Investment manager

Celsius Network was a ‘Ponzi scheme’, says company’s former chief investment officer in lawsuit

Embattled crypto lender Celsius Network operated like a classic ‘Ponzi scheme’, the firm’s former key investment strategist claims in a lawsuit, claiming the firm 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 protect against volatility. , leaving it massively exposed to the recent crypto market meltdown.

The lawsuit said Celsius never maintained enough liquidity to cover its deposits in the event of a major market drop and used client assets to back its own CEL coin and to pay previous depositors.

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

According to the 30-page lawsuit Stone’s KeyFi filed in New York state court in Manhattan, Stone was defrauded of hundreds of millions of investment gains owed to him as a result of Celsius’ negligence. He said he severed his partnership with Celsius in early 2021 after discovering the company had taken no steps to protect his portfolio, leaving him fully exposed to market fluctuations.

A message sent to Celsius representatives was not immediately returned.

Founded and run by Alex Mashinsky, Celsius has become a leading player in the rapidly developing crypto lending space by offering eye-popping interest rates of up to 18% to attract depositors. In total, the company said it had accumulated deposits of more than $20 billion, which it used to make Defi investments and loans.

The model has been met with skepticism by some, and questions have long swirled around the company’s viability. Late last year, regulators in several states sent Celsius cease-and-desist notices asking it to stop selling its leading investment product because it was unregistered and violated the laws of the state.

After Stone stopped working with Celsius, Mashinsky transferred valuable NFTs from accounts Stone previously controlled to a wallet owned by Mashinsky’s wife, according to the lawsuit.

Stone said in his lawsuit that Celsius’ business model was actually a model of desperation, driven by severe exchange rate losses it suffered during Ethereum’s early 2021 bull run. the company to cover many more deposits than it could.

“As customers sought to withdraw their ether deposits, Celsius was forced to buy ether on the open market at historically high prices, suffering heavy losses. Faced with a cash crunch, Celsius began offering double-digit interest rates in order to attract new depositors, whose funds were used to repay previous depositors and creditors,” the lawsuit states.

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

In mid-June, like Bitcoin BTCUSD,
-0.58%
and other cryptocurrencies plunged in value, Celsius froze all withdrawals, trades and transfers by depositors, citing “extreme market conditions”. The company has since said it is considering possibly filing for bankruptcy and restructuring its debts.