Behind the Bastards - How The Winklevoss Twins Lost A Billion Dollars

Episode Date: March 1, 2024

Though the Winklevoss brothers are best known for their role in the early days of Facebook, you'll be surprised to learn that they recently lost customers at their cryptocurrency exchange over a billion dollars through a shady loan scheme. In this episode, Ed Zitron walks you through how the two identical riverboat giants went from being conned by Mark Zuckerberg to conning over a hundred thousand people into putting their cryptocurrency in the hands of the world's worst investor.  Better Offline Theme Song Spotify Pre-Save Link - https://distrokid.com/hyperfollow/mattosowski/better-offline-theme-song-2?utm_campaign=website&utm_medium=Email+&utm_source=SendGrid See omnystudio.com/listener for privacy information.

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That's all for it. So you're likely aware of the tale of Sam Bankman Free, the curly-haired fraudster who conned millions of people out of billions of dollars, crushing the cryptocurrency markets in the process. He did so by creating a cryptocurrency exchange called FTX, where people could buy things like Bitcoin and Ethereum, except it had one little catch. He was stealing the customer funds, keeping only a little around at any given time for people to withdraw. This meant that when hundreds of thousands of people went to withdraw their funds at once, the entire

scheme fell apart and FTX collapsed. Bankman Fried currently sits in prison awaiting sentencing after being convicted on several counts of fraud, including wire fraud and wire fraud conspiracy, which is appropriate, as him and his co-conspirators at one point genuinely used a group called wire fraud chat, and I am not kidding. Yet this isn't about SPF. There are actually two other villains in this story. Two villains of the recent crypto crash that you might have missed, despite the fact that they're both 6'5 and lost their customers over a billion dollars. I'm talking about Cameron and Tyler Winklevoss, two brothers both alike in dignity and appearance, the gay notoriety by suing Mark Zuckerberg of Facebook now known as Metta in the early days

of the social network back in 2004. In the Winklevies defense, Zuckerberg digs screw them as a student at Harvard, where he pretended to work on the Winklevoss' social network, Harvard Connect, while actually working on the earliest version of Facebook, effectively sabotaging the competition from within. When Facebook finally launched, the identical Moist Riverboat giants alleged that Zuckerberg had stolen their idea for a social network and used their code, resulting in a years-long back-and-forth and a $65 million settlement that the Winklevosses were forced by a court to accept in 2011.

I think that had Zuckerberg kept his filthy little hands to himself, we'd likely never have heard of Tyler and Cameron Winklevoss. And I believe the world would have been a better place. If they weren't already, the Winklevoss twins were now millionaires. In 2010, Aaron Sorkin's Oscar-nominated retelling of the Facebook origin story, the social network, would raise their profiles even further, portraying them as victims of a calculated, misanthropic opportunist. Mark Zuckerberg, of course.

You could almost feel sorry for them, even if they were portrayed by Armie Hammer, the famous cannibalism fan and, uh, potentially perverted enjoyer of other things too. But you really shouldn't feel sorry for Armie Hammer, but you definitely shouldn't fool the Winklevosses either. In the years following their legal dustup with Mark Zuckerberg, the Winklevosses either. In the years following their legal dust-up with Mark Zuckerberg, the Winklevoss twins remained active in the tech scene, launching an investment fund in 2012 that focused on

early-stage consumer-centric startups. A year later, they acquired $11 million of Bitcoin, and while it's unclear exactly how much they bought, a New York Times article about their acquisition, which of course featured no verification of their actual purchase, ran on April 11th 2013, when Bitcoin was around $114 apiece, meaning that the Winklevoss brothers likely bought somewhere in the region of 90,000 Bitcoin. Based on today's valuation, those holdings would be worth in excess of $3.8 billion. It was a big, stupid bet, and it absolutely paid off. In the same year, they'd pursue creating a Bitcoin exchange traded fund, also known as an ETF. A thing that allows

you to invest in something, in this case Bitcoin, much like you would trading a stock, without all of the complexity and risk associated with actually owning the thing in question, in this case Bitcoin. While this never materialized, the Winklevoss is cosied up with New York's Department of risk associated with actually owning the thing in question in this case, Bitcoin. While this never materialized, the Winklevoss is cozied up with New York's Department of Financial Services and realized they could found their own cryptocurrency exchange to rival the other American rival Coinbase, which had launched two years earlier. A cryptocurrency exchange, as I've discussed, is a place where you can buy and sell your crypto using generally a credit card or a

debit card. At the time, very focused on debit cards though. In 2015, they launched Gemini. What would eventually become a major and highly respected cryptocurrency exchange that, from the very beginning, tried to swaddle its ugly and often fraudulent industry in a blanket of legitimacy, winning approval from New York state regulators to provide certain financial services. Gemini now sits as one of the top 10 largest cryptocurrency exchanges in the world and one of the few remaining American exchanges. One might be forgiven for thinking they were trustworthy. And they'd be wrong.

