Top Crypto Firms Named in $1B Fraud Lawsuit | Hacker News Reader

Top Crypto Firms Named in $1B Fraud Lawsuit

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55 pointsbelter59 comments

I'm so annoyed at myself that I fell for the Winklevoss's unregistered security [1] Gemini Earn program. It really should have been obvious to me that the 7+% interest they were offering (while every real bank was doing like 0.5%) was unsustainable, but I kept seeing FDIC-backed flashed on their website in regards to GUSD and didn't do the ample due diligence before giving them my money.

Now I'm somewhere about $13,000 poorer, and hopefully slightly wiser. It makes me glad that these douchebags might actually have to pay consequences for their actions.

[1] Not my opinion, but the SEC's https://www.sec.gov/news/press-release/2023-7

It's not entirely your fault. This is what regulators and regulation are for, which obviously should've moved much faster to avoid consumer and investor harm.

It is unreasonable to expect individuals to be sophisticated capital market participants in the face of fraudulent marketing efforts. There is a reason fiduciaries exist [1], as well as whole piles of capital market licenses [2]. This is a natural outcome of less than honest folks leveraging information asymmetry in a complex system.

[1] https://www.consumerfinance.gov/ask-cfpb/what-is-a-fiduciary...

[2] https://www.finra.org/registration-exams-ce/qualification-ex...

Sure, regulators could have moved faster, but the crypto community was pushing out so much bullshit so quickly that even excellent regulators would be overwhelmed short of an all-out ban which would require enforcement to have any teeth anyway.

And as we are seeing with all the FTX fallout, of course they were giving money to all sides of politicians along the way.

Yes good regulations are needed to prevent this sort of garbage, and I fully support that, but there is still some amount of responsibility on people to distrust "too good to be true" scams especially on new complicated "just trust me bro" schemes. There were tons of people warning against this all along.

Yeah, and you know, I'm a yuppie software engineer with a relatively well-diversified investment portfolio (and a good amount of savings in safe things like T-Bills), so I'll be totally fine, albeit extremely annoyed.

What's really upsetting is this lie that these crypto people push, acting like cryptocurrency is the secret way to leave poverty, and that this is the future of finance, and that investing with "Gemini Earn GUSD pays like 50x more than traditional bank interest", in combination with the FDIC-insurance for GUSD on their site. I think it's possible that people put in more than they could afford to lose into GUSD and Gemini Earn. I think it's also possible that people transferred most of their savings from traditional FDIC-insured banks in order to take advantage of Gemini Earn. And I think it's very possible that this is going to hurt the poorest individuals substantially more than anyone else.

I generally don't advocate for violence, but a large part of me really hopes that the Winklevoss twins each step on a Lego block every morning.

Might I make the meta comment that this is a heart-warming thread?

The ayes have it and the motion is carried.

> What's really upsetting is this lie that these crypto people push

Yeah, thieving scum are upsetting to normal good people.

The crypto sales people were obvious, brazen, proud con artists, and everyone talked about what a scam it was. I'm sure some especially unsophisticated people were unaware of it, but plenty knew and decided to take the risk anyway.

> everyone talked about what a scam it was

The problem is, 'everyone' didn't. Mostly-reputable finance sources were cranking out article after article on smart contracts and the crypto ecosystem etc which made the whole thing sound just as legitimate as any other part of the regulated sector.

A truly immense amount of whitewashing occurred and trickled down from on high, it was everywhere and it continues to this day.

Unfortunately blatant scamming appears to have become very normalised in what were previously relatively high-trust societies.

I think that rejecting and trashing the 'high-trust' aspects are a specific goal of the broader cultural movement of which crypto scams are just one symptom.

Yup, and it's coming from a few specific places.

I actually blocked reddit on my router the other day after encountering way too many 'if you see somebody stealing, no you didn't' comments in a thread. It really was the tipping point and something I should have done a long time ago.

If you mean it's also coming from the left (?), I don't think that's meaningful. The crypto uber-libertarian, ubermensch culture runs much of SV, significant parts of Wall Street, has run the White House, etc. The left-wing side has power - where? Nothing within orders of magnitude of the other source.

I lost $11k in Gox, the entire sum of what my father had saved up for me after many years. Feeling the realization of what I’d done was traumatic, and in hindsight $11k was an ok price to pay for such a lesson. It takes many years to get over the self-blame, but once you do, you end up being much more shrewd.

