Gemini and Genesis Court Case: Judge Rules SEC Complaint is “Plausible”

Key Takeaways

• Judge OKs SEC case against Gemini and Genesis over unregistered crypto sales
• Howey & Reves tests pass muster – Gemini and Genesis must defend SEC case
• Despite ongoing litigation with the SEC, Genesis settled for $21 million, to potentially resolve part of the case.

A New York federal judge has made a ruling regarding the Gemini Earn program.

Judge Edgardo Ramos said that the United States Securities and Exchange Commission (SEC) has “plausibly alleged” that Gemini and Genesis violated securities laws.

Unregistered Crypto? SEC Battles Gemini and Genesis

A New York court endorsed the validity of the SEC’s claims against Gemini and Genesis Global Capital . Judge Ramos’ decision says the cases against the companies for offering unregistered securities via the Gemini Earn program are different enough to move forward.

The involvement of Genesis Global Capital and Gemini Trust Company in the Gemini Earn program has drawn significant regulatory attention. In recent years, US securities regulators have increasingly scrutinized interest-bearing cryptocurrency accounts.

Judge Rejects Dismissal in SEC Case Against G&G Over Earn Program

According to Judge Ramos, the operational model in question meets the requirements for an investment contract as outlined by the Howey Test. Furthermore, Ramos referenced the Reves Test , established by the US Supreme Court in the 1990 case of Reves v. Ernst & Young. This test uses the “family resemblance” standard to determine whether or not a note is a security.

Judge Ramos stated that according to both the Howey and Reves criteria, the SEC has credibly accused the defendants of issuing and selling unregistered securities via the Gemini Earn program. Consequently, the defendants’ requests to dismiss the case have been rejected.

According to the order :

“The SEC has plausibly alleged that defendants violated section five of the Securities Act so the underlying claim will not be dismissed.”

Ramos highlighted that it is a common judicial practice to avoid the early dismissal of a claim seeking permanent injunctive relief during the initial pleadings phase, unless the claim requesting such relief is dismissed on its own merits.

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Furthermore, the judge’s ruling clarifies that dismissal should only be contemplated if a real possibility of future violations exists. However, the judge also emphasized the absence of any justification for eliminating the request for permanent injunctive relief at this early phase.

Genesis Pays $21 Million to SEC Despite Bankruptcy Filing

Genesis announced in a bankruptcy court filing last month that it had reached a settlement with the SEC, agreeing to pay $21 million to resolve the lawsuit.

According to the SEC’s lawsuit, Gemini Earn had approximately 340,000 customers and managed assets worth $900 million as of November 2022.

At the same time, the cryptocurrency exchange FTX declared bankruptcy. As a result, Genesis had to “temporarily suspend” withdrawals from Gemini Earn due to “unprecedented market turmoil” and liquidity issues.

After the SEC filed its lawsuit in January of the previous year, Genesis proceeded to file for bankruptcy. The following month, Gemini consented to a settlement with New York’s financial regulator. In it, the platform agreed to return $1.1 billion to customers of Gemini Earn through the bankruptcy proceedings of Genesis.