The United States Securities and Exchange Commission (SEC) has charged Digital Currency Group (DCG) and Soichoro “Michael” Moro, the former CEO of crypto lending firm Genesis, with misleading investors regarding Genesis’ financial health in the aftermath of the Three Arrows Capital (3AC) collapse.
According to a filing released on January 17, DCG and Moro agreed to settle the charges by paying a combined $38.5 million in civil penalties. DCG is responsible for $38 million, while Moro will pay $500,000. Both parties resolved the case without admitting to or denying any violations of the Securities Act of 1933.
“DCG and Moro painted a misleadingly rosy picture,” said Sanjay Wadhwa, the acting director of the SEC’s enforcement division, in a statement.
This settlement marks another chapter in the fallout from the collapse of Genesis, which filed for Chapter 11 bankruptcy in January 2023 after suffering massive losses due to the 2022 default of 3AC, one of its borrowers.
The Impact of Three Arrows Capital’s Collapse
The failure of Three Arrows Capital, once a prominent crypto hedge fund, sent shockwaves through the cryptocurrency industry. Many firms with significant exposure to 3AC were left grappling with financial instability, including Genesis.
3AC had invested heavily in approximately 10.9 million locked LUNA tokens, worth around $570 million at the time, before the Terra ecosystem imploded in May 2022. Following the collapse, the value of these tokens plummeted by over 99%, leaving the investment worth a mere $670 by June 2024.
The catastrophic loss rendered 3AC unable to meet margin calls from lenders by mid-June 2022. On June 16, the fund defaulted, leading to the forced liquidation of several of its positions. Less than two weeks later, on June 27, a court in the British Virgin Islands ordered 3AC to liquidate its remaining assets.
This liquidation occurred on the same day that Voyager Digital, a now-defunct crypto brokerage, issued a default notice to 3AC for failing to repay a loan of 15,250 Bitcoin.
Genesis and DCG’s Misleading Statements
Following 3AC’s collapse, Michael Moro, then the CEO of Genesis, sought to reassure investors. In a social media post in July 2022, he claimed that Genesis, along with its parent company DCG, was working to minimize the losses caused by its exposure to 3AC.
“We previously stated in June that we mitigated our losses with respect to a large counterparty who failed to meet a margin call,” Moro wrote.
However, the SEC alleges that these statements misrepresented the true extent of Genesis’ financial challenges. The regulator’s investigation found that both DCG and Moro provided an overly optimistic portrayal of the company’s health, despite the significant financial blow Genesis had incurred due to 3AC’s default.
Broader Implications for the Crypto Industry
The charges against DCG and Moro reflect the SEC’s ongoing scrutiny of the crypto sector, particularly in cases where investors are allegedly misled. The fallout from 3AC’s collapse has already led to several high-profile bankruptcies and legal disputes, including those involving Voyager Digital, Celsius Network, and Genesis itself.
The settlement between DCG, Moro, and the SEC highlights the importance of transparency and accurate reporting in an industry where financial risks are high and regulatory oversight is intensifying.
As crypto markets continue to evolve, the SEC’s actions signal its determination to hold companies and individuals accountable for ensuring investors are not misled about the risks they face.