New York sues Celsius Network founder Mashinsky for crypto fraud

NEW YORK, Jan 5 (Reuters) – New York’s attorney general sued Celsius Network founder Alex Mashinsky on Thursday, alleging he defrauded investors out of billions of dollars in digital currency by concealing the failing health of the now-bankrupt cryptocurrency lending platform.

According to the complaint filed by Attorney General Letitia James, Mashinski persisted in promoting Celsi as a safe alternative to banks, paying up to 17% interest on deposits while hiding hundreds of millions of dollars in losses on risky investments.

The civil suit seeks to bar Mashinski from doing business in New York and to pay him damages for violating laws, including the state’s Martin Act, which gave James broad authority to perpetrate securities fraud.

“Alex Mashinsky promised to lead investors to financial freedom, but he led them to financial ruin,” James said in a statement. “It is illegal to make false and unreasonable promises and to mislead investors.”

Neither Mashinski nor his attorney immediately responded to requests for comment. Celsius is not a defendant in the suit, which was filed in a state court in Manhattan.

Crypto lenders have gained popularity during the COVID-19 pandemic by offering depositors easy access to credit and promising high interest rates. They then issued tokens to institutional investors hoping to profit from the difference.

But the business model proved unsustainable in 2022 following the collapse of cryptocurrency markets, including terraUSD and luna tokens.

The lawsuit against Mashinsky is the latest effort by the government to address risky cryptocurrency practices.

It follows federal criminal charges filed last month against Sam Bankman-Fried, the founder of the FTX cryptocurrency exchange, accusing him of widespread fraud. He pleaded not guilty.

Yesha Yadav, associate dean at Vanderbilt Law School in Nashville, Tennessee, said James’ lawsuit “adds to the fear factor facing an industry where money is extremely tight and the ability to absorb large fines will be even more limited.”

Yadav added that the lack of a comprehensive federal framework to regulate cryptocurrency frees James to play an “aggressive” enforcement role.

‘Ignore the FUD’

Celsius filed for Chapter 11 protection from creditors last July 13, showing a $1.19 billion deficit on its balance sheet.

The complaint comes a month after the Hoboken, New Jersey company froze wire transfers and wire transfers for 1.7 million of its customers, citing “extreme” market conditions.

Celsius ended November with $9 billion in liabilities, including more than $4.3 billion owed to customers, according to a lawsuit.

James said Mashinski’s fraud ran from 2018, when the deposits were frozen, to June 2022, and his victims included more than 26,000 New Yorkers.

Many of the victims were ordinary investors, such as a father of three who lost his life savings of $375,000 and a disabled veteran who lost $36,000 of his savings over nearly a decade.

Mashinsky, who was born in Ukraine and later immigrated to Israel with his family, started multiple businesses before founding Celsius in 2017, becoming its CEO and public face.

Promotional efforts through social media, interviews and cryptocurrency conferences helped the company raise $20 billion in digital assets by early last year, James said.

But as investors struggled to pay promised returns on their deposits, Celsius shifted to riskier investments.

Two weeks before the pullback was frozen, Mashinski was still dismissing criticism of Celsi’s overextension, urging investors to “ignore FUD,” short for “fear, uncertainty and doubt,” the lawsuit said.

In September, U.S. Bankruptcy Judge Martin Glenn appointed an examiner to investigate Celsius’ mismanagement after a federal commissioner said the appointment could help “neutralize the proverbial mistrust” of the company among creditors and customers.

Mashinski resigned as Celsi’s chief executive in September, saying at the time that he was committed to helping return deposits to investors.

Reporting by Jonathan Stempel in New York; Additional reporting by Luc Cohen, Dietrich Knauth and Hannah Lang in New York and Tom Hals in Wilmington, Delaware; Edited by Noeleen Walder, Chizu Nomiyama, Bill Berkrot, and David Gregorio

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