US regulators say multi-billion dollar crypto lender Celsius operated as a ponzi scheme

by Arthur · September 12, 2022

In June, a multi-billion dollar cryptocurrency lender named Celsius filed for bankruptcy, with court documents showing a $1.2 billion black hole in its finances. Celsius was a crypto trading and lending company that at one point boasted over $5 billion in “assets”. It was first founded in 2017, but quickly attracted crypto traders and speculators: you could deposit crypto with Celsius with the promise of high returns, or take out a cash loan secured against your crypto holdings.

Then it crashed spectacularly and burned with well over a billion in debt. Almost unbelievably, the company tried to put a positive spin on the news – but given that the biggest losers were going to be “normal” investors, the collapse caught the attention of both the US Department of Justice and regulators in the state of Vermont, who have begun to turn around. over rocks to investigate what happened.

The regulators don’t like what they see, to say the least. The Vermont Department of Financial Regulation has now sued the firm in New York, and the state regulator is “particularly concerned about losses suffered by private investors; such as middle-class, unaccredited investors who may have invested entire college endowments or retirement accounts with Celsius.” Vermont attorneys general support DOJ’s request for a legal examiner to protect such interests.

I’ll get you into the weeds in a moment, but of all the legalese and claims to come, here’s the most important line in the application against Celsius: “This shows a high level of financial mismanagement and also suggests that at least at some points the returns to existing investors probably paid with the assets of new investors.”

This is how a public prosecutor calls a Ponzi scheme a Ponzi scheme.

Regulators say Celsius, through CEO Alex Mashinsky and through other channels, made “false and misleading claims” to investors about “the company’s financial health and its compliance with securities laws.” Both are seen as inducements for retail investors to leave their money in Celsius.

Mashinsky was, at least until the bankruptcy, a bold and forward-looking figure who was, of course, extremely bullish about Celsius. He often bragged about how the firm had the capital to back his claims, and when things went south, he continued to insist that all was well.

In this context, Celsius and its representatives are accused of, among other things, “statements about the company’s ability to meet its obligations and to safeguard customer assets, when in fact Celsius lacked sufficient assets to repay its obligations at the time such statements were made. .”

For those of us who live in the normal world, the statements begin to dawn on us the sheer amount of money involved here. Celsius apparently experienced losses of “$454,074,042 between May 2 and May 12, 2022.” This loss of $450 million in 10 days meant that depositor funds were not safe, but Mashinsky and Celsius continued to pretend that they were financially sound.

It’s getting hot here

More seriously, at least for the Ponzi scheme, is that state regulators say Celsius was not financially sound for about two years before this. Not only had it “experienced catastrophic losses in 2021 and failed to generate sufficient revenue to support returns to Earn Account investors,” but testimony from the company’s former CFO took this even further:

“Celsius admitted, through its CFO Chris Ferraro, that the company’s insolvency started with financial losses in 2020 and through 2021, consistent with the allegations in Celsius’ First Day’ statements that the company’s insolvency stemmed from the fall in the crypto market in the spring of 2022 and related “run at the bank,” further demonstrating the falsity of Celsius’s representations to investors.

Under state and federal securities laws, Celsius was required to provide much more detailed information about its financial condition and risk factors. “Instead, Celsius and management kept their massive losses, asset deficits and deteriorating financial condition a secret from investors.”

Perhaps most incredibly, “Celsius also admitted at the 341 meeting that the company had never earned enough revenue to support the returns paid to investors.” This is the classic in the financial fraud industry: Create artificial returns through new investors who are attracted by a scheme that gives unusually high returns. This is where the key line, the one that may ultimately condemn those involved in Celsius, comes in: “at some points, returns to existing investors were likely paid with assets of new investors.”

If it looks like a duck, swims like a duck, and quacks like a duck… it’s probably a duck. The regulator made this submission in a capacity to support the appointment of an examiner: that is, an independent legal expert who will have the power and authority to really dig into these things, no matter what. These are not charges yet, but the basis on which the supervisory authorities believe charges will eventually be brought. One thing seems clear: no matter how much heat Celsius created, the creators are going to get a lot more in return.