The US Securities and Exchange Commission (SEC) has initiated formal cease-and-desist proceedings against venture capital firm Digital Currency Group (DCG) due to its alleged negligent conduct in relation to a lending program offered by its subsidiary, Genesis Global Capital (GGC).
This action arises from findings that Digital Currency Group “misled investors” about Genesis Global Capital’s financial health during a “critical period” in mid-2022.
Genesis Global Capital’s Financial Woes
According to the SEC’s allegations, Digital Currency Group, founded in 2015 and based in Stamford, Connecticut, has never registered with the SEC nor registered any securities.
Genesis, a wholly-owned subsidiary of DCG formed in 2017, offered a crypto asset lending program aimed at retail investors. This program allowed customers to tender Bitcoin (BTC) and other cryptocurrencies in exchange for interest payments, which were generated by lending these assets to institutional borrowers.
In June 2022, GGC faced a significant crisis when one of its largest borrowers, the hedge fund Three Arrows Capital (TAC), defaulted on a $2.4 billion loan. The repercussions of this default were severe, leaving GGC with collateral that was insufficient to cover the loan’s face value.
As the situation unfolded, the value of the collateral continued to decline, exacerbating Genesis Global Capital’s financial woes.
Despite the alarming developments, DCG executives reportedly instructed employees to project an image of financial stability. On June 15, GGC publicly asserted that its balance sheet was strong, a statement that was retweeted by DCG.
This assertion was “misleading,” according to the regulator, as it failed to account for the significant unsecured exposure due to the Three Arrows Capital default.
Following this, GGC’s CEO tweeted that the company had “shed the risk” associated with the default, “further misleading investors” about GGC’s actual financial condition.
Digital Currency Group’s $1.1 Billion Maneuver
The regulatory agency further asserts that in a bid to create the appearance of financial stability, DCG executed a $1.1 billion promissory note to GGC, allowing the subsidiary to report positive equity on its balance sheet.
However, this financial maneuver was not disclosed to Genesis Global Capital’s investors, leading to further accusations of negligence against Digital Currency Group.
The SEC concluded that Digital Currency Group violated Section 17(a)(3) of the Securities Act, which prohibits conduct that operates as fraud or deceit in the offer or sale of securities.
The regulator determined that DCG’s actions constituted negligent misrepresentation of GGC’s financial health, misleading investors during a crucial period.
As a result of these findings, the SEC has imposed a civil penalty of $38 million on DCG. The company must pay this sum within 14 days of the order, with payment options including electronic transfer or certified check.
Featured image from DALL-E, chart from TradingView.com
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