The Breakdown - Gemini's Furious Open Letter Threatens to Sue DCG and Barry Silbert

Episode Date: July 5, 2023

On the eve of the July 4th holiday, Gemini's Cameron Winklevoss published an open letter accusing Barry Silbert and DCG of fraud and demanding they accept terms or face litigation. NLW covers the letter and the community's reaction.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, July 5th, and today we're talking about why the Winkle vosses have had it. Before we dive into that, however, if you were enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly Breakdown Pod. Well, friends, today we are talking about a bit of a bomb that was dropped by Cameron Winklevoss

on Monday night just before the U.S. Independence Day holiday. And I think it's important context that as we are starting to finally feel like things are coming back in the crypto space and are less nervous and more have turned a corner, maybe. You have to remember that coming off of FTX and turning the corner on 2023, the big hanging chat in the industry was DCG. There was a time there where it seemed pretty clear like DCG was going to go under. Now then, by February, things started to seem like they might be getting a little bit better.

And meanwhile, the banking crisis happened and there was a new narrative for Bitcoin and things started to come back. But this issue, as we'll see, remains very unresolved. So, as I said, on Monday night, Gemini co-founder Cameron Winklevoss began the holiday with a bang, publicly making a final offer in the ongoing Genesis bankruptcy. Winklevoss tweeted out, an open letter to Barry Silbert, the CEO of Digital Currency Group, which owns a controlling stake in Genesis. He pointed out that it has been now almost eight months since the crypto lender halted withdrawals, impacting over $1.2 billion in assets loaned out by Genesis Earned customers. Now, as I mentioned, a deal to resolve the bankruptcy looked close in February. However,

since then, countless delays have dogged the process. At the beginning of May, the court appointed a mediator to bring parties together on a deal after the unsecured creditors committee raised concerns about the deal that had been proposed in February. After the mediation process failed to produce results, the court gave DCG until the beginning of August to present a restructuring planned creditors. So with that background, let's look at what Cameron Winklevoss wrote in this open letter to Barry Silbert. I'm not going to read the whole thing, but I will be reading some excerpts. Barry Cameron begins, today marks 229 days since Genesis halted withdrawals and 174 days since I last wrote an open letter to you. As you well know, the DCG enterprise has engaged in fraudulent behavior.

As its leader, you have fostered and architected a culture of lies and deceit, many of which are now well documented in the public record. Tellingly, when I laid out in detail the multiple false and misleading statements that you, your employees, and DCG companies conspired to make to creditors in order to hide the insolvency in financial health of Genesis, including the falsification of balance sheets and other documents to perpetuate an accounting fraud, you didn't directly address or refute a single one of them. So, boom, here we are starting off with the bang using the big F-word, fraudulent behavior. That really sets the tone for the rest of what Cameron writes. Now, the next section is all about how Barry's communications on this issue have been

less than complete, the Winklevosses say. They point to a 4,000-word shareholder letter from January 10th, and say, you somehow forgot to address the multi-billion dollar elephant in the room, that a DCG company owes 3.3 billion to creditors, 1.2 billion of which is owed to earn users. You offer no apology to creditors and earn users for holding their money hostage during the holiday season. No apology for the stress, anxiety, and pain you have caused them and their families. And no apology for the burned bridges and value destruction you have caused our entire industry. No contrition or acknowledgement whatsoever. So part two is something which runs throughout this and which many people assume there's the main point of this,

which is not actually about any of the legal process, but about Cameron trying to consolidate the earn user base around him as the champion for them, and against Barry and DCG as the enemies of them. In other words, some say that in the same way that Cameron is accusing Barry of not taking any culpability, all of these open letters are in some ways Gemini's way of not taking culpability for the losses incurred on their earn product. Now, to be fair to them, it wasn't Gemini that went under. It was their partner. But still, is just worth keeping that analysis in mind. Now, the next part of this open letter basically accuses Barry of playing for time. Cameron writes, on first blush, your letter appears to be a

masterclass and lack of self-awareness. Yet upon further inspection, it's another piece of carefully crafted stupidity designed entirely to shirk responsibility and advance your deeply unethical strategy of playing for time by playing dumb in an effort to screw creditors and earn users once again. After interacting with you, your lawyers, and your advisors for almost eight months, one thing has become abundantly clear. Since the day Genesis closed its withdrawal gates, you have never had any intention of finding a global consensual resolution with creditors and earn users, and you have never had any intention of doing the right thing and taking responsibility for the mess that you, your companies, and your employees created with your reckless and fraudulent behavior.

