Customers are outraged at the Winklevoss twins over their secret $282 million withdrawal from their crypto company’s bank before its collapse last year – and the backlash could further tarnish the twins’ carefully crafted image as trustworthy operators in the unruly digital currency industry.
As The Post first reported last month, Cameron and Tyler Winklevoss – who started the New York-based Gemini crypto exchange following their famous feud with Mark Zuckerberg over who founded Facebook – quietly yanked a trove of cryptocurrency from now-bankrupt bank Genesis on Aug. 9, 2022.
A few months later on Nov. 16, Genesis froze withdrawals on some $900 million in customer assets tied to the Gemini Earn program – an interest-bearing account product that teased up to 8% interest on crypto deposits.
Gemini never responded to The Post’s requests for comment, only to post a lengthy statement on X the next day in which it admitted it had pulled the funds. The firm said it had withdrawn “Earn users’ money” to create a “liquidity reserve” for them under the program’s terms of service – and claimed that the move was part of a “wise and prudent” risk management strategy.
The explanation failed to satisfy some Gemini customers and claimants’ attorneys who told The Post they are still fighting to recover money.
Eric Asquith, a 42-year-old Massachusetts resident, is currently locked in arbitration with Gemini after he allegedly lost access to more than $1 million tied to the Earn program. That included a $150,000 deposit on Oct. 16, 2022 and a $350,000 deposit he made on Nov. 4, 2022 — just 12 days before the bank froze withdrawals, legal filings showed.
“There’s no good way that Gemini can spin this … so you had the smarts to withdraw $282 million, but you didn’t halt the Earn program?” Asquith told The Post. “You didn’t tell anyone what you were doing. You didn’t disclose to any of the Earn users what was happening. You didn’t warn anyone about what was happening.”
Gemini representatives did not respond to multiple requests for comment on this story. Genesis also did not return requests for comment.
Legal and ethics experts said the twins’ actions, including combative dealings with regulators and failure to protect Earn customers, look awkward at best next to their yearslong public campaign to portray Gemini as a safety-minded institution.
On its website, Gemini declares “trust is our product” and describes itself as “the most trusted crypto-native finance platform.” The company frequently notes that it is regulated by the New York Department of Financial Services and once ran a splashy ad campaign with the slogan, “The Revolution Needs Rules.”
Genesis, the Earn program’s sole lending partner, began to wobble in early 2022 after losing $1.1 billion on a loan to the doomed crypto hedge fund Three Arrows Capital. The final blow came last November, when the bank was caught up in the collapse of Sam Bankman-Fried’s FTX empire.
In the days before Genesis suspended withdrawals, Gemini was still assuring customers that its products were safe. On Nov. 11, 2022, the Winklevoss twins said in a blog post that Gemini had “no material exposure to FTX.” The post didn’t mention Gemini Earn.
The Winklevoss twins have publicly thumbed their noses at SEC officials who are scrutinizing the Earn program’s collapse.
In January, the SEC sued Gemini and Genesis, alleging they “offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors” and that customers were given “limited or inadequate information about Genesis’ operations, financial condition, liquidity, or other factors relevant in considering whether to invest in the Gemini Earn program.”
At the time, Tyler Winklevoss called the SEC’s lawsuit “super lame” and described it as “manufactured parking ticket.” Gemini later filed to have the case dismissed.
Nevertheless, the SEC’s lawsuit poses a significant risk to Gemini, according to Lee Reiners, a former Federal Reserve official and lecturer at Duke Law School.
Reiners believes that the Earn program “clearly” qualifies as an unregistered security. From a risk management perspective, the most prudent move for Gemini would have been to “follow the law and not offer this product to begin with,” he added.
“I don’t think there was anything inherently wrong with doing what they were doing, provided that they had registered with the SEC and disclosed the relevant risk,” Reiners said. “Investing comes with risk, but it seems like they cut corners here and they’ve cut corners in the past as well.”
Reiners pointed out that the SEC’s lawsuit isn’t the first time that Gemini has run afoul of federal regulators.
