The U.S. District Court for the District of Connecticut has made a significant procedural ruling, allowing class action fraud lawsuits against the parent company Digital Currency Group (DCG) and its founder and CEO Barry Silbert to proceed. The dispute centers around the Genesis Yield income program, launched by the bankrupt crypto lender Genesis Global Capital.
This ruling partially revises the same court's verdict from February. Previously dismissed claims based on the common (case) law of the State of New York have been reinstated. Additionally, the court will continue to consider claims under federal securities laws.
Key Issue: Venue and Jurisdiction
One of the central points of contention was "venue"—whether a federal court can hear claims based on state laws. The plaintiffs cited the Class Action Fairness Act (CAFA), which under certain conditions allows federal courts to handle class action proceedings. Judge Stefan Underhill agreed with this argument, reinstating part of the previously dismissed state law claims. At the same time, many claims under consumer protection laws of other states were dismissed or postponed.
The Genesis Yield program, which operated on the principle of accruing income on deposited cryptocurrency, was particularly popular in 2021–2022. Through partner products, including Gemini Earn, a joint project with the Gemini exchange, hundreds of thousands of investors participated. However, the crypto market crash in 2022 sharply worsened Genesis's liquidity. In November of that year, the company suspended payments, and in January 2023, it filed for Chapter 11 bankruptcy in the U.S. Code.
Essence of the Plaintiffs' Claims
The class action lawsuit was filed in January 2023. The plaintiffs are individuals and organizations that lent cryptocurrency to Genesis. According to their version, management provided false information about the company's financial condition and misled investors. The trigger was the bankruptcy of the hedge fund Three Arrows Capital (3AC) in June 2022—Genesis's largest borrower, accounting for about 30% of all loans issued.
The plaintiffs allege that DCG and Silbert concealed the deterioration of Genesis's financial position by assuming 3AC's bad debt in exchange for a ten-year promissory note. They argue that the Genesis Yield program was an unregistered security, violating the Securities Act of 1933. The company is also accused of securities fraud under the Securities Exchange Act of 1934, and the plaintiffs seek to hold DCG and Silbert liable as controlling persons.
DCG's side consistently denies all violations and calls the plaintiffs' arguments unfounded. Given discrepancies in judicial practice regarding the application of securities laws to cryptocurrencies, Judge Underhill allowed DCG to file an interlocutory appeal.
It is important to emphasize: this ruling only confirms that there are sufficient legal grounds to consider the claims, but it does not find DCG or Silbert guilty. The court will continue to examine whether Genesis Yield was a security and how accurately information was disclosed to investors.
My comment as an analyst: This is a landmark ruling that could set a precedent for the entire industry. If the court recognizes the Genesis Yield program as a security, it will open a "Pandora's box" for similar lawsuits against other crypto lenders and platforms operating under a similar model. The DeFi and CeFi market urgently needs clear regulatory frameworks, and this process could be a catalyst for their formation.