KEY POINTS
- Judge Ramos said the SEC "plausibly alleged" the companies sold unregistered securities
- He said the regulator sufficiently alleged Gemini Earn investors expected profits from the firms' efforts
- Gemini recently reached a settlement to return at least $1.1 billion to Earn users
A U.S. judge has denied the motions filed by cryptocurrency custodian Gemini and crypto firm Genesis to dismiss a lawsuit lodged by the Securities and Exchange Commission (SEC), saying the regulator had "plausibly alleged" the two companies offered and sold unregistered securities.
The SEC filed charges against Genesis and Gemini in mid-January 2023, accusing the crypto firms of offering and selling unregistered securities through the now defunct Gemini Earn program. "Through this unregistered offering, Genesis and Gemini raised billions of dollars worth of crypto assets from hundreds of thousands of investors," the regulator said, adding that Gemini charged as much as 4.29% in agent fees for the returns Genesis paid to Gemini Earn investors.
Under the program, investors were offered the chance to lend their cryptocurrencies in exchange for high returns. Some of the loans were made to Genesis, which in turn lent crypto to other industry players.
Genesis filed for bankruptcy days after the SEC announced charges against the cryptocurrency lender -- as the exchange was unable to handle the surge in withdrawal requests. Gemini Earn, on the other hand, was halted during a market crypto crash late in 2022 as triggered by the spectacular collapse of Sam Bankman-Fried's FTX.
The partner firms filed motions to dismiss the SEC complaint in May 2023, arguing that the program involved loans, not securities. Gemini said the regulator only wanted to turn the program into "something it was not," while Genesis reiterated that the SEC failed to "plausibly" allege the program offered security notes or investment contracts.
Judge Edgardo Ramos said in an order Wednesday that the SEC "has plausibly alleged that Defendants violated section 5 of the Securities Act, so the underlying claim will not be dismissed." He also said there was "no reason to strike the request for permanent injunctive relief at this preliminary stage" of the case. Thus, the court clerk has been directed to terminate the companies' motions for dismissal.
Ramos also argued that the SEC's complaint "sufficiently alleges that Gemini Earn investors had an expectation of profits" and "defendants marketed Gemini Earn as an investment opportunity and publicly touted investors' ability to earn returns." The SEC specifically said in its complaint that investors in the defunct program "reasonably expected to profit from the efforts of the defendants."
The order comes just weeks after Gemini said it has reached a settlement with the New York State Department of Financial Services (NYDFS) to return at least $1.1 billion in digital assets to Gemini Earn investors. It also agreed to pay a $37 million fine for "significant failures" in its handling of the initiative that threatened the company's security.
Gemini told its Earn customers that it "worked tirelessly" in the past months toward returning the assets of investors. It also said it will contribute $40 million toward the fund recovery process.
