The US Securities and Exchange Commission (SEC) has initiated formal cease-and-desist proceedings against enterprise capital firm Digital Currency Group (DCG) attributable to its alleged negligent conduct in relation to a lending program offered by its subsidiary, Genesis Global Capital (GGC).
This motion 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
In accordance with 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 toward 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 big crisis when certainly 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.
Because the situation unfolded, the worth of the collateral continued to say no, exacerbating Genesis Global Capital’s financial woes.
Despite the alarming developments, DCG executives reportedly instructed employees to project a picture of economic stability. On June 15, GGC publicly asserted that its balance sheet was strong, a press release that was retweeted by DCG.
This assertion was “misleading,” in keeping with the regulator, because it did not account for the numerous unsecured exposure attributable to the Three Arrows Capital default.
Following this, GGC’s CEO tweeted that the corporate had “shed the danger” related to 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 looks of economic stability, DCG executed a $1.1 billion promissory note to GGC, allowing the subsidiary to report positive equity on its balance sheet.
Nevertheless, this financial maneuver was not disclosed to Genesis Global Capital’s investors, resulting in 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 within 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 vital period.
Consequently of those findings, the SEC has imposed a civil penalty of $38 million on DCG. The corporate must pay this sum inside 14 days of the order, with payment options including electronic transfer or certified check.
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