Crypto Lender Celsius CEO Is Arrested, Sued by Regulators

Celsius Network founder Alex Mashinsky was arrested in New York early Thursday morning and charged with defrauding the collapsed crypto exchange’s customers, part of an expanding federal crackdown on the cryptocurrency industry.

The Justice Department charged Mashinsky with seven criminal counts including securities fraud, commodities fraud and market manipulation. Prosecutors also charged Roni Cohen-Pavon, the exchange’s former chief revenue officer, and accused both men of a yearslong scheme to mislead customers about the value of Celsius’s proprietary token.

Three federal agencies also filed civil lawsuits against Mashinsky or the collapsed crypto lender, alleging both defrauded customers who relied on the company to make money by lending out their tokens. The Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission filed their lawsuits in Manhattan federal court.

Regulators and federal prosecutors have ramped up scrutiny of the digital asset industry, cutting off access to products and taking actions against many of the industry’s biggest players. Last month, the SEC sued Binance and Coinbase to try to rein in the crypto markets.

Lawyers for Celsius didn’t respond to requests for comment. A lawyer for Mashinsky said the Celsius founder denies the allegations brought against him Thursday. Mashinsky, 57 years old, faces a maximum of 20 years in prison if convicted of securities fraud.

Mashinsky appeared in court Thursday, where he pleaded not guilty to the charges and was released on a $40 million bond. Cohen-Pavon couldn’t be reached. Prosecutors said he isn’t in the U.S.

The collapse of Celsius in 2022 ushered in a series of high-profile company failures in the digital-assets industry that culminated with the demise of crypto-exchange FTX in November.

The FTC said it has settled with Celsius for $4.7 billion, noting that the judgment will be suspended until creditors and customers have been repaid in bankruptcy proceedings.

Many of Celsius customers’ assets are still locked up in bankruptcy a year later as customers face the prospect of getting a fraction of their assets back in the bankruptcy process. When Celsius filed for bankruptcy protection in July 2022, it disclosed a $1.2 billion hole in its balance sheet.

“The suspension will lift if the bankruptcy cases end without Celsius’s assets being fully distributed or if we find that the companies lied on the financial statements they gave us,” an FTC spokesperson said.

The FTC also sued Mashinsky and co-founders Shlomi Daniel Leon and Hanoch “Nuke” Goldstein, but haven’t agreed to a settlement with them, according to the FTC.

Mashinsky promoted Celsius, which he founded in 2017, as a safe alternative to banks that would allow them to earn a return as high as 17% by lending out their crypto. The collapsed crypto lender at one point held more than $13 billion in investors’ crypto balances. It halted customer withdrawals in June 2022, creating a catastrophe for the thousands of people who had entrusted their tokens to the company.

The SEC’s suit alleges that Celsius and Mashinsky defrauded investors by misrepresenting aspects of its revenue, how it lent out users’ crypto, and its own risky trading practices.

Regulators said Celsius invested customer deposits of cryptocurrency in illiquid assets and risky decentralized-finance bets that tied up money for long periods. The company frequently paid more than 80% of its revenue to satisfy its interest-payment obligations, the SEC said. In 2021, Celsius’s interest payment accounted for 120% of its revenue, the Justice Department said.

Regulators allege that Mashinsky lied repeatedly while building Celsius. The company claimed to have raised $50 million by selling its native CEL token through an initial coin offering when it only raised 65% of its goal, the SEC said. To cover the shortfall, the SEC said, Mashinsky tried to purchase the unsold $18 million of CEL himself through an undisclosed transaction with Celsius. The deal didn’t work out, leaving the outstanding CEL tokens unsold, the regulators said.

Celsius also lied about having 1 million active users when it only had about 500,000 users, many of whom were no longer active users, the SEC said.

Celsius and Mashinsky also hid the fact that the company had experienced loan defaults from institutional investors amounting to hundreds of millions of dollars. They lied about investor assets being insured and misrepresented that the company had received approval from state and federal regulators when it had not, according to the SEC complaint.

The SEC and CFTC suits seek unspecified penalties from Mashinsky. The SEC complaint asks a court to bar him from serving as an officer or director of a public company in the future.

While Mashinsky pitched Celsius as a company that could upend traditional banking, its business model was similar to a consumer bank. The company took in customer deposits and made loans, often paying yields far higher than a federally regulated bank.

The pitch sat well with investors. In fall 2021, Celsius raised $750 million in a round led by venture-capital investor WestCap and Canadian pension fund Caisse de dépôt et placement du Québec. The funding, which could have lowered Celsius’s leverage ratio depending on how it was deployed, valued the company at more than $3 billion.

Important to Celsius’s fundraising pitch was its fast-growing profits, The Wall Street Journal previously reported. Celsius gave projections to investors showing deposits would top $108 billion in 2023, and revenue would hit $6.6 billion, according to documents it provided to investors in advance of raising money.

Mashinsky stepped down as the chief executive of the lender in September last year following a resignation request from Celsius creditors. He remains the majority owner of the lender, with an 83.7% stake in the company, according to the SEC complaint.

Celsius recently teed up a reorganization plan to compensate customers and exit bankruptcy, which is scheduled for a vote by its users in September. Under the plan, a consortium of investors led by TechCrunch founder Michael Arrington will manage the company’s illiquid assets, including its bitcoin-mining business, and distribute a portion of its liquid crypto to customers.

—Dave Michaels and Soma Biswas contributed to this article.

Write to Vicky Ge Huang at [email protected], Caitlin Ostroff at [email protected] and Corinne Ramey at [email protected]