The U.S. Securities and Exchange Commission (SEC) has officially taken action against the venture capital firm, Digital Currency Group (DCG), by starting cease-and-desist proceedings. The issue stems from claims of DCG’s irresponsible actions linked to a lending program managed by its subsidiary, Genesis Global Capital (GGC).
This legal move follows investigations revealing that Digital Currency Group allegedly "misled investors" concerning the financial status of Genesis Global Capital during a crucial time frame in the middle of 2022.
Genesis Global Capital’s Financial Struggles
According to the SEC’s allegations, Digital Currency Group, based in Stamford, Connecticut since its foundation in 2015, has yet to register with the SEC or any of its securities. Established in 2017, Genesis is fully owned by DCG and offered a crypto asset lending program targeting retail investors. This initiative enabled clients to lend Bitcoin (BTC) and other digital currencies to receive interest payments, which were made possible by lending these cryptocurrencies to institutional clients.
However, in June 2022, a storm hit when one of Genesis’s biggest borrowers, the hedge fund Three Arrows Capital (TAC), failed to repay a massive $2.4 billion loan. The consequences were dire, as Genesis found itself with collateral that couldn’t match the amount owed. As events progressed, the collateral’s value kept plummeting, worsening Genesis Global Capital’s financial troubles.
Even amidst these worrisome conditions, DCG’s leaders reportedly directed their staff to maintain an appearance of financial solidity. On June 15, GGC declared its balance sheet was robust, a message that DCG promptly retweeted. The SEC found this claim deceptive, pointing out the substantial unsecured risk left by the Three Arrows Capital’s default.
Additionally, Genesis’s CEO took to Twitter to assure that they’d "shed the risk" from the default, further misleading investors about the true state of the company’s finances.
Digital Currency Group’s $1.1 Billion Move
The SEC also points out that in an attempt to showcase a stable financial outlook, DCG issued a $1.1 billion promissory note to Genesis, allowing the subsidiary to show positive equity on its balance sheet. This crafty financial move wasn’t revealed to Genesis’s investors, resulting in additional negligence charges against Digital Currency Group.
Concluding their findings, the SEC determined that Digital Currency Group contravened Section 17(a)(3) of the Securities Act, which bans conduct that behaves as fraud or deceit in the offering or selling of securities. They saw DCG’s actions as negligent misrepresentation of GGC’s financial situation, misleading investors during a key period.
Because of these conclusions, the SEC has levied a $38 million civil penalty on DCG. The firm is required to pay this fine within 14 days of the order, accepting payments through electronic transfer or certified check.
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