New York AG accuses Celsius ex-CEO of defrauding crypto buyers

Alex Mashinsky, founder and chief executive officer of Celcius Network Ltd., during a panel session at the Blockchain Week Summit in Paris, France, April 13, 2022.

Benjamin Girette | Bloomberg | Getty Images

New York Attorney General Letitia James on Thursday sued former Celsius Network CEO Alex Mashinsky, alleging that Mashinsky defrauded hundreds of thousands of investors out billions of dollars on the now bankrupt cryptocurrency exchange.

Mashinsky publicly assured clients that investing with Celsius is both safer and more lucrative than leaving their investments with a traditional bank. At one point, deposits with the crypto exchange were valued at $20 billion, according to the complaint. But Mashinsky’s statements were false, James claims, and became part of his efforts to hide deep losses in risky crypto lending investments.

“As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” James said in a statement.

The attorney general’s office wants to fine Mashinsky, seek damages and prevent him from running a company or working in the securities industry in New York.

The lawsuit is civil, not criminal, and was brought under the Martin Act, New York State’s broader securities statute. The Martin Act gives prosecutors broad search and subpoena powers to investigate possible wrongdoing.

Celsius offered sky-high yields that attracted investors and swelled the stock market’s coffers. Like the similarly bankrupt Voyager Digital, Celsius has been able to pay off returns of up to 17% by lending client assets to crypto hedge funds including the now-collapsed Three Arrows Capital, known as 3AC, and Sam Bankman-Frieds Alameda Research.

The 2022 crash of cryptocurrencies Terra and Luna forced 3AC into bankruptcy and deepened an ongoing “crypto winter.” Celsius was exposed to the sinking of Terra and Luna both through loans to 3AC and $935 million in direct investments in “highly speculative” Terra bets, all funded by investor money, the complaint said.

Mashinsky claimed that Celsius had “very small losses” and that the exchange had “generally reduced or eliminated any exposure” to borrowers investing in Terra or Luna.

These statements are false, James claims, and are part of a broader campaign to prevent user drains that could have sparked a run on the bank, similar to FTXanother bankrupt exchange.

But Mashinsky made “materially false and misleading” statements aimed at hiding the true extent of Celsius’ exposure, claiming that the crypto exchange was worth over “billions of liquidity,” the complaint reads.

Celsius investors were so despondent and so desperate that some considered suicide, CNBC previously reported.

“Mashinsky never disclosed that Celsius ran a deficit of nearly $1 billion,” the complaint reads. Celsius entered bankruptcy with just $1.75 billion in crypto assets, a far cry from the $4.7 billion it owed to users.

Mashinsky resigned from his position as CEO in September. At the time, he apologized for the “increasing distraction” his leadership had caused.

“Alex Mashinsky is no longer employed at Celsius or involved in the running of the company,” a Celsius spokesman told CNBC.

Mashinsky did not immediately respond to requests for comment.

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