Instead, you have dedicated the last eight months to buying time so you can raise money and stiff creditors and earn users again. From there, Cameron, goes through what he calls Barry's own game. First, he said, was to commit fraud. In June and July of 2022, U, DCG and Genesis knowingly lied to creditors, earn users, and Gemini in order to make us all believe that DCG had absorbed the $1.2 billion in losses that Genesis incurred in the collapse of 3A in May 2022. In reality, DCG absorbed none of these losses and instead entered into a bogus, long-dated promissory note to make it look like it did without ever sending as much as a penny to Genesis. Next, he said, was to fight the promissory note. At this point, the right thing to do

would have been for you and DCG to actually absorb the $1.2 billion in losses, or cut a deal with creditors to restructure the term and quantum of the fake promissory note in a way that was legitimate, fair, and reasonable. You have chosen to do neither. Next was raised capital to pay down the $630 million loan. Cameron Wright's delay is critical because it gives you time to solve the one thing that stands in the way of your ability to fight the promissory note, the $630 million that DCG owes Genesis. The loan is the sort of Damocles that hangs over your head. Unlike the Fugazi promissory note that's not due for 10 years, this loan was due in May of this year. Failure to pay this loan would result would result in a DCG default and bankruptcy filing. As a result, you have been

working feverishly since November, not to make creditors whole, but to raise money so you can pay this loan down and be free and clear to litigate the promissory note over the next decade. Abuse the mediation process. By May 1st, the writing was on the wall. DCG did not have the $630 million and was about to head off a cliff. Faced with your second default and second bankruptcy in less than six months, you sought to buy time through a mediation. Reluctantly, the creditors agreed to give you one last shot. Now, from there, Cameron argues that the real purpose of the mediation was not to come to terms with creditors, but to give DCG what he called an indefinite forbearance on the 630 million it owns Genesis. This Winklevoss says is unacceptable, and that brings him to his final section,

Game Over. Cameron writes dramatically, I write to inform you that your game. games are over. In addition to dragging out a resolution, they have ballooned professional fees to over $100 million, all of which have gone to lawyers and advisors at the expense of creditors and earned users. Enough is enough. To that end, detached is a best and final offer. The proposal is fair and reasonable for everyone and represents the floor that creditors, who are required to support a deal, will accept. If you don't agree to this deal by 4 p.m. Eastern Time on July 6th, we will proceed with the following next steps. Now, the next steps that Cameron lists are one to file a lawsuit against DCG and Barry personally, specifically outlining what they argue is Barry's personal liability

and hiding Genesis' insolvency. Second, they want to file a turnover motion that would push DCG into default. Third, advance a non-consensual plan that would, quote, adhere to a strict timeline and provide for immediate distributions to creditors and earn users. And finally, Gemini would demand that the unsecured creditor committee filed a lawsuit and take depositions related to their investigation into the various intercompany loans. The concluding paragraph reads, in closing, I've seen a lot of bad behavior from you and colleagues over the last nine months. But perhaps the most disturbing part is something you said to me this fall, that you're a victim in all of this. It takes a special kind of person to owe $3.3 billion to

hundreds and hundreds of people and believe, or at least pretend to believe, that they're some kind of victim. Not even Sam Bankman friend was capable of such delusion. In the end, he at least recognized how his actions had hurt others and attempted to make things right. I can say confidently that I speak for all earn users when I say, it's time for you to do the right thing. All right, so there is a lot to dig into here, and it's kind of the least important part, so I'll just get it out of the way first. I'm not quite sure what he's talking about as relates to SBF. I'm not totally sure that Sam has the capacity to recognize how his actions hurt others, and I certainly have no idea what constitutes an attempt to make things right. In fact, I talked about this on another podcast that I think

