The New York Attorney General (NYAG) has brought a suit against Alex Mashinsky, formerly CEO of the now-bankrupt Celsius Network, for securities fraud, failure to register, repeated and persistent fraud, and repeated and persistent illegality.
In the complaint, the NYAG alleges a variety of misrepresentations that Mashinsky made. Here, we’ll summarize the specific misrepresentations they allege.
The NYAG specifically draws attention to Mashinsky’s claims that funds held by Celsius were as safe as they would have been with a bank.
The Attorney General also scrutinizes the times that Mashinsky claimed that Celsius’s lending against crypto was comparable to securities lending by broker-dealers. Specifically, the suit points to an April 2021 interview in which Mashinsky claimed that “the only difference between” the securities lending and what Celsius was doing is that “Celsius gives 80%” of the interest earned to the user.
The NYAG points out that broker-dealers are generally registered with the Financial Industry Regulatory Authority (FINRA) and must register with either the Securities and Exchange Commission (SEC) or a state securities regulator. Celsius was not registered with any of these entities. These entities also generally are insured against the failure of the broker (to a limit). Celsius had no comparable insurance.
The NYAG also draws attention to Mashinsky’s claim that “Celsius takes full responsibility if anything goes bad.”
Mashinsky would frequently promote the number of users that Celsius had, claiming “a community of almost two million people.” However, while Celsius did have approximately 1.7 million registered users, many of these were inactive, with the US subset of accounts having two-thirds of accounts with less than a dollar in balance.
Furthermore, the NYAG alleges that while Mashinsky continued to claim that “we don’t offer any non-collateralized loans” and warned that “non-collateralized loans would be taking too much risk,” Celsius was issuing uncollateralized loans, including to the now-bankrupt Three Arrows Capital (3AC).
The NYAG also alleges that Mashinsky misrepresented Celsius’s exposure to Decentralized Finance (DeFi). In June 2022, Mashinsky claimed that “90% of our business has nothing to do with DeFi,” however the suit cites documents produced by Celsius that suggest that nearly 30% of investor assets were deployed in DeFi.
The NYAG also takes issue with Mashinsky’s claim that Celsius lent only to reputable counterparties. It highlights specifically that Equities First was unable to return approximately $500 million in collateral that Celsius had deposited. It also flags that Celsius was lending to the bankrupt 3AC and Alameda Research, including lending against the FTX Token (FTT).
Furthermore, even as Celsius’s financials deteriorated, Mashinsky continued to promote it as strong and liquid.
Speaking in May 2022, he said, “Celsius is stronger than ever, we have billions of dollars in liquidity,” and a few days later he claimed that Celsius was “standing strong” and said, “we are ready with the liquidity.”
During this period, the NYAG alleges that Celsius actually had a shortfall of over $800 million and was insolvent. Indeed, according to the NYAG, Celsius’s board minutes from May 2022 specifically say that the company’s “capital sits near zero.”
Celsius played down its Luna losses
The NYAG also alleges that Celsius lost nearly double what it claimed during the collapse of Luna and Terra, and says it falsely claimed that it had reduced exposure to funds that were trading the tokens. In actuality, the firm continued to make uncollateralized loans to 3AC, which saw major losses in the Terra collapse.
In the days before Celsius closed withdrawals, Mashinsky continued to portray the firm’s financial position as strong, claiming that “Celsius has billions in liquidity” just two days before it closed withdrawals. The day before Celsius closed withdrawals, it accused someone on Twitter of spreading “FUD and misinformation” when it was suggested that withdrawals at Celsius were beginning to be a problem.
Finally, the NYAG points out that while Mashinsky publicly claimed that “regulators have looked into Celsius, they all came back thumbs up,” the reality is that several state regulators had already alleged that Celsius was engaged in illegal activities.
The NYAG in its complaint against Mashinsky lays out a pattern of public misrepresentations that misled investors about the true nature of the Celsius scheme.