By Dietrich Knauth
NEW YORK (Reuters) - Crypto lender Genesis Global said on Tuesday a New York civil fraud lawsuit could lead to a bankruptcy liquidation that does not resolve its claims against parent company Digital Currency Group (DCG).
New York Attorney General Letitia James sued cryptocurrency firms Genesis Global, its parent company DCG, and former partner Gemini Trust Co on Oct. 19, alleging that they defrauded investors of more than $1 billion through a jointly run investment program called Gemini Earn.
The lawsuit seeks to ban all three cryptocurrency firms from the financial investment industry in New York, which would imperil their efforts to reach a longer-term settlement.
Rather than await the outcome of the lawsuit, Genesis intends to propose a "no deal" bankruptcy plan to distribute available crypto assets to customers and set up a process to preserve litigation claims against DCG and others, Genesis attorney Sean O'Neal said at a court hearing in New York.
"It's not an easy decision, but it is an obvious decision," he told U.S. Bankruptcy Judge Sean Lane. "That was forced upon us by the New York Attorney General's complaint."
Genesis believes creditors would be better off under a bankruptcy plan that includes a DCG settlement, but the company is running out of time to finalize a plan and send it to creditors for a vote, O'Neal said.
DCG will continue to engage in settlement talks in hopes of reaching a better outcome for Genesis creditors, but it is "fully prepared to defend and win" if forced to litigate Genesis's claims, a DCG spokesperson said by email.
"Ultimately, the litigation plan is a failed resolution that will result in far lesser recoveries for creditors."
Gemini, run by the Winklevoss twins best known for their legal battle against Meta Platforms (NASDAQ:META) CEO Mark Zuckerberg, had previously sued DCG over the failure of the companies' crypto lending partnership.
Genesis Global filed for bankruptcy in January after the collapse of key counterparties including FTX caused it to freeze customer redemptions in November 2022.