The US Securities and Exchange Commission (SEC) initiated enforcement actions against Digital Currency Group (DCG) and its subsidiary Genesis on Jan. 17.

The regulator ordered DCG to pay a $38 million civil penalty and comply with a cease-and-desist order to prevent future violations of securities laws.

The SEC accused the crypto conglomerate and its former CEO, Soichiro “Michael” Moro, of misleading investors about the financial health of their operations. 

The charges stem from alleged negligence in public disclosures and financial maneuvers following the collapse of one of Genesis’ largest borrowers, Three Arrows Capital (3AC), in mid-2022.

DCG fined $38 million

The SEC’s case against DCG centers on the company’s actions following 3AC’s default on a $2.4 billion loan, which left Genesis with a substantial financial shortfall. 

According to the SEC, DCG executives knew that Genesis faced losses exceeding $1 billion but directed efforts to project an image of financial stability. 

These efforts allegedly included approving tweets and public statements that falsely characterized Genesis’ balance sheet as “strong” and claimed the risks associated with 3AC’s default had been mitigated.

DCG executed a $1.1 billion promissory note to bolster this narrative and artificially inflate Genesis’s balance sheet. The SEC claims that while the note created an accounting asset, it did not involve a tangible capital transfer, and its terms were not disclosed to investors. 

This maneuver allowed Genesis to report positive equity as of June 30, 2022, despite its precarious financial position. However, a few months later, in November 2022, the firm fully suspended withdrawals, citing an inability to meet redemption requests. 

By January 2023, DCG had filed for bankruptcy, leaving investors and retail customers with substantial losses.

Sanctions against former CEO

The SEC has also sanctioned Soichiro “Michael” Moro, who served as CEO during this tumultuous period. The filing accuses Moro of approving misleading statements and participating in crafting public communications that downplayed the severity of Genesis’ financial troubles.

According to the SEC, Moro personally approved tweets asserting that Genesis had “shed the risk” related to 3AC’s default and that its balance sheet remained robust. The regulator contends that these statements were false and failed to account for Genesis’s significant financial exposure. 

Additionally, Moro signed the $1.1 billion promissory note on behalf of Genesis, further perpetuating what the SEC describes as a misleading narrative to investors.

He was fined $500,000 and barred from engaging in negligent conduct that misleads investors. The SEC’s findings against Moro will also bind related investor actions.

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