I’d like to say that it made me make better bets, but honestly I never speculated again after that. And it’s easy to imagine me having never learned that lesson and dumping >$40k of savings into TSLA shorts (or other obviously-crazy-in-hindsight plays) and getting hit harder at a time when I can least afford it.

Also watched a friend along with a former coworker both get rich on bitcoin and live the easy life. Last I heard from the friend, he was still trying to find a relationship he liked, and the former coworker seems to spend all his time and energy talking about nothing but bitcoin on Twitter. I’m grateful I channeled that into family and learning ML instead.

I don’t know if any of this is helpful context for you, but the overall point is that it’s entirely possible to view this as a positive event, even though it feels really crummy right now. It’s hard to predict how it will affect your decisions in the long run, and you might end up much happier than you otherwise might’ve been. Obviously there’s a measure of self-deception here, since almost everybody will try to jump through mental hoops to justify any poor decision that causes great harm to their life. But once you stop justifying it and start healing, you’ll start to realize that $14k is a rounding error in the grand scheme of life (and that we’re very fortunate to be able to feel like that about such a sum of money), and that at the very least it’s not worth kicking yourself for too long.

> get rich on bitcoin

And what do they pay for all their rich-person-lifestyle stuff with? USD (or the fiat of whatever nation they reside in).

When will I finally be able to pay for my Starbucks latte with partial Microsoft stock?

Naturally!

Bought with Bitcoin couriered in without having to endure onerous capital controls.

Are capital controls as onerous as the poor liquidity and fraud minefield of crypto?

It's a tradeoff, taanstaafl etc.

Getting rich on bitcoin basically means speculation, buy low and dump on high.

You can say the same about the entire stock market, but Bitcoin is fundamentally different. With stocks the most you can do is "technical analysis" which I am not convinced is real because its data based entirely on speculation.

There is nothing to speculate with Bitcoin. Like being a data analysis for a company, you can monitor the entire network for user behavior. You can know when large entities flow funds to and from exchanges. You can monitor user behavior over time and see what is going on with the supply and understand which entities are accumulating and holding supply for long-term. This is called "On-Chain" analytics but it is really no different than data science within a company.

This is only possible because of Bitcoin's ledger being open for anyone to see (IE: https://mempool.space/ ). Companies like Blockware and Glassnode are taking this data, enriching it, and identifying which Bitcoin belongs to which entities, not just that there is "an" entity that owns it, but who.

Did you just ask an LLM to produce some random crypto slang?

Where's the slang? This is just normal day trading terminology

How did you "lose $11k" given the bankruptcy process, bitcoin's rise since, and the vast majority of creditors getting greater than their initial investment back due to appreciation?

Did you choose not to file a claim or sell your claim?

Because it hasn’t paid out yet, I didn’t expect diddly squat, and I have a family in the meantime? If you lost an iPad and found it ten years later magically transformed into the latest model, how would you feel if someone went up and said actually you didn’t lose your iPad?

Oh, not to mention that it’ll probably pay out 20% or less, and although it’s true that 20% of that is still more than the USD I put in, it was only through sheer luck that I’m getting paid in BTC instead of USD. Gox had both options and I happened to buy back in right before the market shut down.

not sure if due diligence would've helped you. you would've had to foresee the entanglement leading all the way back to FTX and predicting their collapse. really crazy that Gemini can still operate in new york with so many customers jammed up

I definitely should have investigated their FDIC claims more thoroughly, though I do think being misleading about that should have pretty strong consequences.

I'm also kind of surprised NYC hasn't suspended their license yet, at least until the SEC lawsuit comes to a conclusion.

It’s strange to see people argue that the claims about crypto firms being obvious crooks are still not credible in retrospect of them having collapsed.

> It really should have been obvious to me that the 7+% interest they were offering (while every real bank was doing like 0.5%) was unsustainable

Gemini may be a victim here too, as TFA explains: it's Genesis that ran the scam (with DCG being Genesis' parent company).

I think the Winklevoss brothers honestly "saw" Bitcoin before most, just like they saw FaceBook before Zuckerberg stole it from them (Zuckerberg lost not just one but two lawsuits against the twins).

They may have been blinded by Genesis/DCG: just like, say, the New-York Times and Forbes got blinded by SBF / FTX.

But I don't think it's fair to say, especially while there's a lawsuit ongoing, that you "fell" for it: they are likely just victims of Genesis (and the lawsuit shall try to determine if that's the case or not).

Now they may have sold unregistered securities, but that's very different compared to downright theft (like Genesis or SBF or so many others did).

