Celsius founder Alex Mashinsky sued for crypto fraud by New York attorney-general

NEW YORK – New York’s attorney-general on Thursday sued Celsius Network founder Alex Mashinsky, claiming he defrauded investors out of billions of dollars in digital currency by concealing the failing health of his

now-bankrupt cryptocurrency lending platform.

Mr Mashinsky persisted in promoting Celsius as a safe alternative to banks, paying interest as high as 17 per cent on deposits, while concealing hundreds of millions of dollars of losses in risky investments, according to a complaint filed by Attorney-General Letitia James.

The civil lawsuit seeks to ban Mr Mashinsky from doing business in New York and have him pay damages for violating laws including the state’s Martin Act, which gives Ms James broad power to pursue securities fraud cases.

“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” Ms James said in a statement. “Making false and unsubstantiated promises and misleading investors is illegal.”

Celsius is not a defendant in the lawsuit.

Crypto lenders gained popularity during the Covid-19 pandemic by promising easy loan access and high interest rates to depositors. They then lent out tokens to institutional investors, hoping to profit from the difference.

But the business model often proved to be unsustainable in 2022 after a sell-off in cryptocurrency markets, including the collapse of the TerraUSD and Luna tokens.

The lawsuit against Mr Mashinsky is the latest effort by the United States government to address risky crypto practices.

It follows federal criminal charges in December against

FTX crypto exchange founder Sam Bankman-Fried, accusing him of widespread fraud.

He has pleaded not guilty.

Ms James’ lawsuit “adds to the fear factor likely facing the industry, where money is extremely tight and the capacity to absorb large fines is going to be much more limited”, said Professor Yesha Yadav, associate dean at Vanderbilt Law School.

The absence of a comprehensive federal framework to regulate crypto frees Ms James to take an “aggressive” enforcement role, Prof Yadav added.

‘Ignore the FUD’

Celsius filed for Chapter 11 protection from creditors on July 13 last year, listing a US$1.19 billion (S$1.6 billion) deficit on its balance sheet.

The filing came one month after the US-based company froze withdrawals and transfers for its 1.7 million customers, citing “extreme” market conditions.

Celsius ended November with US$9 billion of liabilities, including more than US$4.3 billion owed to customers, a court filing showed.

Ms James said Mr Mashinsky’s fraud ran from 2018 to June 2022, when deposits were frozen, with more than 26,000 New Yorkers among his victims.

Many victims were ordinary investors, like a father of three who lost his life savings of US$375,000, and a disabled veteran who lost the US$36,000 he spent nearly a decade saving, she said.

Mr Mashinsky was born in Ukraine and later emigrated to Israel with his family. He started multiple businesses before founding Celsius in 2017, becoming its chief executive and public face.

Ms James said Mr Mashinsky’s promotional efforts through social media, interviews and cryptocurrency conferences helped the company amass US$20 billion of digital assets by early last year.

But as it struggled to pay the promised yields on investor deposits, Celsius allegedly moved into riskier investments.

The lawsuit said that in the two weeks before the withdrawal freeze, Mr Mashinsky was still dismissing criticism that Celsius was overextended, urging investors to “ignore the FUD” – short for “fear, uncertainty and doubt”.

In September, US bankruptcy judge Martin Glenn appointed an examiner to investigate whether Celsius was mismanaged, after a federal trustee said such an appointment could help “neutralise the inherent distrust” in the company among creditors and customers.

Mr Mashinsky resigned as Celsius CEO in September, saying at the time that he was committed to helping return deposits to investors. REUTERS