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Financial Crime: Celsius Network was a ‘Ponzi scheme,’ company’s former investment manager alleges in lawsuit

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Beleaguered crypto lender Celsius Network operated as a classic “Ponzi scheme,” the former head of the company’s key investment strategy alleged in a lawsuit, claiming the company used customer deposits to cover huge liabilities caused by reckless mismanagement.

Jason Stone, whose company KeyFi partnered with Celsius to run its decentralized finance investment business in 2020 and 2021, said in the suit that the crypto lender failed to take steps to hedge against volatility, leaving it massively exposed to the recent crypto market collapse.

The suit said Celsius never maintained sufficient liquidity to cover its deposits in the event of a major market fall and that it used customers’ assets to prop up its own CEL coin and to pay out earlier depositors.

“The unfortunate events that have publicly unfolded in recent weeks show that … Celsius grossly mismanaged its customer funds, failed to perform basic internal auditing to account for its obligations, and manipulated crypto-assets to the benefit of itself and its principals,” the suit claimed.

According to the 30-page complaint Stone’s KeyFi filed in Manhattan’s New York state court, Stone had been cheated out of hundreds of millions in investment gains he was owed due to Celsius’ negligence. He said he broke off his partnership with Celsius in early 2021 after discovering that the company had taken no steps to protect its portfolio, leaving it entirely exposed to market fluctuations.

A message sent to representatives for Celsius wasn’t immediately returned.

Founded and run by Alex Mashinsky, Celsius became a prominent player in the fast-developing crypto lending space by offering eye-popping interest rates as high as 18% to lure in depositors. In all, the company said it had amassed deposits of over $20 billion, which it used to make Defi investments and loans.

The model was met by skepticism by some, and questions had long swirled around the company’s viability. Late last year, regulators in several states sent Celsius cease and desist notices demanding it stop selling its primary investment product because it was unregistered and in violation of state laws.

After Stone stopped working with Celsius, Mashinsky transferred valuable NFTs from the accounts Stone previously controlled to a wallet belonging to Mashinsky’s wife, the suit claims.

Stone said in his suit that Celsius’ business model was actually one of desperation, driven by severe exchange rate losses it incurred during the bull run of Ethereum in early 2021. That left the company having to cover far more deposits than it was able. 

“As customers sought to withdraw their ether deposits, Celsius was forced to buy ether in the open market at historically high prices, suffering heavy losses. Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors,” the suit claimed.  

“Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme.”

In mid-June, as Bitcoin
BTCUSD,
+0.39%

and other cryptocurrencies plunged in value, Celsius froze all withdrawals, swaps and transfers by depositors, citing “extreme market conditions.” The company has since said it was looking at possibly filing for bankruptcy and restructuring its debts. 

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