Barry Silbert's Neverending Story

Barry Silbert – founder of Digital Currency Group (DCG) – is being sued again along with DCG and several of its DCG executives. We've written about this long-running saga quite a few times before . It is unreasonably complicated so here is a quick refresher before we unpack this latest lawsuit. Silbert founded, owned most of and ran DCG for a long time. DCG subsidiary Genesis ran in to solvency problems after the Terra-LUNA collapse in May 2022 as Genesis' counterparties failed to pay back loans from Genesis. The most prominent borrower that blew up and defaulted was Three Arrows Capital. Genesis, overall, had a lot of problems.

DCG owned Genesis and provided some sort of vague liquidity support that held off creditors for a while in 2022. But eventually Genesis filed for bankruptcy. This was linked to Gemini's Earn program freezing about a billion dollars (that was trapped in Genesis). A range of other entities had all kinds of problems too.

But DCG managed to retain control over Genesis' bankruptcy process through what is best described as Silbert and his lawyers outplaying the other participants. Barry Silbert worked in restructuring before founding DCG and, empirically, the man knows what he is doing. Of course being good and your job and being able to wave away billions in claims against an insolvent company you own are not quite the same thing. So this saga continues to roll on.

As a result of DCG exercising substantial control over Genesis even in bankruptcy the official creditors committee has been " so so kind & gentle " to DCG and Silbert. That behaviour led to the creation of a Litigation Oversight Committee (LOC) with the aim of "Overseeing Litigation. Pursuing Accountability. Representing Creditors." The LOC backers' theory was that while Silbert managed to retain control over Genesis that only meant he could stop Genesis from filing catastrophic lawsuits against DCG. There should still be other ways for aggrieved creditors to get their money back.

Who Owes Who?

DCG owned Genesis. And then when Genesis blew up DCG provided support to Genesis. But – and this is key – DCG did not actually provide any cash to Genesis to fix the problems. It provided what are best described as smoke and mirrors. We can tell this did not work becaue, well, the bankruptcy case has been running for more than 2 years now.

The relationship between Genesis and DCG wasn’t just one of parent and subsidiary — it was deeply enmeshed. DCG reportedly directed Genesis to make loans to other DCG-owned companies. On top of that, some DCG executives, including Silbert, held personal funds on Genesis' platform. These overlapping interests created a web of potential conflicts and cross-claims.

Now recall that DCG owned Genesis and managed to retain control through the bankruptcy. So if Genesis' main asset in bankruptcy is a claim on DCG and DCG can prevent Genesis suing to collect on that claim, then two things happen:

1. Genesis' creditors do not get the money
2. DCG gets to keep the money

Exactly how much money DCG has to pay off Genesis is unclear. To be fair it is also still unclear quite how much money DCG owes Genesis. But we know for sure that if Genesis never tries to collect anything then creditors will get $0.

Silbert's plan was, pretty transparently, to find a way to keep sufficient control over Genesis that whatever assets remain at DCG, and in his personal holdings, are not pursued by Genesis. And, as far as the official creditor process is concerned, that has been largely successful. Enter the Genesis LOC.

LOC's Claims

This new filing makes essentially three claims. First it claims that Genesis was directed by DCG to enter into uneconomic-for-Genesis transactions to benefit DCG through benefiting other DCG portfolio companies. For example the LOC claims uncollateralized loans were extended by Genesis to DCG's mining subsidiaries at too-low rates. The flavour of this claim is that DCG deprived Genesis of value – approximately it stole from Genesis – and gave that value to other DCG subsidiaries. And so, the logic goes, Genesis' creditors are entitled to claim value from those other businesses.

As a standalone claim this is messy. If an executive mismanages a company the shareholders of that company do not normally have a claim on that executive's personal assets to cover the losses. Similarly investors in one VC-backed business that fails cannot just go and claim stakes in other companies backed by the same VC because the portfolio companies all did business together and had common investors.

But the LOC claims more than just something akin to "normal" mismanagement or a "normal" business failure. They claim two more sorts of things that change the balance.

They claim Silbert and associates withdrew personal funds from the Genesis platform even as they told external creditors everything was fine. That's a problem. We wrote about this component a few years ago on a separate blog pointing out that Genesis' own bankruptcy filings made clear Silbert's personal funds were withdrawn from Genesis at the height of the company's crisis.