That said I'm sorry about the $13 K loss and if it's any consolation I told someone close to GFTO of BlockFi because these 8% were obviously a scam (and I don't think BlockFi was guilty: they fell for the Genesis scam) and he managed to get his 1 BTC out of BlockFi before things went south (not too sure what eventually happened to BlockFi and people who had funds there).

Yes, but they may get sacked for this:

> "But according to the lawsuit, in the summer of 2022, some top Gemini staff became worried enough to withdraw their own funds.

If senior executives traded their own assets based on non-public information, it'll be hard to claim that they are just a victim of Genesis/DCG and had no idea this was happening.

I can agree with most of what you're saying, but there is a sticking point that I take issue with.

> Now they may have sold unregistered securities, but that's very different compared to downright theft (like Genesis or SBF or so many others did).

I mean, is it? They compared it directly to a bank account [1], and mentioned FDIC insurance for GUSD [2]. They might have not meant for my money to be stolen, but I am quite confident that they were playing fast and loose with terms in order for me to believe that there was lower risk in this than there actually was. There's actually a word for "purposefully making someone believe something that's not true", and it's called "lying", and if they're lying then I kind of have to assume some nefarious intent.

That said, I can broadly agree that maybe they're just morons? I'm probably an idiot too, but it's a little different for a software engineer without any financial training vs. two adults trying to start "legitimate" crypto exchange without doing the proper due diligence to make sure their partners are also legitimate?

[1] https://pbs.twimg.com/media/F1lMbFqWIAAcpKc?format=jpg&name=... [2] https://web.archive.org/web/20211201224824/https://www.gemin...

GUSD is FDIC insured though. GUSD deposited in the 'Earn' program is not. Just like your bank account dollars are no longer FDIC insured once you buy bonds with them.

> GUSD is FDIC insured though.

Even that is a somewhat dubious claim. They even stopped emphasizing that one their website so I suspect they realize that as well.

> Just like your bank account dollars are no longer FDIC insured once you buy bonds with them.

Then their ads and tweets shouldn't have been comparing it to a bank account. That's getting into unregistered security territory. Which again, not my opinion, but what the SEC is alleging.

Crypto tokens are effectively the modern version of penny stocks, the thing you'd see garish ads on MotleyFool.com years ago. It's selling the dream of above average returns to retail investors who don't know any better, a game as old as time.

If films like Boiler Room and Wolf of Wall Street were to be made today, they wouldn't show brokers cold calling retirees, but rather people furiously typing away in Discord rooms, inflating the mirage until the insiders are able to cash out.

The difference is that most penny stocks aren't scams themselves and represent ownership of actual revenue generating businesses. There are some completely fake businesses, and low market capitalization increases the risk of pump-and-dump scams, but those are the minority. Whereas cryptocurrency doesn't generate any revenue: it is always a scam and valuations can only ever be sustained by the greater fool theory.

https://www.investopedia.com/terms/g/greaterfooltheory.asp

"Boiler Room" is really an excellent film, and not widely seen. A great lesson on how some (but certainly not all) stock brokerages work.

They should do a sequel to the Social Network starring the same actor who played the twins in that one for this chapter of their life.

Hard to say but I think Arnie Hammer might have aged worse than the Winklevii...

At this point it'll be news if any firm manages to get out unscathed.

Probably Kraken if I had to guess.

They're trying to be as by the book as possible, even though the SEC and other entities aren't making it easy.

Depends how far back you go, they banked with the Panamanian money launderer Crypto Capital Corp back in the day.

CCC president Ivan Manuel Molina Lee was arrested in 2019 in Poland and Reginald Fowler (formerly part owner of the Minnesota Vikings) pled guilty last year and is facing 20 years.

I’d speculate if the government dug around they could rustle up some wire possible fraud. It’s my understanding the shadiness of CCC was not a secret.

https://decrypt.co/collections/the-crypto-capital-scandal

Give it time.

That was partly Gemini's appeal as well, that they were working with regulators to legitimize crypto. That might have been their intent but it's certainly not the result.

> a retired 73-year-old grandmother among the 232,000 investors who were victims of the alleged fraud.

Why/how did she come to that decision is my only question from this whole article. Perhaps I am too dumb to understand why people invest into shaky things(cryptocurrencies, MLM scams and what nots) or perhaps people just allow others to control their assets.

Perhaps she was swayed by Matt Damon.

How are those spokespeople not liable for fraud?

