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(Kitco News) - On Thursday, authorities in the U.S. took multiple actions against the Celsius crypto lending platform and its former CEO Alex Mashinsky related to allegations of misleading investors and raising billions through the “unregistered and fraudulent offers and sales of crypto asset securities.”
The Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Federal Trade Commission (FTC) all filed lawsuits against Celsius and Mashinsky on Thursday.
At the same time, the US District Court for the Southern District of New York unsealed an indictment filed by the Department of Justice (DOJ) that includes criminal charges against Mashinksy and his former chief revenue officer Roni Cohen-Pavon.
A grand jury has charged the former executives with a total of seven counts, including wire fraud and token manipulation. All of the charges pertain to fraud at Celsius that was organized by Mashinsky through a series of complex balance sheet maneuvers that left customers vulnerable to withdrawal issues and systemic leverage problems.
Mashinsky “orchestrated a scheme to defraud customers of Celsius Network” together with the former Chief Revenue Officer Roni Cohen-Pavon and misled investors about “core aspects of Celsius’s business,” the DOJ alleged.
The DOJ claims Mashinsky falsely said the bankrupt crypto lender was a modern bank and also manipulated the price of its token. Celsius did not hold a federal banking charter. Celsius was in a “dire financial situation” by mid-2022, the DOJ said.
SEC lawsuit
According to the lawsuit filed by the SEC, Celsius reportedly made “numerous false statements about Celsius’s business” while “manipulating the market for CEL,” the native token for the platform.
“In reality, Celsius bought, at Mashinsky’s direction, millions of dollars of additional CEL to bolster the price of CEL and induce investors to buy it,” the SEC claims. The regulator also included statements from unnamed former employees of the company, who said it became clear that Celsius was a “sinking ship” prior to the bankruptcy, while another said that the firm didn’t “have any profitable services.”
In 2021, Celsius incurred losses of $800 million due to its unstable financial model and lost another $165 million in 2022 amid the fallout surrounding the collapse of Terra/Luna. The DOJ said by the time that the algorithmic stablecoin TerraUSD depegged and caused the crypto market to drop, Celsius “could not withstand the drop in crypto asset prices.”
The combination of customer withdrawals and a steep drop in the price of CEL exerted significant financial pressure on the company.
Despite this reality, Celsius claimed in May 2022 that “all user funds are safe,” and on June 10, Mashinsky “sought to reassure investors further by claiming that Celsius has ‘billions in liquidity.’”
User withdrawals and deposits were paused a couple of weeks after he made those statements, and the company filed for bankruptcy in July.
“Among other false representations, Defendants misrepresented Celsius’s central business model and the risks to investors by claiming that Celsius did not make uncollateralized loans, the company did not engage in risky trading, and the interest paid to investors represented 80% of the company’s revenue,” the SEC lawsuit alleges.
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| Celsius was a Ponzi from day one: Examiner report |
CFTC lawsuit
According to the CFTC lawsuit, Celsius “acted as an unregistered commodity pool operator of the Celsius Pool by soliciting, accepting, and receiving assets for the purpose of trading commodity interests; and Mashinsky operated as an unregistered associated person of that CPO by soliciting members of the public to contribute to the Celsius Pool.”
“In order to meet the returns promised to its customers, Celsius engaged in increasingly risky investment strategies, including the extension of millions of dollars in uncollateralized loans and millions of dollars in unregulated, risky decentralized finance agreements,” the CFTC said.
FTC lawsuit
According to the FTC, Celsius customers were “duped” into depositing crypto on the platform after the company and its CEO assured investors that the lender was “safer than a bank or traditional institution” and made claims that deposits were safe.
The firm told its users that it earns profits at “no risk” to its customers “by making secured crypto loans to other exchanges,” the FTC said. “Internally, Celsius employees acknowledged that the promises that Celsius made only collateralized loans were false, and that Mr. Mashinsky was a ‘liar’ for claiming that ‘we do not do unsecured lending.’”
Shlomi Daniel Leon, a co-founder and the current CSO for Celsius, was also named in the FTC lawsuit.
In the time since the lawsuit was made public, the FTC announced it reached a settlement with Celsius and its affiliates that “will permanently ban the companies from offering, marketing, or promoting any product or service that could be used to deposit, exchange, invest, or withdraw any assets.”
The companies also agreed to a fine of $4.7 billion, which will be suspended “to permit Celsius to return its remaining assets to consumers in bankruptcy proceedings.”
“Celsius touted a new business model but engaged in an old-fashioned swindle,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “Today’s action banning Celsius from handling people’s money and holding its executives accountable should make clear that emerging technologies are not above the law.”
Mashinsky, Leon and Hanoch Goldstein did not agree to the settlement and the FTC’s case against them will proceed in federal court.
Each of the four suits made public on Thursday conveys similar claims against the bankrupt lender and its former CEO, saying both defrauded investors and misled the public about its financial position.
Celsius has been going through the bankruptcy process since July 2022. The firm received approval to convert some of its less liquid assets into Bitcoin (BTC) and Ether (ETH) beginning July 1, 2023, in an effort to maintain as much value for its creditors as possible. The SEC said that it “reserves its rights” to challenge the transactions.
