A recently unsealed lawsuit from the bankrupt cryptocurrency lending company Genesis reveals that internal communications from its parent company, Digital Currency Group (DCG), indicate that executives were aware of poor financial management and the imminent legal risks associated with their control over Genesis.
According to filings in the Delaware Chancery Court, DCG's Chief Financial Officer Michael Kraines acknowledged the risk that Genesis could be viewed as a "shadow entity" of DCG.
In a confidential memorandum shared with former Genesis CEO Michael Moro and others, Kraines proposed a "war game exercise" to prepare for potential legal arguments that plaintiffs might raise when Genesis collapsed. This memorandum, attached to the lawsuit, echoes the core claims of the current litigation.
In the memo to Moro, Kraines stated, "The question in my mind is simple: if Genesis were to somehow self-destruct, would it materially harm DCG and have a profound impact on its board and shareholders? My initial thoughts are as follows." This indicates that they were preparing for the impending legal consequences.
The lawsuit further reveals that DCG hired third-party risk consultants who issued warnings, but these warnings were either ignored or acted upon too late. Internal documents show that DCG acknowledged that Genesis was "flying blind" as its loan book ballooned from $4 billion to $12 billion.
As early as 2020, external auditors had pointed out "significant deficiencies and material weaknesses" in Genesis's financial controls.
Internally, Genesis established a so-called "contagion" risk committee to mitigate risk exposure. However, the committee's first meeting did not occur until nine months after DCG's board approved it. Kraines reportedly joked that this delay "just makes future testimony a little easier."
The lawsuit also describes a toxic workplace culture where Genesis employees were expected to serve DCG's interests at the expense of proper governance.
An insider wrote that DCG kept Genesis alive "so that [it] could plunder the balance sheet… propping [Genesis] up to give the appearance of stability, and then borrowing money when [they] could to extract cash." Genesis employees internally referred to the company's environment as a "culture of obedience."
The Genesis litigation oversight committee stated, "This is not just a technical dispute over intercompany accounting. The Delaware lawsuit reveals a deliberate plan by DCG and Barry Silbert to plunder Genesis at the time of its collapse."
Cointelegraph has reached out to DCG for comment but has not received a response as of publication.
The lawsuit also alleges public deception. It claims that after the collapse of Three Arrows Capital (3AC), Genesis employees were instructed to recite pre-prepared messages, while DCG executives, including Barry Silbert, forwarded posts that downplayed the crisis.
Additionally, the lawsuit reveals two controversial transactions, including a promissory note dated June 30, 2022, and a "round-trip" transaction in September 2022, both described as attempts to conceal bankruptcy and mislead creditors.
Genesis seeks to recover over $3.3 billion from DCG, Silbert, and other insiders.
Related: Coinbase claims to have played a "key role" in the largest cryptocurrency seizure in U.S. Secret Service history.
Original article: “Genesis lawsuit accuses DCG of ‘shadow entity’ scheme and ignoring risk warnings”
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