A federal judge has deemed the allegations by the United States Securities and Exchange Commission (SEC) that Gemini and Genesis engaged in the sale of unregistered securities through their Gemini Earn program substantial enough to proceed in court.
The ruling came from Judge Edgardo Ramos of the New York District Court on March 13, denying motions by Gemini and Genesis to dismiss the SEC’s lawsuit in a detailed 32-page order.
The lawsuit, initiated by the SEC in January 2023, claims that the Gemini Earn program, a cryptocurrency yield-bearing product offered by Gemini and managed by Genesis, involved offering and selling unregistered securities.
Judge Ramos highlighted that the program appeared to meet the criteria of an investment contract according to the Howey test, which determines what constitutes a security.
Genesis was specifically noted for not segregating pooled assets on its balance sheet and lending these funds to institutional borrowers based on its discretion, making customers’ profit expectations reliant on Genesis’ efforts.
Furthermore, the court found reasonable the SEC’s position that the agreements underpinning Gemini Earn could be classified as notes, a type of debt security that mandates the repayment of loans with interest.
Judge Ramos stated, “At this stage, under both tests, the court finds that the complaint plausibly alleges that defendants offered and sold unregistered securities through the Gemini Earn program.”
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This ruling does not imply a judgment in favor of the SEC but allows the regulatory body to proceed with its case, requiring the collection of further evidence.
The developments follow amidst a backdrop of challenges for Genesis and Gemini, including Genesis’ bankruptcy filing after the SEC’s lawsuit and subsequent agreement to a $21 million settlement with the SEC noted in a bankruptcy court filing last month.
The controversy surrounding the Gemini Earn program, which boasted around 340,000 customers and $900 million in assets under management as of November 2022, intensified following the market turmoil caused by FTX’s bankruptcy.
This turmoil led Genesis to halt withdrawals from Gemini Earn, citing liquidity issues.
In a move to resolve customer grievances, Gemini agreed in February to return $1.1 billion to Gemini Earn customers via a settlement in the Genesis bankruptcy proceedings, coordinated with New York’s financial regulator.
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