As Celsius Network LLC, et al., Case Number: 22-10964 (MG), proceeds in the Bankruptcy Court for the Southern District of New York (the “Court”), the highly anticipated examiner report was released on January 31st.
Shoba Pillay, a former prosecutor, was appointed by U.S. Bankruptcy Judge Martin Glenn, who is overseeing the Chapter 11 case, as an independent examiner and tasked with investigating the conduct of the company. The highly detailed report covering 689 pages is highly critical of Celsius and its management. Providing support to what many creditors have alleged, the report found that Celsius was far from transparent about a number of its procedures and operations in a way that could be construed as fraudulent.
Among the most troubling findings is how the company used its own token called CEL in a way that enriched itself at the expense of its users and other stakeholders. The report alleges that the company bought in the open market over $558 million of CEL tokens, not to distribute as an interest to depositors, as they said, but in order to artificially increase the price of the tokens through market manipulative purchase timing. Many insiders, including Celsius CEO and founder Alex Mashinsky, took advantage of this inflated price to sell their allocation of CEL tokens. As quoted in the report, the then Celsius Chief Financial Officer appeared to be very aware that what the company was doing was deceptive. “Just to clarify between us three: The last 3-4 months, we always bought more CEL than what we pay as interest per week, but we did not buy it for the interest payments, that is just what we told the community.” Another employee reportedly said in internal Slack conversations, “[w]e are using users USDC to pay for employees worthless CEL…All because the company is the one inflating the price to get the valuations to be able to sell back to the company.”
This conduct of which was called “very Ponzi-like” in the report. This is not the same as concluding that the company operated a Ponzi scheme but provided information that could cause the bankruptcy judge or other regulators to do. Also of note is that the report found that Celsius’s problematic and non-transparent conduct did not start with the recent decrease in crypto prices but was there from the start including in the 2018 Celsius initial coin offering, although they didn’t raise the $50 million as anticipated they never publicly reveal this nor did Mr. Mashinky personally purchase the 11.7 million token shortfall as he committed to doing.
As troubling as these findings are, it’s unclear how these findings will affect creditors and other stakeholders of Celsius as the report did not give direct recommendations to the court.
As a reminder, the deadline to file a proof of claim is February 9, 2023 (the “Bar Date”), as we have noted in previous updates, in order for a creditor to reserve their rights for a fraud claim against Celsius. They should include that in a proof of claim filed on or before the Bar Date.
