Celsius feels the heat: Ex-CEO arrested, watchdogs line up to sue bankrupt crypto biz

July 13, 2023 TH Author

Alex Mashinsky, the now-former CEO of collapsed cryptocurrency concern Celsius, today faces charges of fraud as prosecutors and watchdogs pile in.

America’s Federal Trade Commission [PDF], Commodity Futures Trading Commission [PDF] and Securities and Exchange Commission [PDF] all simultaneously launched legal action against Celsius, Mashinsky, and others on Thursday, while a criminal indictment filed by the Department of Justice [PDF] earlier this week against the ex-CEO was unsealed to coincide with the other three.

Most of the allegations against Celsius et al are fraud related and include claims the now-bankrupt crypto-lending operation failed to appropriately register as a pooling operation and as a seller of securities.

For those not in the know, Celsius was a cryptocurrency lender: customers could store assets including Bitcoin and Ethereum in their Celsius wallets, and were promised decent interest rates on those deposits. People could also take out loans using their crypto-holdings as security. Billions of dollars were lent out with billions more of crypto-tokens under management; the business said it had nearly two million customers.

Then in June 2022 there were claims of liquidity issues due to poor investments by Celsius that the biz dismissed as FUD. Days later, customers were stopped from withdrawing funds, with “extreme market conditions” blamed; and Celsius’s own token CEL crashed in value as other coins were dragged down by the drama. By July the lender had laid off staff and filed for bankruptcy with a $1.2 billion hole in its balance sheet.

Mashinsky has been accused of securities, commodities, and wire fraud, among other charges, by US prosecutors. He was arrested today. Roni Cohen-Pavon, Celsius’s now-former chief revenue officer and Mashinsky’s co-defendant in the Dept of Justice’s criminal case, is being sought by the Feds, who admitted the exec “is currently abroad.”

Here’s a quick summary of the action taken so far:

Dept of Justice: Mashinsky allegedly defrauded Celsius customers, and he and Cohen-Pavon allegedly illicitly manipulated the market to inflate the price of CEL while secretly selling off their stashes of the token.
SEC: Celsius and Mashinsky broke US securities law, manipulated the market with regards to CEL, and misled investors.
FTC: Mashinsky and two other founders of Celsius, CSO Shlomi Daniel Leon and CTO Hanoch “Nuke” Goldstein, allegedly tricked people into thinking their deposits would be safe and always available.
CFTC: Mashinsky and Celsius allegedly fooled people into handing over their money with false claims of high interest yields and security.

It’s said that what remains of Celsius as a company is cooperating with the Feds.

The FTC’s legal challenge includes a proposed settlement [PDF] that, if accepted by the courts, will permanently ban Celsius and its subsidiaries “from offering, marketing, or promoting any product or service that could be used to deposit, exchange, invest, or withdraw any assets,” as well as a monetary penalty of $4.7 billion (£3.6 billion), though Celsius won’t have to pay that until all its customers are made whole – if that is able to happen at all. Celsius has agreed to this arrangement.

Mashinsky, Leon, and Goldstein did not agree to the FTC’s settlement terms, “and the case against them will proceed in federal court,” the regulator said.

Quelle surprise

It’s been a rough twelve months for the cryptocurrency world: first Terra fell apart in May 2022, then Celsius collapsed (a year ago today). FTX imploded and its founder Sam Bankman-Fried was arrested; Binance was sued by Uncle Sam last month, as was Coinbase, then Terra founder Do Kwon was arrested after months on the lam.

In addition, the United States, EU members, and other nations have been stepping up regulatory pressure on the crypto-world. Some of what these watchdogs are hoping to avoid are the very things Celsius and its leadership have been accused of, the details of which were made public in February after the completion of a bankruptcy probe into the lender. Many of the accusations from that report, which was nearly 500 pages long, have been carried over to the four cases Mashinsky and friends are now facing.

According to the Dept of Justice’s telling of the saga, Mashinsky “repeatedly made public misrepresentations regarding core aspects of Celsius’s business and financial condition in order to induce retail customers to provide their crypto assets to Celsius and continue to use Celsius’s services.”

That included allegedly lying about profitability, long-term sustainability, yield generation, and generally a refusal to acknowledge what Celsius leadership was apparently saying among itself all along: the company was allegedly a Ponzi scheme like some other crypto initiatives.

Prosecutors believe Celsius held around $25 billion (£19 billion) in assets at its peak, which it regularly pooled and used to make risky investments that resulted in losses. The company was also accused of pumping up the value of its proprietary CEL token by spending customer funds to buy back the tokens at inflated prices.

At the same time, the Feds say, Mashinsky and other leaders at the company sold their own CEL holdings at the inflated value. The DoJ believes Mashinsky made around $42 million (£32 million) by selling inflated assets, while Cohen-Pavon earned around $3.6 million (£2.7 million).

If convicted of the DoJ charges alone, Mashinsky, 57, could face decades behind bars, and ditto for Cohen-Pavon. The other agencies are asking for financial restitution paid by Mashinsky and his co-defendants, as well as forfeiture of assets acquired with any ill-gotten gains.

“Whether it’s old-school fraud or some new-school crypto scheme, it doesn’t matter one bit. It’s all fraud to us. And we’ll be here to catch it,” said US Attorney Damian Williams.

For what it’s worth: Bitcoin is today up 3.6 percent, Ethereum up 6.3 percent, and Dogecoin up 8 percent, for example, at time of writing, though an unrelated court ruling in favor of XRP coin trading may have something to do with that return of market confidence. ®