Towards the end of 2020, the price of cryptocurrencies began to climb rapidly, with Bitcoin climbing from $19,000 in December to over $40,000 in January, cresting over $50,000 of Bitcoin by March 2021. The cryptocurrency industry would see more venture investment in the first quarter of 2021 than it had in the entirety of 2020, with 129 crypto and blockchain startups receiving $2.6 billion in the space of three months compared to 341 cryptocurrencies receiving $2.3 billion in the entirety of 2020. As an explanation for those listeners that don't know, venture capital investments are generally investing in equity in the company.

They buy a piece of the company for a certain amount of money. Venture capitalists, of course, taking the risk that the company will fall apart. What differs with a lot of these companies is that they will sometimes sell you a token. This isn't necessarily relevant for this story. I just want you to know the fact that this industry, at its core, is based on the idea

of basically selling securities, you know, like stocks, but hiding from the law and conning people. That's not how the Winklevosses fuck people over, though. No. So another thing to realize about these crypto companies is that they didn't really do anything. They'd sell tokens, they would claim that they would build something in the future on something called a roadmap, they would sometimes have a white paper which would describe some underlying technological stuff, but there are really none of them that had a feature

or a function. They were mostly just non-entities that promise things, but because you could trade their tokens which, much like a stock, should have been regulated by the government, but were not because they were such new financial devices and objects. Well, this whole market was growing and growing and growing. And along with it, the Winklevosses were getting even richer. Then they got greedy. To understand how the Winklevosses bungled a billion dollars, I have to give you a little bit of background on the last few years of hell in the cryptocurrency industry.

In February 2021, Gemini, that's their cryptocurrency exchange where you could buy and sell different cryptocurrency, began something called EARN, their EARN program. It was an interest earning program where users could feed their cryptocurrency like Bitcoin, for example, into Gemini through a few clicks and earn interest. And you should put quotation marks around those. So you would get a percentage return on the crypto that you put into Gemini earn. One might be forgiven for believing that as a result, they were putting money into some sort of secure, protected account like a certificate of deposit.

They really were not. I must be clear how not like a bank this was. Gemini, a New York based trust company that promised security protocols on par with those offered by top financial institutions, claimed to generate this interest by working with and I quote, institutional borrowers who were partners who had been vetted through Geminis and I quote again, risk management framework. What's also important to know is that none of what you're about to hear was a security issue.

It was entirely the result of two greedy riverboat giants pissing away money because they were greedy little pigs. And as a result of trusting this company that was a trust company, a New York based trust company, a regulated one allegedly, but not regulated for the thing that I'm about to tell you, people trusted them. And as a result, customers deposited somewhere between 700 million and a billion dollars of funds into Gemini earn, believing that Gemini was offering something akin to an interest generating savings account. After all, Gemini had institutional partners and that is plural,

that's what they said, and they had vetted said partners through their collateralization management process, which means in the case of a loan, you collateralize the loan, you give them something, for example, you would collateralize the loan for a house by giving them a down payment of 20%. In the case of a loan, you might borrow a certain amount of money, but put some money down so they have something in the event that you default on the loan. In plain English, they were claiming to work with institutional investors like banks and hedge funds that would pool Gemini-earned customers, so people giving them their Bitcoin Ethereum and all that.

They would pool those resources to allow them to get involved in big trades with better returns than users would be able to get on their own. Indeed, classical financial markets have larger loans that have preferential rates and get involved in deals that the regular customer would not be able to. That's what people thought they were getting. The other suggestion was that Gemini had diversified its risk. And there's actually an archived version of the Gemini EarnedPage in 2021 that said that Gemini worked with multiple accredited third-party borrowers to do so. As a result, as a customer, you may believe,

well, if one fails, that won't be the end of the world. Right? It's also important explaining that the way that a lot of these companies in crypto made their money was by loaning it to others in the form of margin trading, where investors, both retail and institutional, borrowed a massive amount of cryptocurrency in return for collateral, which was usually less than the amount they were borrowing, as I mentioned, kind of like putting a down payment for a house. Except the asset is a token on a blockchain, like Bitcoin. In fact, as you'll find out, most of the cryptocurrency industry was held up by these loans.

