In June, a multi-billion dollar cryptocurrency lender named Celsius went bankrupt, with its court filings showing a $1.2 billion black hole in its finances. Celsius was a cryptocurrency trading and lending company that at one point had over $5 billion in “assets”. It was only founded in 2017, but quickly attracted cryptocurrency traders and speculators: you could deposit cryptocurrencies on Celsius with the promise of high returns or get a cash loan secured against your cryptocurrency holdings.
Then it spectacularly crashed and burned with more than a billion in debt. Almost unbelievably the company tried to put a positive spin on the news – but since the biggest losers were to be “regular” investors, the collapse has attracted the attention of both the US Department of Justice and Vermont regulators, who have begun to they turn over rocks to investigate what happened.
To put it mildly, regulators don’t like what they see. The Vermont Department of Financial Regulation has now filed against the company in New York, and the state regulator is “particularly concerned about the losses suffered by retail investors; for example, middle-class, non-accredited investors who may have invested entire college funds or bills of retirement in Celsius”. Vermont state attorneys are supporting the Justice Department’s request for a legal examiner to protect such interests.
I’ll get you in the weeds in a moment, but, of all the legalese and allegations to come, here’s the most important line in the filing against Celsi: “This shows a high level of financial mismanagement and also suggests that at least at certain times, returns to existing investors were likely paid with the assets of new investors.”
This is how a state attorney 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 compliance with securities laws.” Both are seen as incentives for private investors to leave their money in Celsius.
Mashinsky was, at least until the bankruptcy, a bold and forward-looking figure who was naturally extremely bullish on Celcius. He often bragged about how the company had the capital to back up his claims and, when things went south, he continued to insist that everything was fine.
In this context, Celsius and its representatives are accused, among other things, of “assurances about the company’s ability to meet its obligations and protect the assets of customers, when in fact Celsius did not have sufficient assets to to pay its obligations at the time such declarations were made.”
For those of us living in the normal world, the statements are starting to become impressive for the sheer amount of money involved here. Celsius apparently suffered losses of “$454,074,042 between May 2 and May 12, 2022.” This loss of $450 million in 10 days meant that depositors’ funds were not safe, but Mashinsky and Celsius continued to pretend that they were financially sound.
It’s hot in here
Most serious, at least for the Ponzi scheme charge, is that state regulators say Celcius was not financially sound for about two years before that. Not only did it “make catastrophic losses in 2021 and fail to generate sufficient revenue to support returns to Earn Account investors,” but the testimony of the company’s former CFO went even further:
“Celsius admitted, through CFO Chris Ferraro, that the company’s insolvency began with financial losses in 2020 and into 2021, refuting claims in Celsius’ First Day statements that the company’s insolvency stemmed from the crypto market crash in spring 2022 and related to the ‘run on the bank’ and further proving Celsius’ misrepresentation to investors.”
Under state and federal securities laws, Celcius was required to provide much more detailed information about its financial condition and risk factors. “Instead, Celsius and its management kept the huge losses, the shortfall in assets and the worsening financial situation a secret from investors.”
Perhaps most surprisingly, “Celsius also admitted at the 341 meeting that the company never had enough revenue to support the returns paid to investors.” This is the classic business of financial fraud: create artificial returns through new investors who are attracted to a scheme that gives unusually high returns. Here comes the bottom line, the one that may ultimately doom those involved in Celsius: “at certain times, returns to existing investors were likely paid with the assets of new investors.”
If it looks like a duck, it swims like a duck, and like a duck… it probably is 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 this material, no matter what. These are not charges yet, but the basis on which regulators believe charges will eventually be imposed. One thing seems abundantly clear: as much Celsius heat has been created, its creators will get a lot more back.