(Bloomberg) -- Former Celsius Network Ltd Chief Executive Officer Alex Mashinsky was accused by US prosecutors of pumping up the price of his firm’s cryptocurrency to entice customers to the platform — all so he could line his pockets to the tune of $42 million.
Mashinsky, who was arrested and charged with wire fraud and other crimes, waged a yearslong scheme to mislead customers before Celsius collapsed last year with more than $1 billion in debt, according to prosecutors. He pleaded not guilty at a hearing Thursday in New York.
Celsius was one of several high-profile crypto firms that imploded last year. The company gained popularity paying high interest rates on digital-asset deposits. But following the collapse of the TerraUSD stablecoin and a downturn in the digital-asset markets the company was unable to meet an influx of customer withdrawals.
“Over the course of the past year we have worked quickly to get to the bottom of what led to Celsius’s collapse,” Damian Williams, the US Attorney for the Southern District of New York, said at a press conference. “To understand how a platform that advertised itself as the ‘safest place for your crypto’ could have left investors holding billions of dollars in losses. Today we have the answer.”
In a 46-page unsealed indictment, prosecutors alleged Celsius staff were forced to change rosy public comments Mashinsky made about the platform’s financial health during his weekly question and answer sessions — “Ask Mashinsky Anything” — because the statements were “false and misleading.”
Mashinsky’s lawyer Jonathan Ohring said his client vehemently denied the claims.
“He looks forward to vigorously defending himself in court against these baseless charges,” he said in a statement.
Mashinsky will be released on bail after agreeing to a $40 million personal recognizance bond, co-signed by his wife and another person. He handed in his two passports to authorities and his travel is restricted to New York.
The Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission also filed lawsuits against Mashinsky. The company, however, entered into a non-prosecution agreement with DOJ and a pending settlement deal with the FTC.
Celsius’s former chief revenue officer, Roni Cohen-Pavon, was also charged with four counts, including fraud. Williams said Cohen-Pavon, an Israeli citizen, is “abroad,” but wouldn’t comment on whether the government would seek his extradition.
Authorities allege that from 2018 through June 2022, Mashinsky “orchestrated a scheme to defraud customers of Celsius Network LLC and its related entities,” according to the indictment. Mashinsky and Cohen-Pavon are also accused of manipulating the price of CEL, Celsius’s native token, prompting customers to purchase it at inflated prices. When Mashinsky and Cohen-Pavon sold their CEL at a profit, they allegedly made about $42 million and $3.6 million respectively.
The price of CEL token issued by Celsius dropped about 6% to around 15 cents, according to data from CoinMarketCap, after the criminal and regulatory filings against the company and Mashinsky. It had traded as high as $8 in June 2021.
Mashinsky is the latest crypto industry figure to face charges after a market downturn exposed shady practices and in some cases, fraud, across the sector. Mashinsky, who helped start Celsius in 2017, has been under intense scrutiny from multiple government agencies since his firm filed for bankruptcy a year ago.
The SEC alleged that Mashinsky and his company made misleading statements to encourage investors to purchase its token, CEL, and to put money into the firm’s Earn Interest Program that promised returns as high as 17% on users’ crypto deposits.
“We allege they engaged in a elaborate fraud involving hundreds of thousands of investors and at its peak, over $28 billion in assets on the company’s balance sheet,” SEC director of enforcement Gurbir Grewal said.
The regulator also accused Mashinsky of misrepresenting Celsius’s financial success to make it appear more profitable than it really was. For instance, the SEC said he falsely claimed the firm made $50 million from an initial coin offering when in actuality it raised less than 65% of its goal — something Mashinsky took steps to hide from the public.
On May 11, 2022, Celsius said on Twitter that the company “abides by robust risk management frameworks to ensure the safety and security of assets on our platform. All user funds are safe. We continue to be open for business as usual.”
But in reality, Celsius was “in dire financial shape” and company executives were communicating about “significant financial losses” at the time. On May 9, a Celsius executive had called the company “a sinking ship,” the SEC said.
The CFTC complaint alleged that Celsius “engaged in increasingly risky investment strategies,” including extending millions of dollars in uncollateralized loans and placing investor assets in unregulated decentralized finance, or DeFi, projects.
“While this was the first case the agency had brought against a crypto lending platform, our allegations are all too familiar for those paying attention,” CFTC director of enforcement Ian McGinley said.
The FTC on Thursday announced a settlement with Celsius shortly after filing its suit under consumer protection laws. The regulator said Celsius had agreed to a ban on handling consumer assets and a $4.7 billion fine. That fine will be suspended to allow Celsius customers to continue seeking recovery through the bankruptcy process, the regulator said in a statement. The suit against Mashinsky and other executives will continue.
New York Attorney General Letitia James was first to strike against Mashinsky and sued him in January for fraud. James accused Mashinsky of duping New York investors out of billions of dollars in crypto assets by making false and misleading statements about the lender’s safety.
The actions against Celsius mark the latest in a string of civil and criminal crypto cases brought by US authorities this year. Federal prosecutors in New York have charged a slew of industry actors for alleged misconduct — most notably FTX co-founder Sam Bankman-Fried.
--With assistance from Bob Van Voris, Lydia Beyoud and David Voreacos.
(Updates with not guilty plea in second paragraph)
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