Former Crypto Lender Celcius CEO Sued in New York Over Misleading Investors

Bloomberg — Former Celsius Network Ltd. CEO Alex Mashinsky, whose cryptocurrency firm went bankrupt last year, has been sued for fraud by the New York Attorney General, the latest fallout from the industry turmoil.

According to a lawsuit filed Thursday in Manhattan, Mashinsky, co-founder of Celsius, has duped hundreds of thousands of investors out of billions of dollars in cryptocurrency by repeatedly making false and misleading claims about lender security. The alleged scheme lasted from 2018 until June 2022, when Celsius froze withdrawals.

“Alex Mashinsky promised to lead investors to financial freedom, but he led them down a path of financial ruin,” New York Attorney General Letitia James said in a statement. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”

The New York lawsuit seeks to permanently bar Mashinsky from conducting business related to the issue, offer or sale of securities or commodities in the state. It also seeks to prevent you from serving as a director or officer of any company that does business in New York. If James prevails in the case, he will seek return of profits from Mashinsky’s alleged illegal conduct, as well as damages and restitution to customers.

Mashinsky did not immediately respond to a message seeking comment.

It’s the latest blow to the industry’s image following the arrest last month of former cryptocurrency mogul Sam Bankman-Fried on fraud charges and the collapse of his FTX empire. James, who has been sounding the alarm about cryptocurrency risks since early 2021, has been involved in several industry enforcement actions, including lawsuits last year against Nexo Inc. and a nearly $1 million settlement with the cryptocurrency platform BlockFi Lending LLC.

Celsius filed for bankruptcy in July amid a $2 trillion market crash that wiped out some of the biggest names in the industry and exposed hundreds of thousands of investors to heavy losses. The lender, which had gambled long before the crash, later declared a deficit of $1.19 billion. Celsius previously said Alameda Research, the commercial firm Bankman-Fried co-founded that is now the focus of his criminal case, owes the lender $12 million.

James said one New York resident mortgaged two properties to invest with Celsius, while another — a disabled veteran — lost his $36,000 savings he had built up over nearly a decade.

“Another disabled citizen, who relied on government assistance to supplement his $8 an hour income, lost his entire investment,” James said in his statement.

Mashinsky and other top executives had withdrawn millions of dollars of cryptocurrency in the weeks before the Celsius crash.according to the company’s bankruptcy case documents.

James argues that Mashinsky repeatedly told the public that Celsius made “safe, low-risk investments” and only lent assets to “credible and reputable entities,” while actually exposing them to high-risk counterparties and strategies. He then misrepresented and covered up the deteriorating financial condition of Celsius, which lost hundreds of millions of dollars in risky investments, according to the attorney general.

Ultimately, Mashinsky defrauded more than 26,000 New Yorkers who invested an estimated $440 million by the end of 2021, according to James.

Mashinsky billed himself as a “modern Robin Hood” promising investors returns of up to 17%, a boast that helped Celsius amass $20 billion in digital assets from investors around the world., according to the complaint. But the lender has struggled to deliver on its promised returns and has turned to riskier investments, the attorney general said.

Celsius allowed users to earn returns on their digital currencies by lending them and sometimes invested the tokens in other applications that generated returns or lent them to institutional investors.

Mashinsky once hosted regular “ask me anything” sessions on YouTube and Twitter, downplaying the risk of investing in Celsius. In a June 10 session, days before the withdrawal freeze, he discussed the rewards users were earning with Celsius.

“All these haters built nothing,” he said.

The case is New York v. Alex Mashinsky, New York State Supreme Court, New York County (Manhattan).

Read more at Bloomberg.com