Now, all of this supposedly legal and cool and normal stuff, all this sounded very trustworthy. This was of course not the case. Neither was it the case that Gemini had diversified their investments at all, or actually really done any risk management of any kind. Although Gemini had the outward appearance of being a highly diversified, sophisticated and well run financial services business, it actually wasn't. They placed the vast majority of their eggs in one single basket. And that was a cryptocurrency brokerage called Genesis. Genesis provided a variety of cryptocurrency-related services for large institutional investors

and high net worth individuals. Their money was made by offering these institutions and individual loans, leveraged by their cryptocurrency, which Genesis would in turn invest theoretically profiting in the process, through their access to large deals as I previously mentioned. When I say leverage, I mean the very simple thing of I give you some money and then you lend me money in return. And there is usually some sort of interest deal there or there is some way where both parties benefit. Sometimes it will be that they are borrowing an asset like Bitcoin where the price can change. Then the collateral they give may be in excess of the amount they're borrowing in dollars,

but the price of Bitcoin may go down. Thus, as a result, if I loaned somebody a billion dollars of Bitcoin, but the price of Bitcoin went down and they gave me, I don't know, 1.0 billion in return, they're gambling the idea that Bitcoin will go up from there and I'm gambling that it will go down and I would have made money on that loan. This is a messy, stupid assholes industry, one built on sand and you're about to find out how badly it can go. So Genesis was also part of a huge empire called the Digital Currency Group, a holding company for multiple different parts of the cryptocurrency ecosystem, including cryptocurrency news outlet CoinDesk, which ironically was a large part of the reason that San Bankman

Freed has gone to prison. I could do an entire episode on this company, but all you really need to know is that they own Genesis and while Genesis was meant to be independent, it absolutely was not. And what's really important to know is how stupidly Genesis was run. They weren't simply bad at investing. They were so bad at investing that they somehow managed to invest in not one, but two of the entities that brought down the entire cryptocurrency industry in 2022. Their first mistake was investing $2.4 billion in three-arrow capital, a major cryptocurrency

hedge fund that ended up being a significant scam that also led to the collapse of FTX, the other entity that Genesis had trusted with its capital. And again, that's the subject of another episode. Three Arrow's Capital was a Singapore-based cryptocurrency hedge fund with over a decade's worth of history, run by two guys. It started life in arbitrage, essentially making money on the differences in prices of products in two separate locations, with a niche in smaller traditional currencies like the Thai Bart and the Indonesian Rupiah. This business model often relied on a healthy relationship with legacy banks. While it had

some success on that front, its relationship soured in 2017, forcing the company to pivot to the wild west of cryptocurrency. It started investing its clients' money in early stage crypto projects, hoping for a big return when their values went up. One of these projects was Terraluna, an algorithmic stablecoin which in plain English is meant to be a token on the Ethereum blockchain that is always related to the price of a dollar. Except in this case, you may have heard that word, algorithmic. And you know what the problem with algorithms is? They need to be perfect and they almost never are. But this bit kind of requires some explanations so bear with me. Cryptocurrencies like Bitcoin

and Ethereum, they're wildly volatile, which is bad if you want to actually transact with them. If a currency could be 25% more or less the next day, how do you actually know what to charge for something? And that's where stablecoins come in. These are cryptocurrencies that aim to fix their value to that of a traditional fiat currency like the US dollar or the euro. Most stablecoins have, or say they have at least, a cash reserve equivalent to the amount of tokens in circulation. Terraluna differed, using an algorithm to maintain price parity. Rather than any reserves, the algorithm worked until it suddenly and violently did not.

On May 3rd, 2022, a Terrastable coin was worth $1. A few days later, it was worth a fraction of a penny. The better-off-lane theme song by Matt Osowski will be dropping this Friday, March 1st, on all streaming platforms. You can find the Spotify Presave link in the episode notes. the best. And the winner is Watch Live Monday, March 11th on I Heart Radio's YouTube channel and listen on I Heart Radio stations across America. Audible is a proud sponsor of the Audible Audio Pioneer Award. Discover the best selection of audio books anywhere, plus binge-worthy podcasts and exclusive Audible Originals. There's more to imagine when you listen.

Try Audible for free with the best of the best. And if you're interested in listening to our podcast, you can find us on our website. and and more personal, with more entrepreneurs, more trailblazers, more live events, more Martha, and more questions from you. I'm talking to my cosmetic dermatologist, Dr. Dan Belkin, about the secrets behind my skincare. Walter Isaacson, about the geniuses who change the world. Angkor Jane, about creating a billion dollar startup. Dr. Elisa Pressman about the five basic strategies

to help parents raise good humans. Florence Fabricant about the authenticity in the world of food writing. Be sure to tune in to season two of the Martha Stewart podcast. Listen and subscribe to the Martha Stewart podcast on the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. insightful conversations between myself, Paul Muldoon and Paul McCartney about his life and career. We had a big bear of a land, it was called Mal Evans, with our logo, and I was coming back on the plane and he said,

