A newly unsealed complaint from bankrupt crypto lender Genesis reveals internal communications at its parent company, Digital Currency Group (DCG), suggested executives were aware of financial mismanagement and looming legal risks tied to their control over Genesis.
According to the Delaware Court of Chancery filing, DCG’s chief financial officer, Michael Kraines, acknowledged the risk that Genesis could be deemed DCG’s “alter ego.”
In a confidential memo shared with former Genesis CEO Michael Moro and others, Kraines laid out a “war-gaming exercise” preparing for legal arguments a future plaintiff might raise if Genesis collapsed. The memo, attached to the complaint, mirrors claims now central to the lawsuit.
“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 to Moro, indicating they were preparing for an imminent legal fallout.
Related: Digital Currency Group CEO Barry Silbert says he should have just held BTC
DCG ignored risk warnings
The filing further reveals that DCG hired third-party risk consultants who issued warnings that were either ignored or acted upon too late. Internal documents show DCG admitted Genesis was “flying blind” as its loan book ballooned from $4 billion to $12 billion.
External auditors had already flagged “significant deficiencies and material weaknesses” in Genesis’s financial controls as early as 2020.
A so-called “contagion” risk committee was formed within Genesis to mitigate exposure. However, its first meeting did not occur until nine months after approval by the DCG board. Kraines reportedly joked that the delay “just made my future deposition a bit easier.”
The complaint also describes a toxic workplace culture where Genesis employees were expected to serve DCG’s interests at the expense of proper governance.
One insider wrote that DCG kept Genesis alive “so [it] could pillage the balance sheet… prop [Genesis] up, give [the] impression of stability[,] then borrow while they c[ould] to get the cash out of it.” Genesis staff internally referred to the firm’s environment as a “culture of submission.”
“These are not merely technical disputes over intercompany accounting,” said the Genesis Litigation Oversight Committee. “The Delaware Complaint exposes a deliberate scheme by DCG and Barry Silbert to pillage Genesis as it collapsed.”
Cointelegraph reached out to DCG for comment but had not received a response by publication.
Related: Bankrupt crypto firm Genesis completes restructuring
Public deception and controversial transactions
The filing also alleges public deception. It claims Genesis staff were told to recite scripted messages after the Three Arrows Capital (3AC) collapse, while DCG executives, including Barry Silbert, retweeted posts that downplayed the crisis.
Furthermore, the complaint sheds light on two controversial transactions. These include the June 30, 2022, promissory note and the September 2022 “roundtrip” deal, both framed as attempts to conceal insolvency and mislead creditors.
Genesis is seeking to recover more than $3.3 billion from DCG, Silbert and other insiders.
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