Last year, the Commodity Futures Trading Commission filed a civil lawsuit against the company for allegedly making “false and misleading statements” to officials related to Gemini’s planned bitcoin futures contract in 2017 and its susceptibility to manipulation. Gemini has denied wrongdoing.
“They, very deliberately, set up to position themselves as the trustworthy exchange, the exchange that took regulation seriously,” Reiners said. “It turns out that might not actually be the case.”
In the case of the Earn program, Gemini has displayed a troubling “lack of transparency” with customers, according to Tobey Karen Scharding, a professor at Rutgers Business School and expert on risk-related business ethics.
“The fact that they were withdrawing money suggested that they had significant worries either about Genesis or about crypto at this time, but they were, at the same time, encouraging their customers to make deposits and encouraging their customers to maintain a very positive attitude toward cryptocurrencies,” Scharding said. “That’s worrying.”
A page assuring Earn customers they could “redeem and move your cryptocurrency back to your trading account (plus interest) at any time” was still live on the company’s website until at least Nov. 14 of last year, according to Wayback Machine’s archives.
Gemini also said Genesis was vetted “through a risk management framework that reviews our partners’ collateralization management process.”
Meanwhile, Gemini’s terms of service inform Earn customers that they agree to accept the risk of “up to, and including, total loss of your available digital assets.”
“The problem is, it’s kind of the Wild West out there with crypto,” said James Park, a former assistant attorney general in the New York State AG’s Investor Protection Bureau. “It’s hard to say that there are clear norms, given that this is unregulated. The terms of service are fairly broad, so they are able to have some discretion to make decisions like this.”
Gemini described the $282 million withdrawal as a protective move against “the broad market turmoil in the summer of 2022.”
“In hindsight, this proved to be a wise and prudent decision,” Gemini said in the statement posted on X. “As a result of our risk management, Earn users had $282 million less exposure to Genesis when Genesis halted redemptions on November 16, 2022.”
But Gerry Grunsfeld, a 48-year-old attorney in Brooklyn who has already resolved one claim against Gemini and currently represents two other claimants, said the company’s explanation for its actions “makes what they did worse, not better.”
“If they were concerned enough to be taking extra precautions, they should be notifying their clients about that and they should be increasing their collateral and they should be doing additional due diligence,” Grunsfeld said.
Of the $282 million, the company said more than $245 million was already used to “fulfill Earn users’ redemption requests,” with another $36.4 million to be “distributed equitably to Earn users” once Genesis bankruptcy proceedings are resolved, according to a Sept. 29 update shared with Earn customers.
Gemini has yet to specify when the $245 million in redemptions were sent out, if the redemptions happened before or after Genesis suspended withdrawals, or why the full withdrawal amount has not already been dispersed.
Legal experts who spoke to The Post speculated that Gemini is withholding onto the remaining $36.4 million because it could be subject to claw backs or otherwise up for dispute during the bankruptcy.
Clarity on the Earn meltdown likely depends on the outcome of SEC’s case, according to Adam C. Pritchard, a securities law expert and professor at the University of Michigan Law School.
Securities are subject to a slate of regulations and disclosure requirements designed to protect investors – including rules blocking companies from disclaiming responsibility and liability via terms-of-service waivers, Pritchard said.
“You’ve got an obligation to provide accurate disclosure, but unless it’s a public company, it doesn’t have ongoing reporting obligations,” Pritchard said. “If you wanted to invest in an entity that would provide you with that ongoing disclosure, you shouldn’t have been investing in this weird crypto asset space. You should have been investing in IBM.”
Gemini Earn’s demise is at the center of a nasty public feud and legal battle between the Winklevoss twins and fellow crypto billionaire Barry Silbert, whose firm Digital Currency Group owns Genesis.
Genesis and related parties have been tied up in court-mediated negotiations to resolve customer claims related to Gemini Earn since early this year. Those negotiations have yet to yield a final agreement, and it’s unclear if Earn customers will be made whole.
The Winklevoss twins sued Silbert and DCG in July, alleging that they were given a “false, misleading, and incomplete representation” of Genesis’s financial health. DCG later filed a motion to dismiss the suit, which is still pending.
DCG declined to comment.
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