Several investors have sued cryptocurrency exchange Gemini and its founders for selling Earn without registering it as a security.
Disgruntled investors claimed that Gemini’s failure to register the product deprived customers of critical risk disclosures.
The Gemini Customer Agreement Limits Litigation
Gemini customers claimed in a proposed class-action complaint filed in Manhattan that Earn’s slick marketing pitch minimized risks clearly outlined in Gemini’s customer agreement. Gemini’s Earn account paid up to 8% on crypto deposits. Gemini founders Cameron and Tyler Winklevoss’ reputations enhanced the product’s dependability.
A closer examination of Gemini Earn’s customer agreement, on the other hand, reveals the devil in the details. Customers are informed in the agreement that their deposits are not insured and that they may lose all of their assets. Customers must also agree to resolve disputes through “binding arbitration,” waiving their right to class-action litigation.
“You and Gemini agree to arbitrate solely on an individual basis,” the agreement states. “You and Gemini also agree and understand that this Authorization Agreement does not permit class action or private attorney general litigation or arbitration of any claims brought as a plaintiff or class member in any class or representative arbitration proceeding or litigation (“Representative and Class Action Waiver”).
Despite this provision, Bloomberg reported that a group of disgruntled investors recently met on Telegram to discuss the possibility of filing a class-action lawsuit against Gemini. It is unclear whether the Telegram group members are the plaintiffs in the lawsuit, which was filed on December 27, 2022, in the Southern District of New York.
Customers on Gemini are looking for answers after Genesis Global Capital, the exchange’s Earn partner, halted withdrawals earlier this month. This suspension has prevented Earn customers from accessing nearly $1 billion in deposits.
Genesis declared a liquidity crisis in November 2022, following the failure of the hedge fund Alameda Research, which left the lender with unpaid loans. Three Arrows Capital, a troubled cryptocurrency hedge fund, owes Genesis Asia Pacific approximately $1.2 billion. Genesis’ creditor committee is being advised by Houlihan Lokey, a restructuring consulting firm.
Some Earn customers expect the Winklevoss twins to deliver, while others are challenging the Harvard alums.
Eric Asquith, an investor, has filed an arbitration claim against Gemini and Genesis, accusing Gemini of fraud and demanding that his funds be returned. He has over a million dollars in deposits and interest accrued in Genesis. Investors, including Asquith, have argued that Gemini’s regulatory commitment, combined with the reputation of its larger-than-life founders, dampened investor due diligence.
Gemini informed Earn customers on December 20, 2022, that Houlihan Lokey had presented a plan to make Genesis creditors whole. Since then, the company has provided scant information on asset recovery, but expects a’more comprehensive update by the end of the week.’