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the total value of all of the tokens on the blockchain. Three arrows capital's entire $500 million position in Luna was now effectively worthless. This collapse also shaved off an estimated $1 trillion value from the wider crypto market. Three arrows capital, the so-called hedge fund, to quote research firm FS Insight was an old-fashioned made-off-style Ponzi scheme, where founders Suzu and Carl Davis would use client funds to borrow from basically anywhere that would let them in the entire crypto ecosystem. And because 3Aros didn't bother collateralizing these loans sufficiently or managing the risk behind them, there was very little money to return to customers. The failure of 3RO's capital left a multi-billion dollar hole in Genesis balance sheet that

it papered over with a $1.1 billion promissory note from its holding company, Digital Currency Group, that was due in 2032. This sounds like it would be helpful, right? in 2032. This sounds like it would be helpful, right? The problem is, this maneuver never appeared to involve the conveyance of any actual money. It pretty much existed only to pretend that Genesis had another $1.1 billion on the books. To be abundantly clear, no money actually ever got sent to anybody. This promissory no only existed to mislead creditors about the financial health of Genesis. As you can understand, those creditors would probably want to know, well, okay, do you

have enough money in case we need our money back? Little bit of a spoiler for you, they didn't. The Terraluna and Three Arrows Capital Fiasco trashed the value of cryptocurrencies, with Bitcoin dropping from around $30,000 in May 2022 to less than $20,000 in October. And in November 2022, FTX collapsed as a result of the Coin Desk article, again, owned by DCG, that revealed that most of FTX's assets were held in FTT, a token that they owned the majority of and could never sell because doing so would crush the FTT market, making said asset worthless. Indeed in cryptocurrency, this is a big problem.

If you have a big market and say there's $20 billion of a token out there but one person owns a billion of it, they actually can't sell it. Because in doing so, the market would suddenly think, oh this is worthless because someone wants to dump him. The result of this revelation that FTX was holding, most of the world's FTT and thus could never sell it and indeed that in the process made their company pretty much insolvent, this left both retail investors and institutional investors out to try. Now Igor Eid and Igor Iirdl listeners may have probably guessed by this point that

Genesis was inexorably entangled in this disaster. Quickly going from saying that they had no material exposure to FTX on November 8th, 2022 to then saying they had $7 million of exposure on November 10th to saying that they had $175 million in exposure a day later to saying that they needed to freeze all customer withdrawals and new loans entirely and that they would likely be going bankrupt, which they said on November 18, 2022. They entered Chapter 11 bankruptcy in early 2023. The digital currency group, which of course owns Genesis, had also borrowed $575 million from them, which has since led to the hilarious situation of Genesis suing

the company that owns it as part of its own bankruptcy proceedings. This is the company that the Winklevoss twins and Gemini, their cryptocurrency exchange, had allegedly run through their risk management framework. And despite allegedly reviewing the collateralization management process that Genesis underwent, which means how they collateralized the loans, what money they took in to make sure that the loans did not just fall apart if something bad happened. Well Gemini hadn't diversified their investments at all.

They put over a billion dollars of customer funds into Genesis, money which is most likely gone now. In many respects, Gemini was the cryptocurrency equivalent of Greensill Capital, a company that at one point was the highest-profile lender in the supply chain financing space, touting former British Prime Minister David Cameron as one of its advisors. Like Gemini, Greensill Capital pretended to be a diversified business when in reality it borrowed money from large institutional investors to lend to a handful of companies. The circumstances behind its collapse are slightly more complicated than those of Genesis,

but not by much. Green cell's implosion in 2021 rippled throughout the industry contributing to the demise of the already troubled credit suise, which were acquired, really they were rescued, by UBS in early 2023 for the bargain price of just $3.25 million. Since November 2022, when Gemini froze withdrawals from Gemini-Earn, the interest-bearing account, the Winklevossism Barry Silbert, CEO of Digital Currency Group, who as I've mentioned are technical owners of Genesis, have engaged in an embarrassing back-and-forth publicly on Twitter, where the Winklevossism have attempted to frame themselves as victims of a scam rather

than bad actors acting badly. If they were remotely competent, they could have yanked their customers' funds, the ones loaned to Genesis from the Gemini-Earn program when it was revealed that Genesis loaned $2.4 billion to 3HR's capital in July of 2022. Call it what you want, prudence, diligence or just risk management but it would have been the sensible thing to do. Unless of course they didn't believe they'd be able to get the money out. On October 19th, 2023, New York Attorney General Letitia James filed a massive fraud suit against Gemini, Genesis Global Capital and Digital Currency Group, alleging a conspiracy to mislead customers and cover up over a billion dollars of losses.

