(Bloomberg) -- A court-appointed examiner blasted crypto lender Celsius Network Ltd and its former Chief Executive Officer Alex Mashinsky for lacking adequate risk management and misleading customers about its business practices and financial health. 

Examiner Shoba Pillay said in her 689-page final report published Tuesday that Celsius — which let people earn yield on their coins by lending them out — lacked the ability to accurately track its assets and liabilities, and tried to erase misrepresentations made by Mashinsky in public statements. 

The company continued to present an optimistic financial picture to its customers even as it faced a worsening liquidity crunch from May, with employees describing the firm internally as a “sinking ship” with no plan, the report said. Celsius also failed to transparently disclose information on purchases of its token CEL, and used customer assets as collateral for loans to patch up holes in its balance sheet.

“Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” the report said. 

The findings come as Celsius continues to inch its way through bankruptcy proceedings while investigations by state and federal regulators in the United States are ongoing. The company filed for bankruptcy in July after a sharp decline in crypto prices exacerbated by the collapse of the Terra blockchain led its risky bets to backfire. The lender, which has more than 100,000 creditors, had halted withdrawals weeks before filing for bankruptcy. 

The examiner was appointed in late September to investigate how Celsius ran its business, including whether different types of user accounts were commingled.

In Tuesday’s report, Pillay noted how comments made by Mashinsky in live weekly question-and-answer sessions with users — intended to present a rosier picture of Celsius’s business — were monitored and in some instances edited by Celsius employees after they had aired to remove inaccurate and misleading content. 

Mashinsky repeatedly told customers that the firm’s CEL token value reflected the business’s value, despite internal conversations throughout 2022 in which employees said CEL should be worth $0. Celsius and its managers also told users that cryptoassets deposited with Celsius were “your assets” that would be returned in the event of bankruptcy, while Celsius’s terms of service stated from March 2020 that all rights of ownership had been transferred to the company.

The latest report examined purchases of CEL made by Celsius itself, using customer funds and money raised from outside investors. It found that the lender spent at least $558 million buying its own token, and concealed from customers the extent to which it was making the market for CEL. 

Celsius often sought to protect CEL from price drops that it attributed to Mashinsky’s sales of large amounts of his personal CEL holdings, the report said. Between 2018 and when Celsius filed for bankruptcy, Mashinsky sold at least 25 million CEL tokens — realizing at least $68.7 million on these sales — while co-founder S. Daniel Leon sold at least 2.6 million CEL tokens for at least $9.74 million, the report said.

Mashinsky, who resigned from Celsius in September, didn’t immediately respond to a request seeking comment.

Celsius also told customers it was offering high yields by investing their assets into low-risk and fully-collateralized institutional and retail loans. In reality, the company began making riskier investments in an effort to attract more customers during the market boom in 2020 and 2021, providing loans that were not fully secured or were unsecured in order to charge higher interest rates, according to the report. By June 2021, it was routine for as much as a third of Celsius’s institutional loan portfolio to be wholly unsecured, the report said.

Faulty Accounting and Risk Management

Celsius’s own accounting systems hampered the examiner’s ability to analyze the business’s financial condition, the report said. The lender used a mix of spreadsheets and accounting systems QuickBooks and NetSuite to record its data. 

The examiner also uncovered “significant tax compliance deficiencies” within Celsius, given it had not employed anyone to do the job until 2021 and then failed to institute the necessary systems to ensure tax was paid. The firm’s Bitcoin mining operations experienced similar issues, with $14 million in unpaid utility bills and as much as $23 million in owed taxes. 

Celsius did not have a risk management function or written risk policies before 2021, the report said, when it hired four individuals to form its first team. This new team began to institute what were described as “stop-gap” measures to allow time to implement more robust procedures in 2022. Despite these changes, while an individual was hired to implement internal audit procedures, the firm’s executive team delayed his proposals and “Celsius never fully implemented a robust risk management policy before it filed for bankruptcy.” 

Pillay first filed a 302-page interim report in November, describing Celsius’s liquidity crunch and the shortfall of funds in the company’s Custody accounts. That report found commingling of some accounts, and said Celsius launched its Custody program “without sufficient accounting and operational controls or technical infrastructure.” 

(Updates with details on the report)

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