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DCG Loses Bid to Kill Fraud Claims Over $1.1B Three Arrows Exposure
Judge Underhill classified Genesis Yield as a security, letting investors pursue claims that DCG hid a $1.1B insolvency. The ruling lifts the discovery stay, giving plaintiffs access to DCG's books.
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Digital Currency Group lost a key legal fight this week. A federal judge denied its motion to dismiss fraud claims tied to a $1.1 billion hole left by Three Arrows Capital's collapse.
US District Judge Stefan Underhill ruled that investors can proceed with claims under the Securities Act of 1933 and the Securities Exchange Act of 1934. He also lifted the discovery stay, giving plaintiffs access to DCG's internal records.
The case centers on Genesis Global Capital, DCG's lending subsidiary. When Three Arrows went under in 2022, Genesis was left holding $1.1 billion in bad debt. Plaintiffs allege DCG and CEO Barry Silbert concealed the exposure through what they call a sham transaction involving a promissory note. DCG argued the note was a straightforward loan. The judge rejected that framing.
Judge Underhill classified the Genesis Yield lending program as a security under the Supreme Court's Howey and Reves tests. The product met the definition of an investment contract: users deposited assets expecting profits from Genesis's trading and lending activities. Platforms offering yield-bearing products where users rely on the platform's efforts for returns now have a court precedent to contend with.
New York Attorney General Letitia James has linked over $3 billion in losses to Gemini Earn and other DCG-affiliated programs. Genesis itself has filed separate lawsuits against DCG seeking billions in alleged fraudulent transfers. The legal pressure comes from multiple directions.