the note and failed to correct the misleading narratives propagated by Genesis.
Violations and Penalties
The SEC found DCG negligent in its actions, constituting a violation of Section 17(a)(3), which prohibits conduct that operates as fraud or deceit in securities offerings. The penalty includes:
- Cease-and-Desist Order: DCG is required to stop violating securities laws.
- $38 Million Fine: Payable within 14 days to the U.S. Treasury.
