(July 14): Alex Mashinsky, the founder and former CEO of bankrupt cryptocurrency lender Celsius Network, was arrested and charged with fraud, a US prosecutor in New York said Thursday (July 13), while three federal regulatory agencies sued him and his company.
Mashinsky, 57, was charged with seven criminal counts — including securities fraud, commodities fraud and wire fraud — while Celsius’ former chief revenue officer, Roni Cohen-Pavon, was charged with four criminal counts, according to the indictment, which was unsealed on Thursday.
Lawyers for Mashinsky and Celsius did not immediately respond to requests for comment, and Cohen-Pavon’s attorney could not immediately be reached.
Mashinsky is one of several crypto moguls to be indicted in another blow for the industry, which has been experiencing a reckoning after a slump in crypto prices led several companies to collapse, including exchange giant FTX. Its founder Sam Bankman-Fried was charged with fraud last year, and has pleaded not guilty.
The US Attorney’s Office in Manhattan said it would hold a press conference to provide details on the charges against Mashinsky and Cohen-Pavon.
‘Profits in your pocket’
Celsius filed for Chapter 11 bankruptcy protection in July last year after customers rushed to withdraw deposits as crypto prices fell. Many have been unable to access their funds for more than a year.
Mashinsky and Cohen-Pavon were charged with market manipulation of the New Jersey-based company’s crypto token, known as Cel, as well as a fraudulent scheme to manipulate the price of the cryptocurrency and wire fraud related to the manipulation of the token, according to the indictment.
Prosecutors alleged Mashinsky also personally reaped approximately US$42 million (RM193 million) in proceeds from selling his holdings of the Cel token.
In a related development, the US Securities and Exchange Commission (SEC) sued Mashinsky and Celsius on Thursday, according to a court filing, alleging he and his firm raised billions of dollars through the sale of unregistered crypto securities and misled investors about the financial state of the privately held company.
The SEC, along with other regulators which also filed lawsuits Thursday, accused Mashinsky and his company of touting Celsius as safe — akin to a traditional bank — even as they took increasingly risky steps to deliver promised high yields on customer deposits.
Celsius used emails with phrases like “Pour Yourself a Cup of Profits” and “Profits in your Pocket” to promote its interest-earning program, which promised investors returns of up to 17%, the SEC said.
While the firm lost millions of dollars as customers raced to withdraw funds, the then-CEO and Celsius continued to claim the company was financially secure and had enough funds to meet withdrawals, regulators said.
Celsius was among the first in a series of bankruptcies in the cryptocurrency sector last year as token prices cratered amid rising interest rates and stubbornly high inflation. It filed for bankruptcy shortly after Singapore-based crypto hedge fund Three Arrows Capital and rival crypto lender Voyager Digital did the same.
Crypto lenders such as Celsius grew rapidly as crypto prices surged during the Covid-19 pandemic. They promised easy loan access and high interest rates to depositors, then lent out tokens to institutional investors, hoping to profit from the difference.
The SEC said Celsius engaged in “risky trading practices” and made uncollateralised loans, despite telling investors that it did not. The company also falsely claimed to have raised US$50 million from its initial token sale, and claimed to have 1 million active users when in fact it only ever had around 500,000 depositors, many of whom were no longer active, the SEC said.
The US Commodity Futures Trading Commission and the Federal Trade Commission also sued Celsius and Mashinsky. The FTC said it had reached a settlement with Celsius that will permanently ban it from handling customers’ assets.
The regulators’ lawsuits add to a series of challenges for Celsius Network and its founder. In January, New York state’s attorney general sued Mashinsky, alleging he defrauded investors out of billions of dollars in digital currency by concealing the lending platform’s failing health.
The crypto industry has been on even shakier ground since the SEC’s lawsuits against major crypto exchanges Binance and Coinbase Global last month raised risks of further regulatory challenges for the sector.
Mashinsky is a serial entrepreneur, having founded eight companies, including telecommunications provider Arbinet, which went public in 2004, and Transit Wireless, which provides Wi-Fi to New York City’s subway.