The Attorney General's office found that the twin brothers named Cameron and Tyler Winklevoss had mislead investors about the risks associated with Genesis, and that Genesis not only failed to disclose its losses, but took steps to actively hide them from their clients and the public. The New York Attorney General's suit is damning and shows that Gemini was well aware of the rotten condition of Genesis from the launch of the program in 2021. With Gemini and I quote the Attorney General's suit here, their internal risk analysis showing that Genesis Capital's loan book

was under-collateralized, which means that they did not have enough money to give back the money that they owed to their customers. And that only a year into the program, Gemini revised its estimate of Genesis Capital's credit rating, which is the way in which you measure whether a creditor or someone who is borrowing or loaning money, whether they're worthy of doing so, they revised its estimate of their credit rating from an investment grade of BBB to a non-investment or junk grade of CCC. Don't need to get too technical here, just know that's pretty bad. Genesis also routinely reported to Gemini from May 2022 through November 2022 that he had failed

its own internal loan-book risk assessments. To the point that in July 2022, a Gemini board member compared Genesis Capital to Lehman Brothers prior to the financial collapse of 2007 and 2008. At this point, you're probably thinking, so all the money's gone. And you're right. Gemini and the Winklevosses decided they would terminate the earned program on September 2nd, 2022, but only decided to inform Genesis that it would do so on October 13th, 2022. It continued to send customer funds to Genesis throughout this period until an indeterminate time, with all of this information coming from the Attorney General's suit. And they failed to let customers know that the program was fully terminated

until January 2023, though I should add that they froze withdrawals in November 2022. All of these dates are very confusing, but the important fact to know is that Gemini knew from 2021 that they were sending customer funds into an unreliable, unstable, under-collateralized lender for years. And indeed, even when they froze their own program, when they decided that the party had to stop in September 2022, they were still taking customer funds and putting it in Genesis' hands. They didn't freeze the

withdrawal process, the way in which customers have withdrawn their funds until November 2022. So that's months of throwing customer money into the toilet and aggressively flushing it, like you're trying to get rid of a basketball. They knew. Cameron and Tyler Winklevoss knew. They knew what they were doing. They knew they were losing customers' money and they didn't care. Two American billionaires put a billion dollars of customer funds into deeply questionable lenders' hands, then proceeded to obfuscate the risks involved. They claimed that Genesis had appropriate risk ratios and healthy financial condition as recently as November 14, 2022, a full month after it had formally terminated their agreement

with Genesis, who was the company that they were lending this to. This wasn't a casual fling with a risky asset class. It was a near billion dollar swindle of, and I quote Cameron Winklevoss in his abominable letter to Barry Silbert, a swindle of a single mother who lent her son's education money to them, a father who lent his son's bar mits for money to Gemini earn, a husband and a wife who lent their life savings, a school teacher who lent his children's college funds. Cameron and Tyler Winklevoss, as well as Barry Silbert, who runs Digital Currency Group and Biproxy Genesis, have defrauded investors at a similar scale to Sam Bankman

Freed, as I mentioned, the disgraced and now incarcerated CEO of FTX. They convinced customers that they were putting money into an interest-generating account, tricking them into believing that this was a stable, risk-managed investment, one that was continually liquid, and they indeed advertised that you could withdraw your assets instantly. As opposed to the reality that Cameron and Tyler Winklevoss knowingly funneled customer funds into an unstable under-collateralized lender. They intentionally and repeatedly misled customers, claiming to an earn investor on June 27, 2022 that they periodically would conduct an analysis of their partner's cash flow, balance sheet and financial statements to ensure that appropriate risk ratios and healthy

financial condition of their partners happened, and that they said their partners were vetted through a risk management process, heavily implying that said process would protect their customers. And on October 20th 2022, less than a month before the Winklevoss is froze with draw-alls from Gemini-ERN, leaving their customers unable to access their funds or their interest, Digital Currency Group's CEO Barry Silbert, also the owner of Genesis, met with Cameron Winklevoss and told him that Gemini was Genesis Capital's largest and most important source of capital and that they couldn't withdraw Gemini-ER funds without bankrupting the firm. Cameron and Tyler Winklevoss not

only deceived customers, but turned their assets into a load-bearing part of Genesis' balance sheet so that they could funnel them into billions of dollars of loans, which would then go into places like Three Arrows Capital and FTX. And the Winklevosses have spent the best part of a year playing the victim with pathetic open letters that they post on Twitter to Barry Silbert, demanding the returns of funds that they knew were gone, claiming that Silbert hid in his ivory tower and he should take responsibility and do the right thing, as Cameron and his brother continued to mislead the world about what actually happened.

