Crypto Billionaire Accused of Defrauding Creditors, Propelling Industry's 2022 Collapse — WSJ

By Kevin T. DuganIn the depths of the brutal 2022 meltdown in the digital-assets market, billionaire crypto entrepreneur Barry Silbert had a message for investors like Mark Cuban who were worried about getting wiped out: Stay calm, your money is safe, we're solid.His own actions didn't show the same confidence, according to new filings in lawsuits filed by creditors in Silbert's now-bankrupt lending business, Genesis Capital.That April, Silbert demanded repayment of more than $100 million in loans that he and the companies he controlled had made to Genesis, according to the creditors, who are alleging a wide-ranging fraud. The calls started one day after Silbert received a dire warning of a "market crash" from consulting firm Oliver Wyman, they allege.Silbert was one of the crypto market's first moguls. Founded in 2015, his Digital Currency Group built a large venture-capital portfolio, launched an asset manager that oversaw crypto funds (Grayscale Investments) and, through Genesis, lent to other investors.Creditors allege that Silbert ran his companies with lax controls and misrepresented the depth of their financial problems so he could personally profit. They also said Silbert, his closest executives, and his brother Alan withdrew millions of dollars in loans while telling investors to keep their money on the platform. His actions, they argued, led to Genesis's failure."Silbert and his cronies recklessly operated, exploited, and then bankrupted Genesis following a spectacular campaign of fraud and self-dealing," wrote the creditors, who represent the bankrupt Genesis Capital and its Asia Pacific arm. The 202-page filing, made public Monday in Delaware Chancery Court as part of ongoing proceedings in a case the creditors brought last year, is partially redacted, with internal messages and other company details kept out of the public eye. More information may be unredacted in the coming weeks."This is a baseless lawsuit that recycles the same tired, two-year old claims in an opportunistic attempt by sophisticated investors to extract additional value from DCG," a DCG spokeswoman said in a statement. "We worked in good faith with a wide range of stakeholders to try to achieve a comprehensive resolution of the DCG-related aspects of the Genesis bankruptcy. We will vigorously defend ourselves against these spurious claims."The filings rewrite the history of the 2022 crypto winter, a volatile period that culminated in the collapse of Sam Bankman-Fried's FTX. According to the creditors, the trouble started in 2021, more than a year ahead of the marketwide selloff, when DCG's Grayscale Bitcoin Trust, a fund that held bitcoin, started to trade at a discount to the digital currency.The slide pushed Genesis into technical insolvency, and eventually helped trigger the crypto market's ferocious downturn, the creditors said. Throughout 2022, Silbert, his companies and his business associates bled the lender of more than $800 million in more than 140 transactions, the creditors said.The creditors are seeking $2.3 billion in Delaware Chancery and Manhattan federal bankruptcy courts, and want to be paid in digital currencies that may continue to rise. DCG has previously settled with the Securities and Exchange Commission for its oversight of its lender, but has been at odds with Genesis over a settlement facilitated by the New York attorney general's office that would return $2 billion to customers who lent the platform money. DCG has denied wrongdoing in the continuing civil fraud suit against DCG filed by the attorney general's office.The crypto market's 2022 collapse erased some $2 trillion in paper holdings. At the time, many investors believed that the problems started that May when two crypto tokens — the TerraUSD stablecoin and the Luna token — lost about $60 billion. The creditors argue that the seeds of the selloff were first sown much earlier — in about February 2021, when crypto markets were still on a bull run but the Grayscale fund was starting a yearslong decline.In early 2021, Grayscale Bitcoin Trust was one of the few vehicles that enabled investors to buy access to bitcoin without owning the digital currency itself. But it charged a high fee — 2% on the assets it managed — and subjected new investors to a six-month lockup period before they could sell.Genesis was then still a behemoth, too. That year, it originated $130 billion in loans to crypto investors, a nearly sevenfold increase from the year before.In 2021, the single largest holder of Grayscale Bitcoin Trust was Three Arrows Capital, the filings claim. The creditors say the hedge fund took advantage of the market distortions created by the lockup period, which had helped keep the Grayscale fund's market value floating above the value of all the bitcoins it owned.By February 2021, Grayscale Bitcoin Trust no longer traded at a premium. Nevertheless, Genesis encouraged Three Arrows to pledge its Grayscale Bitcoin Trust holdings to borrow more, even as the fund's price continued to slide, the creditors allege. A representative for Three Arrows Capital couldn't immediately be reached for comment.As the trust's premium disintegrated to a discount, DCG pushed Genesis to mismark the value of the fund when it was used as collateral, the creditors claim. DCG also forbade the lender from selling or hedging Grayscale Bitcoin Trust. The trust's collapse left Three Arrows underwater, but the hedge fund was still allowed to use its trust holdings as collateral to borrow even more from Genesis, according to the filings. The hedge fund would become one of the largest holders of TerraUSD and Luna, which were quickly becoming popular.In April of that year, Oliver Wyman shared with Silbert and DCG a report that portended the market meltdown, offering a series of scenarios of the turmoil that would follow if some of the company's largest trading partners went bankrupt, and the "ripple effects across [the] broader crypto market." DCG, the consultant wrote, was likely unprepared.Silbert's response to the consultant's warnings came just one day later, when he called $4 million in loans he made to Genesis, the creditors allege. And in the days that followed, DCG and its international subsidiary demanded Genesis repay another $125 million.In the months that followed, Oliver Wyman's report would prove prescient. Genesis, as the world would soon learn, had the most exposure to Three Arrows Capital.After Three Arrows collapsed in June 2022, Genesis had a $1.1 billion hole in its balance sheet. This also set off a race to keep the company afloat by the end of the month.When crypto prices began to fall sharply, DCG told its own clients not to pull their money, according to the creditors. These requests convinced two of its largest customers, the exchanges Bitvavo and Gemini, not to pull more than $3 billion. A Genesis executive told Cuban, the "Shark Tank" star who was then an owner of the Dallas Mavericks, that the lender was facing "no liquidity issues," according to the new allegations. Cuban said he had nothing to add regarding the filing. "First I've heard of it," he said in an email.Silbert would send a message internally that "the hole in Genesis equity due to the Three Arrows exposure is something...we will need to fill by 6/30," according to the filings.The creditors allege that, amid this collapse, DCG turned to its investment bank, Ducera Partners, for help, and the firm soon helped put together a $1.1 billion "promissory note" that was due in 10 years, at a 1% interest rate. The bank, which is named as a defendant, "clearly understood that the June 30 Balance Sheet was materially false and misleading," the creditors claim.Representatives for Oliver Wyman didn't immediately return requests for comment. A spokesman for Ducera declined to comment.