Federal Judge rules SEC lawsuit against Gemini and Genesis to proceed

A federal judge in New York, Edgardo Ramos, has dismissed motions by crypto firms Gemini and Genesis to terminate a lawsuit filed by the United States Securities and Exchange Commission (SEC), allowing the case to move forward. 

The court’s decision, detailed in a 32-page order from March 13, stems from allegations that the Gemini Earn program offered and sold unregistered securities.

The SEC’s lawsuit, initiated in January 2023, argues that Gemini Earn, a product designed to generate yield on crypto assets, constitutes an investment contract under the Howey test, a legal standard used to determine if an arrangement qualifies as a security. 

According to the SEC, Genesis did not segregate customer assets but instead pooled them on its balance sheet, lending them to institutional borrowers at its discretion. This setup led to customers’ profit expectations being tied to Genesis’ efforts, further supporting the SEC’s stance that the Gemini Earn agreements are akin to notes, necessitating loan repayments with interest.

Despite the court’s decision to let the SEC’s lawsuit proceed, it does not equate to a judgment in favor of the regulator. The parties involved will continue with evidence gathering as the legal process unfolds.

In the lead-up to the lawsuit, Genesis had reached a settlement with the SEC in a bankruptcy court filing last month, agreeing to a $21 million fine. The lawsuit also highlighted that in November 2022, Gemini Earn had around 340,000 customers and managed $900 million in assets. That same month, the collapse of FTX led Genesis to “temporarily suspend” withdrawals from Gemini Earn, citing market turmoil and liquidity challenges. Following the SEC’s lawsuit, Genesis filed for bankruptcy, and in February, Gemini agreed to return $1.1 billion to Gemini Earn customers in a settlement facilitated by New York’s financial regulator during Genesis’ bankruptcy proceedings.