NY AG Sues Founder of Crypto Firm Celsius

New York Attorney General Letitia James filed a complaint against Celsius Network LLC CEO Alex Mashinsky on Thursday. James, on behalf of the people of the state of New York, alleges he violated the Martin Act and other statutes in selling crypto-backed earned interest accounts as unregistered securities.

According to the filing, Celsius was a crypto asset trading platform on which customers could trade assets and purchase/sell assets for fiat currency. Their flagship product was called the “Earn” program through which individuals could deposit their money in an earned interest account. 

In numerous press releases, interviews, and his weekly Ask Mashinsky Anything livestream, Mashinsky himself reportedly touted Celsius as like a bank but safer, since they had the customer’s best interests at heart. He further explained that Celsius avoided risky unsecured loans, investments in suspicious crypto assets like FTX’s coin FTT, and dubiously collateralized loans through DeFi protocols. The last is an algorithm-processed crypto-asset loan that is collateralized through an auto-liquidation procedure if the asset’s value drops below a certain threshold.

The complaint further states that in a December 2021 interview, Mashinsky himself said “if somebody’s offering you [a yield] of 20%, I would be very careful digging into why and how they’re paying it.” He promised Celsius’ earned interest accounts yielded 17% interest. 

During and after the Spring 2022 crypto crash Mashinsky purportedly assured investors that Celsius’ investments in the crashing companies, like FTX, were limited. He even offered incentives for new investors, court documents allege.;

However, over the past few years, Celsius’ investments had become increasingly risky to try and earn the promised profits. While in 2020 Celsius earned almost $10 million in uncollateralized loans, in the first half of 2022, the company made at least $394 million in said loans. 

Contrary to statements otherwise, Attorney General James alleges Celsius had heavily invested in FTT and other similar crypto assets in which the issuing organization owned a vast majority of said coin. Celsius’ own risk assessment team is stated to have known that these assets were highly illiquid since their value was highly dependent on the relatively small amount of cryptocurrency in circulation. Celsius also retained much of their collateral in their own vast stores of their cryptocurrency, CEL.

The complaint describes how this all came to a head in the late spring and early summer of 2022. While Machinsky outwardly projected confidence and security, in May the company owed $820 million more than they had in assets. Mashinksy began heavily recruiting new customers to salvage the downfall. In a June 10 AMA, Mashinsky said, “Celsius has billions in liquidity…. [W]e provide the immediate access to everybody, anyone who needs access to it, to the liquidity.” On June 12, Celsius paused all withdrawals “to stabilize liquidity… to preserve and protect assets.” On July 13, with approximately a $1 billion deficit, Celsius declared bankruptcy. In the complaint, a father of three is described as having lost his life savings of more than $375,000

James alleges that Celsius’ earned interest accounts constitute securities under the Martin Act, and thus under said act as well as New York’s General Business Law and Executive Law, Mashinsky was required to register them as securities and register himself as a dealer in securities. The complaint further alleges that his countless false statements about the safety and security of Celsius, including statements that regulating bodies approved of the company and its practices, constitute securities fraud, and business fraud more broadly. She, on behalf of the citizens of New York, seeks statutory and compensatory damages as well as a permanent injunction preventing him from trading in any kind of security, including crypto assets, and operating as an officer or director of any company doing business in the state. 

The case will be heard in the Supreme Court of New York.