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

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

Benjamin Girette | Bloomberg | Getty Images

New York Attorney General Letitia James sued former Celsius Network CEO Alex Mashinsky on Thursday, alleging that Mashinsky defrauded hundreds of thousands of investors at his now bankrupt crypto exchange.

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

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

The attorney general’s office is seeking to fine Mashinsky and impose damages, and bar him from running a business or working in the securities industry in New York.

The action is civil, not criminal, and is being brought under the Martin Act, New York State’s broad securities law. The Martin Act gives prosecutors sweeping search and subpoena powers to investigate potential wrongdoing.

Celsius offered exorbitant returns that lured investors and bloated the stock exchange’s coffers. Celsius, like Voyager Digital, also bankrupt, was able to pay out returns of up to 17% by lending client assets to crypto hedge funds, including the now-collapsed Three Arrows Capital and Sam Bankman-Fried’s Alameda Research.

The 2022 Terra/Luna crash forced 3AC into bankruptcy and deepened an ongoing “crypto winter”. Celsius was exposed to the downfall of Terra and Luna through both loans to 3AC and direct investments of $935 million in “highly speculative” Terra bets, all backed by investor funds, according to the report. complaint.

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

These statements were false, according to James’ complaint, and were part of a larger campaign to prevent user exits that could have precipitated a run on the bank similar to what happened at FTX, another bankrupt exchange.

But Mashinsky made “materially false and misleading” statements designed to hide the true extent of Celsius’ exposure, saying the crypto exchange had “billions in cash” just days before Celsius filed for bankruptcy. on July 13, 2022, according to the complaint.

Celsius investors were left behind and so discouraged that some contemplated suicide, CNBC previously reported.

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

Mashinsky stepped down as CEO in September 2022. At the time, he apologized for the “increasing distraction” his leadership had caused.

“Alex Mashinsky is no longer employed by Celsius and is not involved in the management of the business,” a Celsius spokesperson told CNBC.

Mashinsky did not immediately respond to requests for comment.

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