Celsius Network’s Alex Mashinsky Sued By New York Attorney General For Fraud

New York Attorney General Letitia James filed a civil lawsuit against Alex Mashinsky on Thursday, saying that the co-founder of the bankrupt cryptocurrency lender Celsius Network cheated investors out of billions of dollars in digital currency.

The lawsuit claims 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. According to the lawsuit, Mashinsky fraudulently claimed that Celsius was safer than a bank and only lent assets to respectable organizations.

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

This follows after the U.S. Bankruptcy Judge Martin Glenn determined on Wednesday that the firm owns the $4.2 billion in crypto deposits in Celsius’s Earn accounts, not the customers. This effectively puts most of the 600,000 accounts at the back of the line for repayment in the crypto lender’s bankruptcy.

The decision is said to be a matter of contract law, with the decision referencing terms of use implemented on April 15, 2022. The document in question contained the text that “all right and title to such Eligible Digital Assets, including ownership rights,” is held by Celsius. This thereby makes Earn account holders unsecured creditors, with the recovery of such funds dependent on distributions to unsecured creditors, with Glenn highlighting that “a fundamental principle of the Bankruptcy Code is equality of distribution,” and that there will not be enough value to repay all accounts in full.

READ: Celsius Earn Accounts To Be Treated As Unsecured Claims In Bankruptcy Filing

“The Court does not take lightly the consequences of this decision on ordinary individuals, many of whom deposited significant savings into the Celsius platform,” Glenn wrote. “Creditors will have every opportunity to have a full hearing on the merits of these arguments during the claims resolution process.”

The decision allows Celsius to sell nearly $18 million in stablecoins held in consumers’ Earn accounts.

READ: Celsius Looks At Selling US$23 Million In Stablecoin Holdings For Its Bankruptcy Process

According to the attorney general’s office, as of December 31, 2021, more than 26,000 New Yorkers had deposited almost $440 million in Celsius.

Mashinsky resigned from the CEO position in September, pledging to “continue to maintain [his] focus on working to help the community unite behind a plan that will provide the best outcome for all creditors – which is what [he has] been doing since the company filed for bankruptcy.”

A week after, he was found to have withdrawn $10 million worth of cryptocurrency very shortly before putting a halt on customer withdrawals as the company fell towards bankruptcy.

In a Financial Times piece, people familiar with the events inside the Celsius Network offices back in January painted a clearer picture on how things literally went down. The topline thesis: Mashinsky took over the company’s trading strategy and overruled experienced finance executives, hoping to protect the firm’s assets ahead of the US Federal Reserve meeting to discuss inflation-fighting policy.

Basically, the strategy was to move the crypto assets in anticipation of a potential sharp decline of crypto prices following a hawkish outcome of the Fed meeting–and reportedly directly in-charge of the trading desks at the time was Mashinsky, according to the people.

Mashinsky had been ordering the sale of hundreds of millions of dollars’ worth of bitcoin, apparently without double checking the often unreliable information. The firm would then buy back the crypto asset a day later at a loss.

“He was ordering the traders to massively trade the book off of bad information,” one of the people said. “He was slugging around huge chunks of bitcoin.”

In addition to restitution and damages, James wants Mashinsky barred from doing business in New York involving the issuance or sale of securities and commodities. She also wants him barred from functioning as an officer of any firms doing business in the state.

Information for this briefing was found via the Wall Street Journal, Reuters, 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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