The New York Attorney General Letitia James is suing Alex Mashinsky, co-founder and former CEO of bankrupt crypto lender Celsius Network, alleging he defrauded hundreds of thousands of investors, including 26,000 New Yorkers.
The lawsuit claims that Mashinsky of lying to investors, concealing Celsius’s financial problems, and failing to meet state law registration requirements under his watch.
"The law is clear that making false and unsubstantiated promises and misleading investors is illegal," James said in a statement. "Today, we are taking action on behalf of thousands of New Yorkers who were defrauded by Mr. Mashinsky to recoup their losses."
Celsius Network was a lending platform that took in crypto and cash deposits from retail investors, and then lent them out to institutional investors to pay customers high rates of interest.
In its statement, the New York AG's office said: "Mashinsky repeatedly claimed that Celsius made safe, low-risk investments and only lent assets to credible and reputable entities. However, investors' assets were routinely exposed to high-risk counterparties and strategies, many of which resulted in losses that Mashinsky concealed from investors."
The business plan officially fell through at the beginning of June when the company froze customer withdrawals. Celsius filed for bankruptcy protection at the beginning of July.
At Celsius' petition date, the company had approximately 600,000 accounts in its Earn program, which carried a market value of $4.2 billion as of July 10, which included $23 million in dollar-pegged stablecoins. The company also reported a $1.2 billion gap between its assets and liabilities.
New York's suit follows similar suits against crypto lender Nexo in September and its $1 million settlement with the now bankrupt lender, BlockFi.
Following Celsius' July petition, dozens of customers filed letters to the court arguing Mashinsky had misled them.
According to the lawsuit, on several occasions Mashinsky’s statements ran contrary to the company’s risk management hygiene. For example, the lawsuit and at least one customer cited a CNBC interview on April 13, where he said the company doesn’t “offer any non-collateralized loans.”
However, it also increased exposure to uncollateralized loans between 2020 to June 2022, making those riskier loans to at least 19 different counterparties including Alameda Research and Three Arrows Capital, the suit alleged.
Mashinsky resigned in late September saying his role as CEO had "become an increasing distraction."
A bankruptcy judge overseeing Celsius’ chapter 11 proceedings ruled Wednesday that deposits Celsius customers put into its Earn program belong to the bankruptcy estate, not its customers.
The company’s Terms of Use was acknowledged by the judge as a “contract governed by New York law,” which meant Celsius held “all right and title to such Eligible Digital Assets, including ownership rights” in the cryptocurrency assets (including stablecoins), according to the order.
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