US Regulators Say Multibillion-Dollar Crypto Lender Celsius Operated as a Ponzi Scheme

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In June, a multi-billion dollar cryptocurrency lender called Celsius went bankrupt, with its court records showing a $1.2 billion black hole in its finances. Celsius was a crypto trading and lending company that at one point had over $5 billion in “assets”. It was only founded in 2017, but quickly attracted crypto traders and speculators: you can deposit crypto with Celsius with the promise of high returns, or take out a cash loan secured by your crypto holdings .

Then it crashed spectacularly and burned with over a billion owed. Almost unbelievably, the company tried to put a positive spin on the news, but since the biggest losers were going to be “normal” investors, the collapse caught the attention of the US Department of Justice and regulators. from the state of Vermont, who began spinning on rocks in order to investigate what happened.

To put it mildly, regulators don’t like what they see. Vermont’s Department of Financial Regulation has filed a lawsuit against the company in New York, and the state regulator is “particularly concerned about losses suffered by retail investors; for example, middle-class investors non-accredited who may have invested entire college funds or retirement accounts with Celsius.” Vermont state attorneys support the DOJ’s request for a legal examiner to protect those interests.

I’ll take you through the weeds in a moment, but, of all the legalese and claims to come, here’s the most important line in the case against Celsius: “It shows a high level of financial mismanagement and also suggests that at least at times, the returns of 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 statements” to investors about “the company’s financial health and compliance with securities laws “. Both are seen as incentives for retail investors to leave their money in Celsius.

Mashinsky was, until the bankruptcy at least, a bold, forward-thinking figure who was of course hugely optimistic about Celsius. He frequently bragged about how the company had the capital to back up its claims and, when things went wrong, continued to insist that everything was fine.

In this context, Celsius and its representatives are accused, among other things, “of making statements about the company’s ability to meet its obligations and protect customer assets, when in fact Celsius did not have sufficient assets to repay its obligations at the time such statements were made.”

For those of us living in the normal world, the statements are starting to get teary because of the amount of money involved here. Celsius apparently suffered losses of “$454,074,042 between May 2 and May 12, 2022”. That $450 million loss in 10 days meant depositors’ funds weren’t safe, but Mashinsky and Celsius continued to claim they were in good financial shape.

It’s getting hot here

More serious, at least for the Ponzi scheme accusation, is that state regulators say Celsius was not in good financial shape for about two years before that. Not only did it “suffer catastrophic losses in 2021 and fail to generate sufficient revenue to sustain returns for Earn Account investors,” but the testimony of the company’s former CFO went even further:

“Celsius has admitted, through its chief financial officer Chris Ferraro, that the company’s insolvency began with financial losses in 2020 and through 2021, belying claims in Celsius’ day one filings that the company’s insolvency stemmed from the spring 2022 crypto market crash and related “run on the bank” and further demonstrating the falsity of Celsius’ representations to investors.”

Under state and federal securities laws, Celsius was required to provide much more detailed information about its financial condition and risk factors. “Instead, Celsius and its management hid from investors its massive losses, shortfall in assets and deteriorating financial condition.”

Perhaps most surprisingly, “Celsius also admitted at the 341 meeting that the company had never earned enough revenue to sustain the returns paid out to investors.” This is the classic financial scam: creating artificial returns thanks to new investors attracted by a scheme that gives abnormally high returns. This is where the key line comes in, one that could ultimately damn those involved in Celsius: “at times, returns from existing investors were likely paid with new investors’ assets.”

If it looks like a duck, swims like a duck, and quacks like a duck…it’s probably a duck. The regulator has filed this case in order to support the appointment of a reviewer: that is, an independent legal expert who will have the power and authority to really dig into this case, without overlooking anything. . These are not charges yet, but the basis on which regulators believe charges will eventually be made. One thing seems abundantly clear: no matter how much heat Celsius creates, its creators are going to recover a lot more.

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