is coming out today called In the Arena. But basically, the entire time that everyone was freaking out about what the hell was going on with FTX, Sam wasn't communicating to the team, he wasn't communicating to the biggest users. He was just out frantically trying to raise money to close the gap. Which is kind of exactly what Cameron is accusing Barry of here. Anyways, it was a super weird part of this whole thing that many people noticed, so I just wanted to address it. But again, probably the least substantive part of the whole thing. Now, Ram Alawalia, who has previously been on this show, has spent a ton of time trying to analyze this thing. Right after it was released, he wrote, quick reactions. Forecast the July 6th 4 p.m. ultimatum date will come and go. DCG will not accept the terms. One, the proposed term sheet is much farther away than the last term sheet we saw circulating

a few weeks ago. Two, DCG would be on the hook for FTX claims exceeding 300 million. Now, FtX has claims to the tune of billions. There's a legal process to assess the validity of those claims. I don't believe Barry will accept that legal risk. John Ray would not hesitate to take aggressive action against DCG, unlike the current CEO of Genesis who may well be conflicted. Now, Rahm then followed that up with a longer thread where he wrote,

Cameron's strategy is to negotiate a deal alongside the other creditors without DCG at the table. The creditors don't need DCG to sign off since DCG is not a creditor. What creditors want from DCG is a make-whole kicker, cash or equity, and they can pursue that in parallel. Prediction? Genesis creditors will align on a plan without a grand bargain that involves DCG. This keeps the ball moving towards recovery and keeps the pressure on DCG. The strategy is get points on the board, then pressure the Genesis CEO and board, who solely hold the threat of bankruptcy. Overall, Cameron's strategy is sound needle-threading. So what is Barry's plan?

One, by time, generate cash flow to plug holes. Two, distance from Genesis actions. The alleged accounting fraud and misrepresentation took place between Genesis and clients, not at DCG. We have yet to see a link from DCG and Barry directing Genesis management to induce customers with the alleged false statements. More time allows DCG to fill balance sheet solvency in liquidity holes. Cameron is correct that DCG did not inject cash or equity into Genesis. but legally DCG did assume the liability and now has an impairment that reduced DCG's net equity position to the tune of $1.1 billion. So, the promissory note did crater the DCG balance sheet. That makes it hard, if not impossible, for DCG to refinance its loans because they will

fail various minimum capitalization or net equity covenants, leaving aside the litigation overhang. What happens next? I expect DCG and Barry will let the Friday ultimatum deadline come and go, just like the May payments. Once a joint plan is signed off amongst all creditors, then the pressure campaign will pivot away from Barry. So basically what Rahm is arguing is that for all the bumbastic language, Cameron is actually just nudging things down the field and trying to organize the creditors in some way while keeping pressure on Barry. Now, the rest of the community is definitely acknowledging that pressure as well.

Investor Adam Cochran writes, Oh shit, Gemini is putting its foot down. Game over for Barry. Yet others thought, as I mentioned at the beginning of the show, that it was a little bit deflecting. Parker Lewis wrote, A master class and lack of self-awareness designed entirely to shirk responsibility by Gemini and the Winklevoss. Pleditor writes, sure seems like the target audience is Gemini customers, not DCG. Gemini brand has taken a hit, so Winklevosses want to wash their

hands of this and redirect the public anger at DCG. Now, reinforcing the This is Just for Show perspective, John E. Deaton, the founder of CryptoLaw.U.S. wrote, I just read this open letter. As someone who files lawsuits, my question is, if Cameron can prove the claims, why not just file the damn suit? I learned a long time ago in a moment of crisis when integrity and honor mean everything. and someone shows you who he really is, take him at his word and his actions. Now, I will close on that note saying my two cents on that particular part. I think that actually filing this lawsuit is a big red button approach, in that it dramatically ratchets things up, but not necessarily in a way that gets Gemini

what they want. It just blows things to hell and creates a totally new set of problems to deal with as well. This continues to be an incredibly messy process. And of course, the biggest victims are the people who had their money. on Earn who are now sitting around watching this all play out in public. However, to the extent that there is upside, I will say this. The longer that this goes on, the more the market has priced in all the possibilities of a potential failure of DCG. And I think that that reduces the potential that it creates some big shock that we have to deal with later on, even if ultimately DCG

is in fact forced into bankruptcy. But who knows? This is a saga that has many parts of the story to tell, and so we'll just have to see how it waits to play out. That's going to do it for today. I appreciate you listening as always. Until next time, be safe and take care of each other. Peace.