SEC Enforcement Actions Against Digital Currency Group and Genesis
The US Securities and Exchange Commission (SEC) took action against Digital Currency Group (DCG) and its subsidiary Genesis on Jan. 17. The regulatory body imposed a $38 million civil penalty on DCG and issued a cease-and-desist order to prevent future violations of securities laws.
Allegations of Misleading Investors
The SEC accused DCG 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 revolves around the company’s actions following 3AC’s default on a $2.4 billion loan, which resulted in a significant financial shortfall for Genesis. Despite knowing about losses exceeding $1 billion, DCG executives directed efforts to portray a false image of financial stability. This included approving misleading tweets and public statements about Genesis’ balance sheet.
DCG executed a $1.1 billion promissory note to artificially inflate Genesis’s balance sheet, creating an accounting asset without a tangible capital transfer. This maneuver allowed Genesis to report positive equity as of June 30, 2022, despite its precarious financial position. The firm ultimately filed for bankruptcy in January 2023, leaving investors with substantial losses.
Sanctions Against Former CEO
The SEC also sanctioned former CEO Soichiro “Michael” Moro for approving misleading statements and participating in crafting public communications that downplayed Genesis’ financial troubles. Moro personally approved false tweets and signed the $1.1 billion promissory note on behalf of Genesis, contributing to what the SEC deemed a misleading narrative to investors.
Moro was fined $500,000 and prohibited from engaging in conduct that misleads investors. The SEC’s findings against Moro will impact related investor actions.