Celsius Creditors Move To Sue Mashinsky, Other Executives For Fraud

Debtors of the bankrupt cryptocurrency lender Celsius Network have presented a sale plan to the U.S. Bankruptcy Court of the Southern District of New York. The strategy is part of Celsius’s comprehensive reorganization plan for its retail platform and mining operation, and it has the approval of the official committee of unsecured creditors (UCC).

The plan is centered on an in-principle agreement with NovaWulf Digital Management, a digital asset investment firm that will serve as the plan’s sponsor.

According to the filing, the debtors chose NovaWulf because it “provides the greatest means for the Debtors’ liquid crypto assets to be distributed and the value of the Debtors’ illiquid assets to be maximized through a new firm controlled by competent asset managers.”

The strategy follows a filing made by the UCC in a proposal to sue Celsius co-founder Alex Mashinsky and several executives for “fraud, recklessness, gross mismanagement and self-interested conduct” that led to the crypto lender’s demise.

The move followed six months of inquiries into Celsius’ current and past directors, executives, and employees, according to attorneys for the UCC in a proposed complaint filed in bankruptcy court on Feb. 14.

The proposed case, which seeks damages in an amount to be determined at trial, seeks to assert claims and causes of action against the following Celsius executives, individuals, and entities:

  • Alex Mashinsky, co-founder, director and former CEO
  • Daniel Leon, co-founder, director and former CSO and chief operating officer
  • Hanoch “Nuke” Goldstein, co-founder and chief technology officer
  • Harumi Urata-Thompson, former chief financial officer and chief investment officer
  • Jeremie Beaudry, former general counsel and chief compliance office
  • Johannes Treutler, former head of Celsius’ trading desk and person in charge of purchasing CEL tokens on behalf of Celsius
  • Aliza Landes, the former vice president of Lending of Celsius and spouse of Daniel Leon
  • Kristine Mashinsky, the spouse of Alex Mashinsky

According to the lawyers, the executives made “negligent, reckless (and sometimes self-interested) investments” that caused Celsius to lose $1 billion in a single year, while mismanagement resulted in another quarter-billion dollar loss “because they could not adequately account for the company’s assets and liabilities.”

“After that loss, they did not invest in or develop the company’s systems to adequately fix the issue, resulting in further losses,” they noted.

The executives also reportedly directed Celsius to spend “hundreds of millions of dollars” on public markets to inflate the price of CEL tokens, while they “secretly sold tens of millions of CEL tokens (or were aware of such sales)” for their own advantage.

“They sat idly by as Mr. Mashinsky recklessly bet hundreds of millions of dollars on the movement of the cryptocurrency market. They covered up Mr. Mashinsky’s repeated lies about Celsius’ investments and financial condition,” the lawyers for the UCC wrote. “Finally, when it became apparent that Celsius would be required to file for bankruptcy, the Prospective Defendants withdrew assets from the sinking ship […] while actively encouraging customers to keep their assets on the Celsius platform.” 

On March 8, a hearing on the proposed complaint will be held.

The sale of Celsius

The sale plan, however, is the result of a court-approved sales process announced by Celsius lawyers in January 2023. They said that the bankrupt crypto lender intends to rebuild itself as a new, publicly traded “recovery corporation” in order to avoid bankruptcy.

Debtors’ advisors contacted over 130 parties and signed non-disclosure agreements with 40 possible bidders during the “comprehensive” sale process. There were six proposals for the retail platform and three offers for the mining business.

The next stage will be to finalize a formal agreement designating NovaWulf as the winning bidder.

According to the plan, NovaWulf will contribute $45 million to $55 million in cash to NewCo, a term used to denote a company spin-off before it is given a formal name.

Earn creditors will all receive a considerable distribution of liquid crypto, with a “convenience class” of creditors earning 70% recovery of their assets. No Celsius founders will be involved in NewCo, and the UCC will pick the bulk of the NewCo board.

The proposal includes a $50 million reserve for NewCo’s mining operations, among other mining-related details.

Bankruptcy law in the United States typically allows a corporation four months to exclusively plan how it will wind up its affairs. Celsius’s request to extend that period has been met with opposition from creditors and the US government.

Mashinsky’s legal troubles

Mashinsky is already facing a a civil lawsuit from the New York Attorney General, claiming that the former CEO misled investors about Celsius’s financial strength and then disguised the lender’s terrible predicament after it lost hundreds of millions of dollars in hazardous transactions. 

“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” said New York Attorney General Letitia James. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”

Earlier this month, an examiner’s investigation into the crypto lender’s operations before its collapse last year concluded that Celsius utilized customer funds to offset shortfalls in its obligations to pay stratospheric yields and to prop up the value of its CEL coin while certain firm insiders were cashing out.

“From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises. Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” former prosecutor Shoba Pillay’s report said.

Information for this briefing was found via Coindesk, Coin Telegraph, and 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.

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