It depends on their relationship with the fraudulent enterprise. In the most boring fact pattern, Matt Damon is no different legally from the Kinkos branch that runs off investor one-sheets; he's just a vendor providing a service. What tips you into potential liability is actual knowledge of fraudulent conduct (or of recklessness or negligence giving rise to that outcome).

Where spokespeople have deep business relationships with their clients --- as is the often the case with Ryan Reynolds --- they're potentially reachable by plaintiffs. So far as I know, Reynolds hasn't sponsored anything particularly shady, though.

In a bit of fairness, I kind of blame the "investing media". If you watched CNBC from ~2019 until about 2022, they were listing $BTC like it was any other ticker on the stock market.

I cannot speak for this grandmother, but I cannot blame someone who doesn't really understand what cryptocurrency is for just assuming it's "some techy version of a stock", especially as more traditional brokers like Venmo and CashApp and PayPal start handling crypto as well.

Most likely a younger family member who had made some quick gains and offered to invest part or her savings as well.

It's called "Low financial and social literacy"

There are lots of people who see a website say "You will make free money" and their brain just skips over the part where you normally would go "that doesn't make any damn sense". They are usually the same people who spread rumors as "I know a guy who knows a guy who definitely knows a guy at a school where they had a litterbox for furry kids". It's no different to how some people just REALLY REALLY suck at basic arithmetic, or others can read the same page of a book ten times and struggle to pick out what happened.

We ALL have some semblance of this. We are ALL fallible bags of chemistry following really dumb patterns that evolved around surviving the wilderness, where being "correct" was not nearly as important as surviving until tomorrow. It's why I just don't understand the willingness to let people suffer "because why should I help them".

We need strong regulations, strong consumer protections, strong medical systems, and strong education systems because being born really really freaking stupid should doom you to a bad life.

Echo chambers are very, very real and it’s easy to get caught up when everyone around you is drinking the kool-aid.

I moved to a new city a couple years ago and met up with some other devs as a way to make new friends. There were 4 or 5 of us going out for beers and the discussion inevitably turned to crypto. I’ve been a skeptic for many years and when asked about my crypto holdings, I politely said that I wasn’t invested or interested.

One guy in particular kept telling me that I was going to get left behind and that I really needed to buy in before it was too late. I told him that I didn’t trust the market and he went on about how corrupt the Fed is. He was really awkward, and at times, emotional about it.

Needless to say, friends were not made that night and I’m glad that the peer pressure aspect doesn’t bother me because a lot of people would cave in that situation.

Kind of like the apocryphal story of Joe Kennedy and the shoe shine boy’s stock tips,

The crypto SuperBowl ads were a signal that it was about to come crashing down.

Basically, the smart money was looking for naive suckers so they could cash out.

Calling run-of-the-mill pump and dump schemers "smart money" offends the sensibilities. It's "smart" only in the most anti-social sense of the word, like believing it's "smart" to act in bad faith as long as you get some benefit from it.

That unfortunately seems to be the modern definition of 'smart.'

> The crypto SuperBowl ads were a signal that it was about to come crashing down.

Should we short Coca Cola, Nike and Pizza Hut because they too had superbowl ads?

“Has a superbowl ad” doesn’t seem like a great signal to me, other than in retrospect when it’s easy to spot a loser.

Coca Cola, Nike and Pizza Hut are products that everyone buys. It makes sense they would advertise during the Superbowl. But I don't personally know anybody non-techy who knows anything about crypto, never mind has any use for it (although I did have one friend who almost fell victim to an Internet scam that mentioned crypto). So it makes less sense why they would be advertising it on such a huge scale, before most average people had even come into contact with it (in a non-criminal context, anyways).

What I never got was why I would want to use these things as currency. Cryptographically write down everything I ever do financially? I am going to go with no on that one. I do not really care I bought a stick of gum 20 years ago...

These things strike me as a privacy nightmare.

If I saw someone pumping crypto wearing a RATM shirt - and knew they were a rich, Harvard/Oxford-educated finance bro - I would run soooo fast

Crypto and fraud is now a very iconic duo, just like Romeo and Juliet.

Can someone who fell for the 7%+ return explain which part you got tricked by? Was it just not registering as red flag to offer such a high, risk free rate? Or did you believe it wasn’t risk free, but thought the risk of it turning into this situation too low/zero?

How much of the decision was based on using the claimed FDIC insurance as a limiter on the downside risk?

I don’t mean any antagonism by these questions, I’m personally curious what is the thought process to get involved with this investment option.

The FDIC insurance seemed like a no-brainer <pun intended seen for what it is now>.

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