A newly unsealed complaint filed by bankrupt crypto lender Genesis alleges that internal communications at its parent company, Digital Currency Group (DCG), revealed executives were aware of financial mismanagement risks and potential legal liabilities tied to DCG’s control over Genesis.
Internal Memo Acknowledges ‘Alter Ego’ Risk
According to a Delaware Court of Chancery filing, DCG’s then-Chief Financial Officer, Michael Kraines, explicitly acknowledged the risk posed by Genesis potentially being regarded as DCG’s “alter ego.”
In a memo dated June 29, 2021, and shared with former Genesis CEO Michael Moro, Kraines detailed a “war-gaming exercise” preparing for potential future litigation scenarios where Genesis’s collapse might lead to claims against DCG.
“The question on my mind simply put is ‘if Genesis were to somehow blow itself up could that somehow tank DCG to the profound detriment of its board and shareholders?’ My prefatory thinking here is as follows,” Kraines wrote, indicating preparations for imminent legal fallout stemming from Genesis’s potential failure.
DCG Ignored External Risk Warnings
The filing reveals DCG hired third-party risk consultants who issued serious warnings about Genesis’s precarious situation, which appear to have been either ignored or acted upon too late.
Internal documents show DCG admitted Genesis was operating “flying blind” as its loan book expanded dramatically from $4 billion to $12 billion. Genesis established a “contagion” risk committee to address this, but its first meeting did not occur until nine months after DCG board approval.
External auditors flagged “significant deficiencies and material weaknesses” in Genesis’s financial controls as early as 2020. Kraines reportedly noted the delay creating a “longer runway for the inevitable” and humorously suggested the committee’s formation timing might complicate future testimony.
The complaint also describes a culture at Genesis that prioritized DCG’s interests, with one insider writing that DCG kept Genesis operational to “pillage the balance sheet,” giving the appearance of stability to borrow and withdraw funds.
“These are not merely technical disputes over intercompany accounting,” stated the Genesis Litigation Oversight Committee. “The Delaware Complaint exposes a deliberate scheme by DCG and Barry Silbert to pillage Genesis as it collapsed.”
Public Deception and Controversial Transactions
The filing further alleges public deception following the Three Arrows Capital (3AC) collapse. Genesis staff were directed to recite scripted messages while DCG executives, including Barry Silbert, disseminated content downplaying the crisis.
Additionally, the complaint details two highly contentious transactions: a June 30, 2022, promissory note and a September 2022 “roundtrip” deal. These are framed as efforts by Genesis (and DCG) to conceal insolvency and mislead creditors.
Genesis is seeking to recover more than $3.3 billion from DCG, Silbert, and other alleged insiders.
CoinDesk reached out to DCG for comment but had not received a response by publication.
