SEC Cracks Down on Digital Currency Group with $38 Million Fine for Investor Fraud

By: Eva Baxter

The U.S. Securities and Exchange Commission (SEC) has taken significant enforcement actions against the prominent crypto conglomerate, Digital Currency Group (DCG), and its subsidiary, Genesis. Following an investigation, the regulator has imposed a $38 million civil penalty on DCG and mandated compliance with a cease-and-desist order to prevent any future breaches of securities laws.

This action stems from allegations that DCG and its former CEO, Soichiro “Michael” Moro, misled investors about the true financial health of their operations, particularly following the dramatic collapse of one of Genesis's largest borrowers, Three Arrows Capital (3AC), in the middle of 2022. The charges accuse the company of negligence, specifically in misrepresenting their financial status to investors through public disclosures and financial manoeuvres during a period of financial upheaval.

The SEC's case highlights that following the 3AC’s default on a $2.4 billion loan, DCG was confronted with a considerable financial deficit. Although executives were aware that Genesis faced losses exceeding $1 billion, they allegedly attempted to paint a picture of financial stability to the public. Efforts to present Genesis’s balance sheet as strong included crafting public messages that falsely claimed the risks connected to the 3AC default had been resolved. This false narrative was purportedly reinforced by DCG executing a $1.1 billion promissory note, but without making actual capital transfers or disclosing its terms to investors. This action helped Genesis report positive equity as of June 2022, despite the precarious financial standing.

A few months later, in November 2022, the financial situation became untenable as Genesis suspended withdrawals, unable to fulfill redemption requests. By early 2023, DCG's financial throttle resulted in bankruptcy, causing substantial financial harm to investors and retail customers. In conjunction with penalizing the firm, the SEC has sanctioned former CEO Soichiro “Michael” Moro. The agency found that he was complicit in approving misleading statements, including assertions that suggested the firm had mitigated risks associated with 3AC’s default and misrepresented the stability of its financial position. Alongside a $500,000 fine, Moro faces a prohibition from involvement in activities that could mislead investors.

The SEC's aggressive stance in pursuing these penalties indicates a broader regulatory intent to tighten oversight over crypto firms and ensure they uphold transparency and integrity in dealing with investors. These developments send a clear message to other entities in the crypto industry about the importance of truthful financial reporting and accountability in financial dealings.