While I'd never refer to the Winklevossus' victims, one cannot ignore how thoroughly fraudulent Barry Silbert's empire had become. On January 24th, 2022, Genesis Capital loaned $100 million to DCG, the company that owned it, due on July 24, 2022. Only four digital currency groups to tell them that they, and I quote the suit, literally did not have the money. Barry Silver's solution was to, and I quote, repaper the loan, delaying its due date by 10 months to May 2023. And you'll be surprised to hear that they never actually paid it back, along with several other loans that were either unpaid or paid back in shares of another part of the digital

currency group called Grayscale Bitcoin Trust, another enterprise involved in crypto. According to Sam Bankman-Fried's testimony during his own criminal fraud and conspiracy trial, Barry Silbert begged him for help, which he declined to provide despite Genesis Capital having loaned FTX billions of dollars in the past, which trustees agreed to settle for a puzzling $175 million. And just to be clear, the bankruptcy trustee just was like, I'll take $175 million, I don't need the billion back. And one can really see where they misled Gemini and the Winklevoss brothers.

The $1.1 billion promissory note from digital currency group to Genesis, the one that was completely fake and was literally just words on paper, was marked in Genesis' balance sheet which Gemini was occasionally shown as $1.1 billion in receivables from related parties, with no designation of what it was or how it was amortized. In plain English, that just means, to any financial analysis, that would appear as just money in the bank. We are receiving cash from someone, $1.1 billion actually, and that's good, that would make you a little bit calmer.

However, one cannot ignore the fact that Gemini knew that something was up. In a March 5th, 2021 email to an earned investor, Gemini claimed that Genesis was, and I quote, only lending assets deposited into earned to institutional borrowers in an over-collateralized way. Over-collateralization, meaning that they were loaning more money than they were borrowing. How does that work? It doesn't. Gemini never sought to correct a coin desk article from February 2021 that claimed, and I quote, that the Genesis loans are over-collateralized. The loans in question being the ones where Gemini earn funds, the funds that people put into Gemini earn to earn interest, were going. It's all just a

big pile of dog shit. Get ready for our 2024 I Heart Podcast Awards presented by the Hartford live at South by Southwest. Celebrating the best of the best. And the winner is... Watch live Monday, March 11th on I Heart Radio's YouTube channel and listen on I Heart Radio stations across America. Audible is a proud sponsor of the Audible Audio Pioneer Award. Discover the best selection of audio books anywhere, plus binge-worthy podcasts and exclusive Audible originals. There's more to imagine when you listen.

Try Audible for free when you sign up at audible.com. Hi, I'm Martha Stewart, and we're back with a new season of my podcast. This season will be even more revealing and more personal with more entrepreneurs, more trailblazers, more live events, more Martha, and more questions from you. I'm talking to my cosmetic dermatologist, Dr. Dan Belkin, about the secrets behind my skincare. about the secrets behind my skincare. Walter Isaacson about the geniuses who change the world. Angkor Jane about creating a billion dollar startup.

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or wherever you get your podcasts. In May 2021, Gemini's risk management team determined that Genesis Capital was, and I quote, highly leveraged with an over 95% debt to asset ratio, meaning that most of their money was in debt rather than things they actually had, and that Genesis has low liquidity and that the business is just able to cover its short-term obligations. Think of it like living paycheck to paycheck to the tune of billions. By August 2021, Gemini-ERN had placed $3 billion of customer assets in Genesis' hands. And this whole situation enrages me. This is one of the largest and

most gratuitous acts of negligence in the history of finance, a craven and deliberate swindle that flowed through every vein of the organization. Gemini intentionally and repeatedly misled customers into investing in an under-collateralized and risky lender by dressing their fraud in the trappings of conventional retail banking. Gemini was well aware and continually reminded of how unstable and disorganized Genesis was and how risky its customers assets were held. And yet it continued to hype the scheme

in the hopes that nothing would ever change. They put billions of dollars into an entity that from the very beginning, they knew was rotten. They knew could barely cover their bills. They could have predicted this and indeed, they tried to. They just wanted to keep the party going. Cameron and Tyler Winklevoss are villains. And while they didn't outright steal customer funds, they intentionally and willfully misled customers into investing in Genesis Capital, an unstable and recklessly managed lender. They were fully aware of these dangers. Yet they

chose to launch a program that their own risk management team believed was riskier than other partners that Gemini had considered loaning that money to. Saying in February 2022 that Genesis' finances were weaker with a higher leverage ratio and low liquidity ratio. Meaning that they were more risky and they had less money to give back to customers when they need it. And indeed, they worried that a market downturn would mean that a 50-60% default rate for Genesis was an appropriate assumption, meaning that more than half of their loans would go under. And that a market downtub would mean that a 50-60% default rate for Genesis' loans was an appropriate assumption, meaning that more than half of their loans would default

in the event that there was a change in the cryptocurrency market. The risk management team repeated this language several times and it took until May 2022 for Cameron Winklevoss to personally ask for a one-page-out on the risk profile of Gemini, Earn and Genesis, the company that they had lent at that time of $1 billion to. And indeed, whether Earn adequately compensated Gemini for the risk. In plain English, they were saying, you know what, is it really worth it for us to risk all of this customer money and when they said worth it, they mean is it really worth it for us to risk all of this customer money and when

they said worth it they mean is it making us enough money for the pain in the ass we're creating? I hope it wasn't. I hope they burn for this one. Having read the entire New York Attorney General suit, I cannot find a single instance of concern for the hundreds of thousands of people the Gemini and Cameron and Tyler Winklevoss failed despite Gemini's pledge to uphold and I quote, the highest level of fiduciary obligations.

