New York attorney general Letitia James has filed a lawsuit against the co-founder of bankrupt crypto lender Celsius Networks, accusing him of defrauding investors out of billions.
The suit filed on Thursday accuses Alex Mashinsky, who stepped down as the CEO of Celsius in September, of falsely touting the company as a safe alternative to banks to encourage investors to deposit billions of dollars in digital assets.
Instead, Celsius used the funds to dish out "risky loans" including giving US$1 billion to Alameda Research, the crypto hedge fund founded by recently indicted FTX founder Sam Bankman-Fried, the suit alleged.
READ: Celsius Network creditors suffer major setback following disappointing court ruling
“As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” said James in a statement.
“The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”
The lawsuit, which seeks unspecified damages and restitution, accused Mashinsky of violating New York's Martin Act, which authorizes the state's attorney general to seek compensation for citizens of the state in cases of financial fraud.
The rise and fall of Celsius
Mashinsky co-founded Celsius in 2017 and grew its assets to more than $20 billion.
But in June, Celsius froze withdrawals and transfers for its 1.7mln customers, citing 'extreme' market conditions as the value of most cryptocurrencies plunged.
Celsius subsequently filed for Chapter 11 bankruptcy on July 13, 2022, listing a $1.19 billion deficit on its balance sheet.
The new lawsuit called Mashinsky the “public face of Celsius” and claims he “promoted Celsius as a safe alternative to banks while concealing that Celsius was actually engaged in risky investment strategies.”
False promises
“Touting himself and his company as a modern-day Robin Hood .... Mashinsky promised investors some of the highest yields in the industry, as high as 17%,” the suit stated.
“These promises were false – but proved wildly popular.”
On Wednesday, a US bankruptcy judge ruled that Celsius owns most of the cryptocurrency that customers deposited into its online platform, meaning most Celsius customers will be last in line for repayment in the crypto lender's bankruptcy.
The ruling by bankruptcy judge Martin Glenn in New York affects approximately 600,000 accounts that held assets valued at $4.2 billion when Celsius filed for bankruptcy.
Contact the author at jeremy@proactiveinvestors.com