[co-author: Matt Stankiewicz]
On July 13, 2023, U.S. prosecutors unsealed an indictment against Alexander Mashinsky, the founder and former CEO of beleaguered Celsius Network LLC (“Celsius”) charging him with securities fraud, commodities fraud, and wire fraud. The DOJ alleges that Mashinsky defrauded customers by misleading them about Celsius’s operations, specifically related to the company’s success and profitability, along with the investments that Celsius ultimately made utilizing customer funds. The indictment further charges Mashinsky and Roni Cohen-Pavon, former Chief Revenue Officer of Celsius, with conspiracy, securities fraud, market manipulation, and wire fraud. These additional charges stem from the alleged manipulation of the price of Celsius’ CEL token.
Celsius was a cryptocurrency platform that offered a variety of unique services for its customers. In addition to operating a standard exchange (similar to Coinbase, Kraken, and several others), Celsius also offered users interest-bearing accounts to store their digital assets and personal loans secured by those same deposits. The New Jersey-based company became quite popular in the industry before the company unraveled and filed for bankruptcy in 2022. At its peak, the company held approximately $25 billion in assets. Celsius became popular due to its “Earn” program, which allowed users to earn yield against the crypto they deposited in the platform. Celsius pooled user assets together and offered loans to institutions and funds, made investments, and conducted various other strategies to earn profits for the platform and its users.
Mashinsky frequently billed the company as “the safest place for your crypto.” He marketed the company aggressively across many social media platforms, and frequently hosted Q&As with Celsius customers where he answered questions directly from his users. The DOJ’s complaint that Mashinsky made so many false and misleading statements during these Q&As, that Celsius had a team of employees that would go through each recording, flag the problematic statements, and often edit out the most egregious ones before posting the recording online.
Ultimately, Mashinsky oversold the “safety” of the platform. To keep up with the high interest rates promised by the Celsius Earn program, Celsius would need to make tremendous profit, virtually unsustainable for a startup aggressively building market share and adding customers. The reality is that Celsius was largely unprofitable for most of its existence. Senior executives frequently discussed this clear and obvious problem. Mashinsky, aware of the issues, instead boasted about the health of the company publicly, claiming that it was safe and financially stable. Mashinsky frequently claimed that Celsius returned 80% of its revenues back to its customers, with the remaining going towards funding operations. This percentage split was wildly untrue, however, as the company was not profitable enough to even bother doing any such calculation. The company instead determined its rewards rates based on marketing concerns, trying to stay ahead of its competitors in order to entice more users to its platform.
Furthermore, regularly Celsius mismanaged customer assets. As one example, Celsius executives determined a massive problem in the company’s balance sheets in 2021. The issue was caused by a shortfall of Bitcoin comprising hundreds of millions of dollars. It turns out that Celsius used customer deposits of Bitcoin to purchase CEL tokens on the open market, in part to fund users’ Earn rewards and in part to continue bolstering the price of the CEL token. At this point, Celsius could not fulfill user withdrawals of Bitcoin past a certain point. Celsius purchased additional Bitcoin on the open market but lost substantial sums of money doing this as the price of Bitcoin had risen drastically.
Additionally, Celsius launched its own CEL token in 2018 through an initial coin offering (“ICO”). The company’s misdirection began around this same point. Despite constantly claiming that the company sold out all publicly available tokens during the ICO, the company actually failed to sell 325 million tokens during this period, more than one-third of the total available. To hide this fact, Mashinsky created an entity and arranged for it to “purchase” the remaining $18 million worth of tokens to cover the shortfall. Further, the price of the token became an important aspect of the business, as it often signaled to the market the health of the company. As such, Mashinsky and Cohen-Pavon continued to find ways to artificially inflate the price. While many times this simply involved misleading statements, it also included using customer funds to purchase large amounts of CEL on the open market. These types of purchases were not disclosed to customers.
Meanwhile, after manipulating the price upwards, both Mashinsky and Cohen-Pavon were selling their own holdings of CEL for personal profits. Mashinsky earned approximately $42 million from his sales of CEL tokens, while Cohen-Pavon earned approximately $3.6 million. These sales were not disclosed and Mashinsky, in fact, claimed that he was not selling any CEL during this time.
Celsius eventually found itself in a dire financial situation as the crypto market began to tank and rumors of insolvency began to swirl in the industry. Mashinsky continued to tout the safety of the platform and encouraged consumers to continue depositing their crypto into the platform. Mashinsky, meanwhile, was withdrawing his own personal assets as he saw the troubles that Celsius was facing. A massive sell off of the CEL token following in the markets and Celsius was eventually forced to halt withdrawals from the platform, stranding $4.7 billion in user funds. Celsius filed for bankruptcy on July 13, 2022.
