Embattled crypto lender Celsius is a ‘fraud’ and a ‘Ponzi scheme’, lawsuit alleges

Celsius on Thursday was sued by former investment manager Jason Stone as pressure continues to mount on the company amid a crash in cryptocurrency prices. Stone alleged, among other things, that Celsius CEO Alex Mashinsky (above) was ‘capable of becoming very rich’.

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Crypto lender Celsius artificially inflated the price of its own digital coin, failed to hedge risk and engaged in activities that constituted fraud, a lawsuit alleges.

Celsius on Thursday was sued by former investment manager Jason Stone as pressure continues to mount on the company amid a crash in cryptocurrency prices.

The lawsuit comes after Celsius, which offers customers interest in depositing their crypto, was forced to suspend withdrawals for its users as it faces a liquidity crunch.

Celsius was not immediately available to comment on the lawsuit when contacted by CNBC.

Stone’s relationship with Celsius

Celsius acts like a bank in that it offers customers a return, sometimes as high as almost 19%, if they deposit their crypto with the company. Celsius then lends that crypto to others willing to pay high interest to borrow. Then he tries to pocket that money in order to give the yield back to the customers.

Stone founded a company called KeyFi that specializes in crypto trading strategies. Celsius and KeyFi entered into a “handshake agreement” whereby the latter company would “manage billions of dollars in customer crypto deposits in exchange for a share of the profits generated by those crypto deposits,” according to the lawsuit.

There was “no formal written agreement between the parties,” according to the lawsuit.

Beginning in August 2020, Celsius began “transferring hundreds of millions of dollars in crypto-assets” to Stone and his team, according to the lawsuit. Celsius has created a wallet on the Ethereum blockchain called “0xb1”. This is where the company sent the assets Stone was to deploy, according to the lawsuit.

What does the lawsuit allege?

Stone makes a number of allegations against Celsius in the lawsuit.

Celsius and Stone decided to engage in crypto trading strategies that required an effective hedging strategy to manage risk and hedge against price fluctuations of certain digital coins, according to the lawsuit. He adds that Celsius had a complete view of the business activities KeyFi was engaging in.

Stone claims that Celsius executives have “repeatedly assured him” that the company has entered into the necessary hedging transactions to ensure that price fluctuations of certain crypto assets would not have a material and negative impact on the company. or its ability to repay depositors. Stone and his team relied on those representations, the lawsuit adds.

“But those promises were lies. Despite its repeated assurances, Celsius failed to implement basic risk management strategies to protect against the price fluctuation risks inherent in many deployed investment strategies. “, says the lawsuit.

Stone alleges there were “several incidents” in which “Celsius’s inability to perform basic bookkeeping put client funds at risk.”

Another allegation revolves around the digital coin called CEL. This is Celsius’ own token. Celsius says that if users accept their interest payment in the form of CEL, they could earn higher interest than those who don’t.

The lawsuit, however, alleges that Celsius engaged in transactions to artificially inflate the price of CEL.

“The purpose of this scheme was both fraudulent and illegal: Celsius tricked customers into being paid in CEL tokens by offering them higher interest rates,” the lawsuit alleges. “Then, by deliberately and artificially inflating the price of the CEL token, Celsius was able to pay customers who opted to receive their interest payments in the form of the CEL token let alone the crypto-asset.”

Stone also alleges that Celsius CEO Alex Mashinsky was “able to enrich himself substantially.”

Finally, Stone claims in the lawsuit that Celsius was running a “Ponzi scheme.”

Due to Celsius’ inability to hedge against business risks, it had “massive liabilities” to cryptocurrency ether-denominated depositors, but failed to keep holdings in this digital coin equal to those debts. , according to the lawsuit.

As customers sought to withdraw either deposit, Celsius was forced to buy more ether on the open market at high prices (circa January 2021) and suffered heavy losses, according to the court case. Stone alleges that Celsius then began offering double-digit interest rates in order to attract new depositors whose funds were used to repay previous depositors and creditors.

“So while Celsius continued to present itself as a transparent and well-capitalized company, in reality it had become a Ponzi scheme,” the lawsuit alleges.

What happened to Stone?

Stone left Celsius in March 2021. He claims in the lawsuit that at the time of his departure, Celsius had a $100-200 million hole in its balance sheet that “he could not fully explain or resolve.”

He claims that Celsius retains control of the Ethereum wallet “0xb1” and that the CEO of Celsius uses it “for his own benefit”.

In one instance, Stone claims, Mashinsky transferred valuable non-fungible tokens, or NFTs, from the accounts to his wife’s wallet.

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