Alex Mashinsky, the founder and former chief executive of the bankrupt cryptocurrency firm Celsius Network, was arrested on Thursday and charged with defrauding customers and lying about his firm’s business model.
Federal prosecutors said Mr. Mashinsky, 57, misled customers into believing that Celsius was a safe place to park their money, when in reality it was fraught with risks. He was also sued by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission.
Mr. Mashinsky was arrested at his home in New York, a person close to the investigation said. The charges against him include wire fraud, commodities fraud and manipulation of securities prices. Prosecutors also filed charges against the company’s chief revenue officer, Roni Cohen-Pavon, accusing him of price manipulation and wire fraud, among other offenses.
Founded in 2018, Celsius rose to prominence as a kind of crypto bank that promised customers sky-high interest rates and handled tens of billions of dollars in deposits before it collapsed last year. As its charismatic pitchman, Mr. Mashinsky appeared in YouTube videos where he claimed that Celsius was a safer, more egalitarian alternative to traditional banks.
“The message we send today is quite simple,” Damian Williams, the U.S. attorney for the Southern District of New York in Manhattan, said in a statement. “If you rip off ordinary investors to line your own pockets, we will hold you accountable.”
At its peak, Celsius controlled about $25 billion in crypto assets. But last summer, Celsius filed for bankruptcy amid a broader implosion in the crypto markets that sent coin prices plummeting. In the process, Celsius devastated its more than 500,000 users, many of whom lost their savings. Mr. Mashinsky resigned from the firm in September, calling his role “an increasing distraction.”
When it filed for bankruptcy, about $4.7 billion in customer assets were frozen on the company’s platform. In a settlement with the F.T.C. announced on Thursday, Celsius agreed to pay that amount in restitution to customers, although the payments will be suspended while the bankruptcy process unfolds.
In charging documents, the authorities said the company and Mr. Mashinsky repeatedly lied to investors about how it generated interest for customers. It even lied about the number of customers it had and wrongly told investors that their deposits were insured, according to regulators.
“Mashinsky portrayed Celsius as a modern day bank, where customers could safely deposit crypto assets and earn interest,” the indictment said. “In truth, however, Mashinsky operated Celsius as a risky investment fund, taking in customer money under false and misleading pretenses.”
Jonathan Ohring, a lawyer for Mr. Mashinsky, said the Celsius founder “vehemently denies the allegations.” It was not immediately clear who represented Mr. Cohen-Pavon. Prosecutors said Mr. Cohen-Pavon, an Israeli citizen, was abroad and was not arrested.
Mr. Mashinsky was set to be released on bail after he signed a $40 million personal recognizance bond secured by his home in New York and a brokerage account at First Republic.
Mr. Mashinsky’s arrest adds to a growing list of crypto executives who have faced intense scrutiny from law enforcement since the market crashed last year. In December, Sam Bankman-Fried, the founder of the failed FTX exchange, was arrested on fraud charges. In March, federal agents searched the home of Jesse Powell, the founder of Kraken, the second-largest U.S. exchange. And in June, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, was sued by the S.E.C. He is under criminal investigation.
After its launch in 2018, Celsius quickly grew in size as all crypto assets soared in value — especially during the pandemic, when investors and speculators flush with cash poured into crypto.
Investors in Celsius, like customers of FTX, Binance and other crypto firms, all came to believe they were putting money into world-changing assets destined to shoot up in price. Mr. Mashinsky and some of his colleagues did everything in their power to convince Celsius customers that was the case, authorities said.
The company marketed annual yields as high as 18 percent, dwarfing the amount of interest that traditional banks offer. “That’s like going to the Olympics and getting 15 medals in 15 different fields,” Mr. Mashinsky once said.
Celsius took its product to market at a time when traditional banks were paying little interest on savings accounts and money market funds, making the firm highly attractive to investors seeking higher than normal yields.
But Celsius never explained in detail how it generated those huge yields. In public comments, Mr. Mashinsky repeatedly claimed that the firm eschewed risky practices, like lending out funds without requiring collateral. In reality, Celsius made millions of dollars in loans that were not backed by any collateral, according to the S.E.C.
In its complaint, the S.E.C. said Mr. Mashinsky and others at the firm discussed Celsius’s in-house digital currency, CEL, as if it were the stock of a publicly traded company. But as with so many crypto fraud cases, Celsius’s token was neither registered nor regulated.
The story that Mr. Mashinksy sold to investors began to unravel last year, when crypto prices tumbled. By last spring, the S.E.C. said, emails from employees at Celsius revealed they knew the firm was a proverbial house of cards.
In one email cited by the S.E.C., an employee described Celsius as a “sinking ship.” In another, an unnamed executive said, “We don’t have any profitable services.”
Celsius filed for bankruptcy last July. Even after the collapse, Mr. Mashinsky was convinced he could start a second act. Before his resignation, he tried to rally support for a revamped version of Celsius, calling it Kelvin, after the unit of temperature.
Source Link: Credit Link