The Winklevosses represent their position as the trusted stewards of the digital currency industry claiming to live by a policy of asking for permission rather than forgiveness as they brazenly funneled billions of dollars of customer funds into a lender that they clearly didn't trust. They ignored the signs, they ignored the risk management profiles, they ignored the worries. And they continually rambled about being licensed and regulated by the New York Department of Financial Services, which means absolutely nothing as Gemini-earned deposits were being loaned to Genesis, per the terms of Gemini-earned agreement, which in turn took them out of the regulation of the MYDFS.

The Winklevosses, the so-called self-regulators of crypto according to Paul Vignier of the Wall Street Journal, built a reputation as the trustworthy party in a lawless industry, only to use it as a means of making $22 million in agent fees and $10 million in commission from risking billions of dollars of customer funds. And in this case, Gemini-earned customers are likely going to lose 40-50% of their holdings if they get anything back at all. A good comparison point here is that creditors related to Voyager, which was another crypto-ponsai scheme, only got back 35% of their holdings. Now I have to get into some more annoying financial stuff. You'll forgive me, I just

want you to know how loathsome these wet river giants are. These boat boys have really buggered this up. In October 2023, the Winklevosses filed something called an adversary proceeding in court against Genesis. In bankruptcy court to be specific, seeking to recover $1.6 billion in value for the benefit of earned users in an attempt to paper over their financial mismanagement. On August 15, 2022, Gemini accepted over 30.9 million shares of grayscale Bitcoin trust, a stock tied to the price of Bitcoin with a minimum investment of $50,000 in the ticker of GBTC. They accepted this as collateral for customer funds invested in Gemini earn,

valued at the time at around 15 bucks apiece, somehow taking on what they call an, I quote, initial collateral stake over a year after the program started, just to be clear, no collateral when they loaned the money out. It was worth around $463 million at the time, and the Winklevosses for some reason decided to foreclose upon it on November 16, 2022, selling it when its price was around $9 a share. This left them with $284 million, a little bit over that, or roughly 64.1% of its original value. They didn't have to sell it and indeed, one might argue they legally shouldn't have because it was collateral from a loan. In the same way that the bank can't immediately foreclose

on your home when you're in it and you've missed a few payments, they probably weren't meant to do so. But I continue. Now the Winklevosses are claiming that they should be considered owed the difference between $284 million and the amount owed to earned creditors. Genesis argues, I should say, the bankruptcy trustee of Genesis which has no interest in anything to do with what Genesis is doing other than getting money back for the creditors, most of which are institutional, customers come last. That trustee is arguing that it actually didn't give Gemini $284 million in credit. They gave them 30,905,782 shares of GBTC and that the collateral should be valued at the price of GBTC today, which would value the stake that they had given them at

800 million. This is confusing, but what you need to realize is, Gemini-owned customers have lost somewhere between 800 million and a billion dollars. Had the Winklevosses not sold their shares, they would have got a lot more back. In essence, the Winklevosses rushed to sell these shares who are effectively no reason, potentially flaunting very basic foreclosure rules, and Genesis' argument is that they shouldn't have to make up the difference for their massive fuckup. Interestingly, Gemini was also meant to receive another 31 million shares of GPTC on November 10th 2022 and Genesis just didn't send it. And guess what? The bankruptcy court

isn't going to help with that. Let's be clear. Both of these parties are scum. And in a just society they'd rot in the depths of the worst jails. Under the terms of Genesis' reorganization plan under bankruptcy, Gemini earned customers. Those people, regular people, the people's college funds, the bar mitzvah funds, the single mothers who had lost their money. They'd be considered class 4 unsecured creditors, getting paid out behind Genesis' institutional creditors, secured creditors, and priority claims, which is why Genesis had to pay $175 million to FTX's bankruptcy. A single mother's waited to retrieve their son's college funds. Yet there may be hope that Gemini earned customers will be made whole.

