Court finds claims against Gemini and Genesis plausible as SEC suit continues

A federal judge has determined that the United States Securities and Exchange Commission’s (SEC) claim against crypto firms Gemini and Genesis, accusing them of selling unregistered securities through the Gemini Earn program, is plausible enough to proceed to court. In a 32-page order on March 13, New York District Court Judge Edgardo Ramos rejected motions by Gemini and Genesis to dismiss the SEC’s lawsuit. The judge also denied a separate request to halt the SEC’s demand for the firms to cease selling securities and to hand over Gemini Earn profits if the SEC wins the case. Judge Ramos stated that the SEC’s suit filed in January 2023 “plausibly alleges” that Gemini Earn, a cryptocurrency product offered by Gemini and managed by Genesis, sold unregistered securities. The judge added that the SEC adequately claimed that Gemini Earn met the criteria of an investment contract under the Howey test, a legal framework used to classify securities. According to Judge Ramos, Genesis pooled assets on its balance sheet and lent funds to institutional borrowers based on its discretion and judgment, with customers’ expectation of profits dependent on Genesis’ efforts. The order also confirmed the SEC’s assertion that Gemini Earn agreements qualified as notes, which are debt securities requiring loan repayments with interest. However, the judge’s order does not guarantee a ruling in favor of the SEC, as the regulator still needs to prove its case, and all parties will proceed with gathering evidence. In a related development, Genesis recently disclosed reaching a settlement agreement with the SEC for $21 million in a bankruptcy court filing. The SEC’s suit stated that as of November 2022, Gemini Earn had approximately 340,000 customers and $900 million in assets under management. In that same month, FTX filed for bankruptcy and Genesis temporarily suspended Gemini Earn withdrawals due to unprecedented market turmoil and liquidity issues. Genesis filed for bankruptcy after the SEC’s suit in January last year, and in February, Gemini agreed to return $1.1 billion to Gemini Earn customers through the Genesis bankruptcy proceeding as part of a settlement with New York’s financial regulator.