Independent examiner finds Celsius ticks every Ponzi box

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An independent investigation has determined that now-bankrupt crypto lender Celsius Network was a Ponzi scheme by using client funds to buy up its native token and inflate price.

Since September, former prosecutor Shoba Pillay has examined claims that the crypto lender was misappropriating funds and defrauding investors. Pillay, a partner at law firm Jenner & Block, was appointed as an independent examiner by US bankruptcy judge Martin Glenn, who oversees Celsius’ chapter 11 bankruptcy case.

The executive summary of Pillay’s 689-page report states that Celsius’ promises of “trust,” “transparency,” and “financial freedom” were a complete lie.

“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 concluded.

34 people were interviewed as part of the investigation, including Celsius’ former chief exec and founder Alex Mashinsky, current and past employees, customers, and business partners.

Report says Celsius misused millions of client funds in Ponzi scheme

Since the middle of March 2020, Celsius has been secretly timing its purchases in order to prop up the price of CEL significantly, the report said. By June 2021, CEL’s price “increased by 14,751%.”

Celsius’ inner circle made millions in profits from their hefty share of tokens soaring in value. Chief exec and founder Alex Mashinsky has reportedly sold at least 25 million CEL tokens since 2018, worth at minimum $68.7 million — despite repeatedly denying his dumps to the public.

Read more: The many misrepresentations of Alex Mashinsky

To keep Celsius’ token value stable during major sales by early investors, Celsius “often increased the size of its resting orders to buy all of the CEL that [they] were selling.” All the while, employees were aware and increasingly urging executives to adopt proper procedures.

“We are using users USDC to pay for employees worthless CEL… All because the company is the one inflating the price to get the valuations to be able to sell back to the company,” one employee was quoted as saying in Celsius’ Slack channel.

  • Celsius spent at least $558 million buying its own token, the newly published report revealed.
  • Since 2018, Celsius reportedly transferred at least 223 million CEL from the secondary markets to its own wallets — more than the 203 million CEL released in its ICO.
  • Basically, Celsius bought every CEL token ever created “at least one time and in some instances, twice.”

Celsius couldn’t afford to keep buying back all of its own sales — so it decided to use customer deposited bitcoin and ether to pay for it instead, the report said. Only, the company failed to keep track of how much it was stealing from whom. In 2021, it found itself missing a bunch of bitcoin and ether that it suddenly needed to buy in order to keep up with customer withdrawals — right when the price of bitcoin and ether was soaring.

It allegedly decided to use client deposits to buy approximately $300 million in stablecoins to correct this shortfall — a band-aid on a leaking ship.

Read more: Investigation finds Celsius ‘Custody’ was ploy to remain relevant

“As a result, Celsius was left with a hole in its balance sheet of stablecoins rather than BTC and ETH,” the independent report stated. “That hole continued to grow as a result of Celsius’ continued buybacks of CEL and the significant losses Celsius suffered on some of its deployments in 2021.”

Celsius owes millions in bills and taxes

The report highlighted how Celsius executives exacerbated mounting liquidity issues by refusing to lower ridiculously high reward rates, turning to high-risk investments to increase yield, and accepting FTX’s own propped-up token as collateral.

Indeed, Celsius enjoyed close ties to other controversial crypto projects Tether and FTX. Pillay stated in the report that certain borrowers, including Tether, Alameda Research, and Three Arrows Capital enjoyed limits sometimes twice or three times greater than standard. At one point, Tether’s exposure grew to $2 billion and was deemed an “existential risk” internally.

Celsius was eventually forced to pause customer withdrawals in June to avoid insolvency. Had it not done so, “new customer deposits inevitably would have become the only liquid source of coins for Celsius to fund withdrawals,” Pillay’s report stated.

For the most part, Celsius had enough remaining reserves to satisfy the remaining outstanding withdrawals — but occasionally, the firm did indeed “directly use new customer deposits to fund customer withdrawal requests.”

Investigators further uncovered almost $14 million in unpaid utility bills in its mining arm, Celsius Mining, as well as “significant tax compliance deficiencies.” A suspected $23.1 million in use taxes remains outstanding while $3.7 million has been reserved for “potential VAT liability.”

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