The recent enforcement actions taken by the US Securities and Exchange Commission (SEC) against Digital Currency Group (DCG) and its subsidiary Genesis have sent shockwaves through the crypto industry. On Jan. 17, the SEC announced that DCG would be required to pay a hefty $38 million civil penalty and adhere to a cease-and-desist order to prevent future violations of securities laws.
The SEC’s accusations against DCG and former CEO, Soichiro “Michael” Moro, revolve around alleged misleading of investors regarding the financial health of their operations. The charges stem from negligence in public disclosures and financial maneuvers following the collapse of Three Arrows Capital (3AC), one of Genesis’ largest borrowers, in mid-2022.
The SEC’s case against DCG focuses on the aftermath of 3AC’s default on a $2.4 billion loan, which left Genesis facing significant financial losses. The SEC alleges that DCG executives were aware of these losses but chose to portray a false image of financial stability. This included approving misleading tweets and public statements that misrepresented Genesis’ balance sheet as strong and downplayed the risks associated with 3AC’s default.
To bolster this false narrative, DCG executed a $1.1 billion promissory note that artificially inflated Genesis’ balance sheet without disclosing the terms to investors. This maneuver allowed Genesis to report positive equity despite its precarious financial situation. However, by November 2022, Genesis fully suspended withdrawals due to an inability to meet redemption requests, leading to DCG filing for bankruptcy in January 2023.
Former CEO Soichiro “Michael” Moro has also faced sanctions from the SEC for his role in approving misleading statements and participating in crafting public communications that misrepresented Genesis’ financial troubles. Moro personally approved tweets that falsely claimed Genesis had shed the risk related to 3AC’s default and maintained a strong balance sheet. He also signed the $1.1 billion promissory note on behalf of Genesis, further perpetuating the misleading narrative to investors.
Moro has been fined $500,000 and barred from engaging in negligent conduct that misleads investors. The SEC’s findings against Moro will also impact related investor actions.
This enforcement action serves as a stark reminder of the importance of transparency and accountability in the crypto industry. Investors must remain vigilant and conduct thorough due diligence before investing in any digital asset.