Yet, there may be hope that Gemini-earned customers will be made whole. Mere hours after the original broadcast of this podcast, the New York State Department of Financial Services announced that Gemini had committed to return at least $1.1 billion to earn customers, though only after the resolution of Genesis Global Capital's bankruptcy. Assuming that the bankruptcy courts approved the settlement, Gemini-earned customers can, according to Gemini, expect to receive approximately 97% of their assets in kind within two months of February 28th, 2024, and the rest about 10 months after that. Unlike the proposed FTX settlement, customers will also receive the actual crypto they committed. In the case of FTX, they are getting the dollar equivalent on the day that FTX went bankrupt, which means they are getting much less than they make

if they were selling their crypto today. This means that these customers might actually make money, because on the day that Gemini earned shutdown, Bitcoin was somewhere between $11,000 and $15,000. This means that they are actually going to make a profit somehow, which is pretty good. It's rare to find good news here. And don't get too excited yet though. All of this is dependent on the tedious pace of bankruptcy courts. That, in this case especially, will kind of consider Gemini-Ern's customers second-class citizens. This landmark settlement is being spun by the Winklevoss brothers as, and I quote, a successful resolution of Gemini-Erarn that was reached, and I quote

again, with Genesis and other creditors, one in which these identical River Twins are considered, and I can't believe they're willing to say this, responsible stewards of the crypto ecosystem. This couldn't be further from the truth. Superintendent Adrian Harris of New York State's Department of Financial Services said in a statement the Gemini had failed to conduct due diligence on an unregulated third pie. Later accused of massive fraud, harming earned customers who were suddenly unable to access their assets. The MYDFS's investigation revealed, and I quote, the Gemini engaged in unsafe and

unsound practices that ultimately threatened the financial health of the company. And they collected hundreds of millions of dollars in fees from Gemini customers that could have gone to Gemini, substantially weakening Gemini's financial condition. The Winklevosses are not responsible stewards. They're towering con artists that got caught, and they were forced to pay up only because they ran a foul of one of the few responsible regulators left in America. While I'm hopeful they'd earn customers a made-hole, I also fear that the bankruptcy courts may drag their feet. And even if they don't, kinda just want more here. The Winklevosses aren't even the ones paying the fines their company

is. Gemini will pay the $37 million fine from the MYDFS and I think they're going to pay the $1.1 billion in cryptocurrency too. What's weird is, I can find no evidence about where that money is coming from. I'm also worried that Genesis, as they have multiple times will kind of stonewall this deal. They want to get out of this, they recently set up with the SEC for $21 million so they have a reason to do well with the US government, but I fear for this. All of this is contingent on bankruptcy courts, but don't really care. Regardless of this landmark settlement, it is great. It's great that the regulators got the customer's money back. But my blood is still boiling.

Cameron and Tyler Winklevoss will continue to run Gemini, which is a multi-billion dollar financial services company. Despite the fact that it's very clear that they really didn't do any due diligence and that due diligence, which they did, they completely ignored. They knew that this was a bad deal. They sent tens, hundreds, over a billion dollars

to a company that they knew as early as 2021 was bordering on insolvent. Yet they're still allowed to walk around both as free men and stewards of the financial industry. It's kind of taken the piss. And even though the New York Attorney General's suit is still out there, it's not over yet, and they're still seeking $3 billion in restitution, they're doing so from Gemini and Digital Currency Group. The Winklevosses are still left unscathed. These are Craven fraudsters that continued again and again to operate without oversight

or restraint, and now they're going to profit handsomely off of an industry built on the back of manipulating and conning people. And despite how good this settlement is, these guys are still billionaire boat boys. They're unscathed, they rob their own company, they rob their customers. They laughed in our faces and at this time in society, when tens of thousands of people are being laid off, when people can't get houses, when the regular person that cannot seek wealth, people that go out and fuck over customers again and again and again in broad daylight, lying to us, lying to you and me in a way

that is so craven, nothing happens to them. Oh god, they got slightly embarrassed. They can't be kicked out of Gemini, they own the bloody thing. The crypto industry isn't attacking them despite the fact that two of your so-called stewards are fucking con artists. Anyone who's listening to this, who's a big fan of crypto, who believes that these guys are good people, or indeed that really there are any good people in this industry, should read the New York Attorney General's suit. They should read everything that the Winklevosses did. They should listen to this podcast again, perhaps, and recount the many

ways, the manifold ways, in which these two giant freaks, shat all over their customers, lied to them, lied to regulators, lied to their own company, and sat there with their thumbs up their arses, not digging into their own personal piggy banks, making the dumbest calls again and again, and nothing has happened to them. I pray that Letitia James and the New York Attorney General's office finds a way to exile these two bastards from this goddamn financial services industry. But I'm gonna be honest, I'm not holding my breath. Thank you for listening to Better Off Line.

It's a weekly tech podcast. You can find it on iHeartRadio's app or anywhere else you find podcasts. The editor and composer of the Better Offline theme song is Matosalski. You can check out more of his music and audio projects at Matosalski.com, M-A-T-T-O-S-O-W-S-K-I dot com. If you want to get in touch with me, email me at ezatbetteroffline.com, me at EdZitron on Twitter or Zitron.Bsky.Social on Blue Sky. Check out my newsletter and more of my work on betteroffline.com.

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