Gemini Trust Company and the Winklevoss twins face claims they froze $900 million in customer crypto assets while withdrawing $282 million for themselves.
A class action filed November 15 in federal court in Florida accuses the cryptocurrency exchange and its founders of operating an unregistered securities scheme that trapped approximately 340,000 retail investors when the platform halted withdrawals in November 2022.
The suit, brought by BAO Family Holdings and Brett A. Osborn, targets Gemini's "Gemini Earn" program, which launched in February 2021 promising interest yields on cryptocurrency holdings. Gemini marketed the program as safe and flexible, assuring customers they could redeem assets "at any time" while emphasizing its status as a New York limited purpose trust company regulated by the state's Department of Financial Services.
But according to the filing, Gemini transferred customer assets to Genesis Global Capital through a "Master Digital Asset Loan Agreement." Genesis pooled these assets with funds from other investors and lent them primarily to institutional counterparties including FTX Trading Ltd. and Three Arrows Capital. Genesis earned revenue by lending at higher rates than it paid to Gemini Earn users and by collecting management fees. Genesis sent interest payments to Gemini, which deducted an "Agent Fee" before distributing the remainder to customers.
The arrangement unraveled as Genesis sustained losses from exposure to collapsing crypto entities throughout 2022. According to publicly filed information cited in the complaint, on October 20, 2022, Digital Currency Group founder Barry Silbert met with Cameron Winklevoss and disclosed that Genesis faced imminent bankruptcy risk, had insufficient liquidity to return Earn user deposits, and that ending the partnership could trigger a "bank run" placing Gemini Earn users at significant risk.
Gemini allegedly kept accepting deposits anyway. Two days before the freeze, on November 14, 2022, the exchange published communications and online advertisements stating Gemini had "no exposure to FTT tokens or Alameda and no material exposure to FTX," that "Gemini is a Full-Reserve Exchange and Custodian," and that "all customer funds held on Gemini are held 1:1 and available for withdrawal at any time."
On November 16, 2022, Genesis announced it would freeze withdrawal requests since "withdrawal requests have exceeded our current liquidity" following volatility in the crypto asset market. Gemini simultaneously suspended withdrawals from the Gemini Earn Program. At the time, Genesis held crypto assets equal to roughly $900 million from a total of 340,000 Earn users, most of whom reside in the United States, according to the complaint. Genesis filed for Chapter 11 bankruptcy protection on January 20, 2023.
The plaintiffs claim that prior to the Genesis bankruptcy filing, the Winklevoss defendants reportedly withdrew nearly $282 million from Gemini, with no mention made to Earn users.
The case alleges eight violations spanning federal securities law, state consumer protection statutes, and fiduciary duty. At its core is the claim that Gemini Earn agreements constituted unregistered securities. Customers tendered digital assets to Gemini, which transferred them to Genesis in exchange for Genesis's promise to pay back principal with accrued interest on demand. Neither Gemini nor Genesis registered these arrangements with the SEC or qualified for an exemption, according to the suit.
The filing invokes Section 10(b) of the Securities Exchange Act and Rule 10b-5, alleging Gemini made untrue statements of material fact and omitted material facts necessary to make its statements not misleading. The suit claims Gemini failed to disclose escalating liquidity and counterparty risk at Genesis, Genesis's deteriorating financial condition in 2022, known concentration of lending exposure creating immediate redemption risk, internal assessments identifying Genesis as a high-risk borrower, and the growing likelihood that Gemini Earn users would be unable to withdraw their assets.
As a New York limited purpose trust company, Gemini allegedly owed heightened duties of care, prudence, disclosure, honesty, and loyalty that go beyond obligations of ordinary commercial parties. The suit claims the exchange breached those fiduciary duties by failing to disclose known risks while continuing to solicit deposits. Despite possessing information that Genesis's financial condition had weakened significantly and being aware of mounting liquidity pressures and concentrated counterparty exposure, Gemini allegedly continued to solicit and accept customer assets into the Earn program.
The filing also accuses Gemini of violating Florida's Money Transmitter Act by receiving and transmitting monetary value for Florida residents without being licensed as a money transmitter by the Florida Office of Financial Regulation. The plaintiffs claim this violation constitutes a per se violation of Florida's Deceptive and Unfair Trade Practices Act.
The proposed class covers all persons and entities who transferred digital assets into Gemini Earn or purchased Genesis Yield securities through the Gemini platform between approximately February 2021 and November 2022 and were unable to withdraw or redeem those assets following the November 16, 2022 suspension. The plaintiffs seek compensatory damages, rescission, restitution, disgorgement, statutory damages, injunctive relief, attorneys' fees, and interest.
For wealth managers, the case highlights risks in alternative investment platforms marketed to retail clients. High yields often mask counterparty exposure and liquidity constraints that clients may not understand. Regulatory status and institutional branding don't guarantee safety when the underlying business model depends on a single borrower lending to distressed counterparties.
The Gemini case also raises questions about when crypto lending programs cross the line into securities offerings requiring SEC registration. As digital assets gain traction with retail investors, advisors recommending these products face scrutiny over due diligence and suitability standards.
No court has ruled on the merits. The defendants have not yet responded to the allegations.
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