(Bloomberg) -- The US Justice Department’s case against Alex Mashinsky, the former chief executive officer of bankrupt crypto lender Celsius Network Ltd., paints a picture of a man who went to great lengths to dupe investors about the value of his once-high-flying business.

In an indictment unsealed Thursday in Manhattan, prosecutors claim that from 2018 through June 2022 Mashinsky orchestrated a wide-ranging scheme to mislead Celsius customers about “core aspects” of the company’s business and inflate the value of its proprietary token, CEL. The alleged scheme was previewed in an earlier civil suit by New York’s attorney general, but the Justice Department case puts the claims in sharper focus.

The charges boil down to an old deception with a fresh crypto angle:

Mashinsky portrayed Celsius as a modern-day bank, where customers could safely deposit crypto assets and earn interest. In truth, however, Mashinsky operated Celsius as a risky investment fund, taking in customer money under false and misleading pretenses and turning customers into unwitting investors in a business far riskier and less profitable than what Mashinsky had represented. 

Calling Celsius as the “safest place for your crypto” Mashinsky urged the public to “unbank” themselves by moving their assets to Celsius. Customers were enticed with returns on their crypto assets in the form of weekly “rewards,” and the ability to take loans secured by their deposits. But the promises were never what they seemed, prosecutors say.  

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. Mashinsky misrepresented, among other things, the safety of Celsius’s yield-generating activities, Celsius’s profitability, the long-term sustainability of Celsius’s high-reward rates, and the risks of associated with depositing crypto assets with Celsius.

Mashinsky’s habit of speaking directly to customers and potential customers via live-streamed “Ask Mashinsky Anything” broadcasts featured heavily in the indictment. The sessions, posted to Celsius’s YouTube page, included so many false and misleading statements that Celsius employees regularly had them edited out before they went online, prosecutors say.

But, despite warnings from other Celsius employees, Mashinsky continued to misrepresent the nature of Celsius’s core business activities in live broadcasts. Moreover, neither Mashinsky nor Celsius ever issued corrections to notify the public and those who had watched the live recorded versions of the AMAs that certain of Mashinsky’s statements were untrue or misleading.

The indictment outlines a second scheme that focused on alleged efforts to manipulate the price of CEL in a way that caused the public to buy into the token at inflated prices. It started when Mashinsky allegedly lied to customers about the outcome of Celsius’s 2018 “initial coin offering” for CEL by claiming he’d raised $50 million by selling all the tokens he had made available.

In reality, Celsius failed to sell more than one-third of the 325 million CEL tokens it had made available for sale and only raised approximately $32 million through the ICO.

The alleged deception kicked off a years-long scheme to “mislead customers and market participants” about the value of CEL, allowing Mashinsky to sell his own tokens at inflated values, according to the indictment. The CEO and others manipulated the true worth of CEL by spending hundreds of millions of dollars to buy CEL in the open market to inflate the price, the US says.

Mashinsky, the defendant, repeatedly made false and misleading public statements concerning the nature of Celsius’s market activity and the extent to which Celsius itself was responsible for artificially supporting and inflating the price of CEL, thus making it appear that there was a broader market interest in CEL than actually existed.

Celsius’s false and misleading statements couldn’t protect the company when the crypto industry was in crisis. But that didn’t stop Mashinsky from allegedly telling customers that everything was fine, according to the indictment.

Mashinsky, the defendant, nevertheless continued to publicly tout the safety of Celsius and encourage customers to continue to deposit crypto on the Celsius platform, even as Mashinsky himself withdrew almost all his non-CEL personal crypto deposits, worth millions of dollars, from the Celsius platform.

On June 12, 2022, Celsius announced that it was halting all customer withdrawals. At the time, hundreds of thousands of investors had about $4.7 billion worth of crypto assets on the Celsius platform, “none of which they could access,” according to the indictment. Celsius filed for Chapter 11 bankruptcy the next day.

SEC Complaint

The US Securities and Exchange Commission, which also sued, highlighted efforts by Celsius and Mashinsky to hide its financial condition in the spring of 2022, even as its crypto assets sharply declined in value.

On May 11, 2022, Celsius said on Twitter that it “abides by robust risk management frameworks” and that “all user funds are safe,” according to the suit. But in reality, Celsius was “in dire financial shape” and executives were communicating about “significant financial losses” at the time, the SEC claims.

Nine days before the tweet, Mashinsky and board members discussed the company’s “significant financial losses and struggling business model.” A presentation noted pre-tax losses of $811 million for 2021 and $165 million in losses for the first quarter of 2021.

On May 9, a Celsius executive called the company “a sinking ship,” the SEC said.

Within days, that executive wrote “there is no hope…there is no plan,” and the business model is “fundamentally broken.”

Celsius allegedly doubled down on its deception by encouraging customers to ignore the warning signs, the SEC said. In a June 7 blog post entitled “Damn the Torpedoes, Full Speed Ahead,” the company said it was “deeply optimistic about the future,” despite “misinformation and confusion.”

At the same time, a business outlook presentation had been circulating that said: “Celsius has been consistently losing money and is facing an erosion in the capital position as well as liquidity constraints. The current business model is not financially sustainable.”

CFTC Complaint

By 2021, Celsius’s reward obligations to customers exceeded net revenue by about $1 billion and by $380 million in the first half of 2022, the CFTC said in its complaint.

The company “used customer assets to fund operational expenses and rewards, failed to adequately track or reconcile customer assets and liabilities on a digital asset by digital asset basis,” and didn’t “recognize a significant shortfall in customer deposited digital asset commodities.”

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