Overview of the Legal Case
A recent court case involving the insolvent cryptocurrency lender Genesis has shed light on internal discussions at its parent company, Digital Currency Group (DCG). These discussions suggest that top executives were alerted to financial mismanagement and potential legal repercussions regarding the governance of Genesis.
Concerns from DCG Executives
In a filing submitted to the Delaware Court of Chancery, Michael Kraines, CFO of DCG, expressed concerns about the perception that Genesis could be seen as an extension of DCG itself.
Kraines shared a confidential document with former Genesis CEO Michael Moro, discussing a “war-gaming exercise” aimed at strategizing for anticipated legal challenges in the event of Genesis’s financial collapse. He highlighted his apprehension over the potential impact of Genesis failing on DCG’s reputation and stakeholders.
Risk Assessments and Internal Culture
The complaint indicates that DCG had engaged independent risk assessment firms, whose warnings were either disregarded or addressed belatedly. Documents revealed that DCG was aware Genesis was “flying blind” as its lending portfolio surged from $4 billion to a staggering $12 billion. Concerns from external auditors about deficiencies in Genesis’s financial practices had already been raised in 2020.
A “contagion risk committee” was formally established at Genesis to address financial exposures, but its first meeting occurred nine months after receiving board approval. Kraines remarked that this delay eased his potential deposition testimony.
Work Environment and Culture at Genesis
The complaint presents a troubling picture of Genesis’s internal culture, describing a toxic environment where employees prioritized DCG’s interests over sound corporate governance. An insider suggested that DCG kept Genesis operational merely to exploit its financial resources, fostering a facade of stability while draining funds through borrowing.
Employees characterized the company’s atmosphere as a “culture of submission”.
Exploitation Allegations
The Genesis Litigation Oversight Committee asserted that the situation is far more than just technical disputes related to inter-company finances, indicating a calculated effort by DCG and its leader, Barry Silbert, to exploit Genesis during its decline.
Contacted for a response, Cointelegraph noted that DCG had not provided feedback by the time of publication. Additionally, the complaint accuses DCG executives of misleading the public following the collapse of Three Arrows Capital (3AC).
Controversial Transactions and Recovery Efforts
Genesis staff were reportedly instructed to deliver scripted responses regarding the crisis, while DCG leaders, including Silbert, downplayed the situation on social media.
The legal filing highlights two contentious transactions: a promissory note dated June 30, 2022, and a questionable “roundtrip” deal from September 2022, both allegedly intended to obscure the reality of insolvency and deceive creditors. In pursuit of recovery, Genesis seeks over $3.3 billion from DCG, Silbert, and other insiders.