It is not a "normal" business failure when management publicly assures creditors the company is solvent while they are pulling their own (large) deposits out the back. Whether that is fraud or some kind of criminal or civil violation is clearly a legal question. But it is not good and elevates this from "So the business failed" to "Hmm, maybe management is liable for some of the losses."

In that same separate blog post we cover how a combination of DCG and Genesis filings from 2022 and 2023 make clear the company was self-reporting as insolvent in the numerical sections of financial statements even while it was claiming in words that all was fine.

The standards, and one imagines the carefulness of proofreading, for private businesses like DCG and Genesis are lower than for publicly traded companies. But it is still a problem to report negative equity while claiming in words you are solvent. It is also a problem to take money out of a subsidiary in that operates in the financing business when that subsidiary cannot safely finance those payments. Specifically the LOC claims:

DCG also took distributions from Genesis even when Genesis did not have sufficient liquidity to justify them.

And the LOC has more to say. They provide details of loans Genesis made at DCG's direction to Foundry in strange circumstances:

For example, DCG caused Genesis to issue a loan to Foundry, DCG’s crypto mining company, without any collateral, so that Foundry could further lend that money to BTC miners accepting computer equipment as collateral.

Genesis, a company in the business of making loans, was instructed to make uncollateralized loans to a sibling mining business so that other business could go ahead and make collateralized loans. The LOC continues:

From a business perspective, the loan terms made no sense for Genesis, but the understanding among Genesis employees was that they were required to support the DCG ecosystem as Silbert mandated.

If Genesis made market-rate loans to Foundry and then Foundry made some sort of mining-equipment-collateralized loans this might all be fine. If Genesis made direct loans against that same collateral it might all be fine. But this is a pretty clear case of Genesis handing value to Foundry at DCG's direction.

So?

If DCG owned the equity in all of these businesses, and Silbert owned most of the equity in DCG, what is the problem here? Shareholders direct company management and company management is answerable to the shareholders.

Or rather that is most of the story. Management has some duty to take care of creditors too. And once the business fails, or is near failing, the company may have stronger liabilities to the creditors than the shareholders.

Put simply: if DCG directed Genesis to transfer so much value to Foundry that Genesis immediately exploded then Genesis' creditors would clearly have a strong claim on Foundry's assets. They'd also have a strong claim against whoever at DCG directed that form of theft. Silbert could not simply, for example, direct Genesis to give all client funds to Foundry, put Genesis into insolvency, and then keep the asset through DCG's equity ownership of Foundry. There are myriad steps one can take in insolvency proceedings to undo that sort of transaction and get the value back to credtiors.

Genesis' creditors are owed money. And they appear to have plausible claims that DCG misappropriated at least some Genesis assets by transferring them to DCG's shareholders in a personal capacity and to sibling DCG portfolio companies via uneconomic deals.

Will This Work?

The general principles at work here concern "fraudulent transfers" and "trading while insolvent." Those are fancy insolvency-related ways of describing transactions that can be retroactively voided because they are "unfair." Fraudulent transfers, roughly, are transactions that were unreasonable and damaged the insolvent entity badly enough that the court will undo them. And trading while insolvent refers to the potential personal liability managers of a business take on when they enter into contracts on behalf of a company they already know is walking dead.

Silbert has lots of money. Some DCG portfolio companies are still around and earning money. The LOC clearly wants some of that money. Do they want a trial and a judgement? Do they want a settlement? They want money. And this case certainly makes Silbert and DCG management look bad. But Genesis, and DCG's portfolio as a whole, has been insolvent since the Terra ecosystem blew up 3 years ago. If Silbert and DCG can weasel out of this one, or settle for a small sum, maybe they can finally declare victory and avoid paying back most of the money.

Some of the dealings with other web3 companies looked bad – but then DCG's counterparties also looked bad. Whether an aggrieved Gemini or similar would get sympathy was never really clear. But with Silbert's personal financial dealing with Genesis finally reaching court this time does look different. Mismanagement is given a wide berth in insolvency in the US. But yanking tens or hundreds of millions of dollars from a company you manage that soon goes under? Seems a lot more likely Barry Silbert is finally going to need to pay out now.