Exactly a year after Celsius Network filed for bankruptcy, the firm and its founder Alex Mashinsky are now facing charges of fraud and unregistered offer and sale of securities. The U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice through the New York State Attorney’s Office have all taken action against Celsius and Mashinsky for alleged violations of federal securities laws.
Celsius had filed for bankruptcy on July 14 of the previous year, and its assets were recently acquired by crypto consortium Fahrenheit.
The SEC has accused Celsius and Mashinsky of various violations, including failing to register the offers and sales of Celsius’s crypto lending product, the Earn Interest Program. The complaint alleges that Celsius misrepresented its business and made false statements to investors regarding trading strategies, risks, financial health, and the safety of customer assets.
“Celsius lied to investors by presenting itself as a safe investment opportunity and a chance to gain financial freedom, but, behind the scenes, the company operated a failing business model and took significant risks with investors’ crypto assets,” said Gurbir Grewal, Director of the SEC’s Enforcement Division. “Thousands of retail investors have experienced significant financial hardship as a result of Celsius’s and Mashinsky’s illegal conduct, and today we are holding Celsius and Mashinsky responsible for defrauding thousands of retail investors.”
Additionally, the SEC claims that Celsius and Mashinsky engaged in market manipulation to artificially increase the price of the company’s crypto asset security, CEL.
Celsius operated the Earn Interest Program from 2018 until June 2022, offering investors the opportunity to earn interest on their crypto assets. However, the SEC asserts that Celsius did not register the program as a securities offering nor qualify for any exemption, thereby depriving investors of the protections provided by registration.
Moreover, the complaint alleges that Celsius and Mashinsky made false and misleading statements about the company’s operations, strategies, and financial status, misleading investors who placed their trust in Celsius.
As a result of these charges, the SEC seeks injunctions against future securities law violations and an injunction preventing Mashinsky from participating in crypto asset securities transactions. The complaint also requests financial penalties, disgorgement of profits, and prejudgment interest.
Celsius, however, has cooperated with the SEC and agreed to the relief requested in the complaint, including a permanent injunction against future securities law violations.
The news comes after it was reported that Mashinsky was reportedly arrested on July 13 following an investigation into the company’s collapse, according to Bloomberg’s sources.
CFTC
The CFTC has also filed a separate complaint against Mashinsky and Celsius, alleging fraud and material misrepresentations in connection with the operation of their digital asset-based finance platform. The complaint claims that Celsius acted as an unregistered commodity pool operator (CPO), and Mashinsky operated as an unregistered associated person (AP) of a CPO.
“As companies and individuals develop new products and services utilizing digital asset commodities, they must adhere to the long-established rules prohibiting fraud in the market and comply with the registration requirements of the Commodity Exchange Act,” said Director of Enforcement Ian McGinley.
The complaint alleges that between 2018 and June 2022, Mashinsky and Celsius were involved in a fraudulent scheme, deceiving hundreds of thousands of customers by misrepresenting the safety and profitability of their digital asset-based finance platform. Through various public channels such as videos, blog posts, livestreams, social media, and their website, they marketed Celsius as a secure alternative to traditional banks, assuring customers that their digital assets would be safe and promising high interest payments.
To generate the income needed for these interest payments, Celsius pooled and used customers’ digital assets for loans to institutional and retail customers, as well as for other revenue-generating activities, including futures trading. However, Celsius operated the Celsius Pool without registering as a CPO.
Furthermore, Mashinsky failed to register as an AP of a CPO, despite soliciting the general public to contribute to the Celsius Pool. Based on the false assurances of safety and high interest rates, customers entrusted approximately $20 billion to Celsius.
Despite Mashinsky’s claims in May 2022 that Celsius had substantial liquidity and could accommodate customer withdrawals, the company abruptly froze withdrawals on June 12, 2022. On July 13, 2022, Celsius filed for bankruptcy, revealing liabilities exceeding assets by over one billion dollars.
The CFTC seeks restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations.
New York State Attorney
In parallel with the SEC and CFTC actions, the U.S. Attorney’s Office for the Southern District of New York has charged Mashinsky, Celsius’s Chief Revenue Officer Roni Cohen-Pavon, and other employees, with fraud, while Celsius has reached a non-prosecution agreement with the office.
In an unsealed indictment, it was alleged that Mashinsky and Cohen-Pavon profited from fradulent activities in two schemes. In the first scheme, Mashinsky deceived customers by misrepresenting crucial aspects of Celsius’s business. He portrayed Celsius as a safe and profitable platform where customers could deposit crypto assets and earn interest, similar to a modern-day bank. However, in reality, Mashinsky operated Celsius as a risky investment fund.
Mashinsky promoted Celsius through media interviews, Twitter, and weekly “Ask Mashinsky Anything” sessions. The Attorney’s Office claimed that Mashinsky “made so many false and misleading statements
in the [sessions] that Celsius employees from multiple departments began to review [them] after
they had aired, flag false and misleading statements by Mashinsky, and, at times, edit Mashinsky’s misrepresentations out of the recorded versions of the [sessions] posted to the internet.”
In the second scheme, Mashinsky, Cohen-Pavon, and other Celsius employees engaged in illicit manipulation of CEL’s price. This manipulation led the public to purchase CEL tokens at inflated prices, which personally benefited Mashinsky and Cohen-Pavon. They were secretly selling their own CEL tokens at prices that they knew did not reflect the true market value of the tokens.
“Under the direction and leadership of Alexander Mashinsky, the defendant, Celsius also launched its own native crypto token, CEL, through an initial coin offering (ICO) in or about 2018 designed to raise money to fund Celsius’s operations,” the unsealed indictment wrote. “During and after this ICO, Mashinsky falsely claimed that Celsius had sold all the CEL tokens that it had made available for sale to the public during the ICO for a total raise of $50 million.”
“In reality, Celsius failed to sell more than one-third of the 325 million CEL tokens it had made available for sale and only raised approximately $32 million through the ICO,” the indictment added.
Celsius and its former CEO faced difficulties starting in June of the previous year when the platform suddenly halted withdrawals. Subsequently, securities regulators from five U.S. states launched an investigation into Celsius on June 16, 2022, and the company filed for bankruptcy within a month.
“On or about June 12, 2022, Celsius announced that it was halting all customer withdrawals from the Celsius platform. At that time, hundreds of thousands of Celsius customers-many of whom were retail investors- still had approximately $4.7 billion worth of crypto assets on the Celsius platform, none of which they could access,” the indictment read.
The investigation into the troubled crypto lender began after New York State Attorney General Letitia James sued Mashinsky on January 5. The lawsuit alleged that the former CEO had misled investors, resulting in billions of dollars in losses.
The SEC and CFTC expressed their appreciation for the collaborative efforts of the U.S. Attorney’s Office and the FBI.
Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
