| 1 December 2023, Friday |

Founder of bankrupt crypto lender Celsius must face New York fraud lawsuit

A Manhattan state court judge ordered on Friday that Alex Mashinsky, the founder and former CEO of the now-bankrupt cryptocurrency lender Celsius Network, must face a civil fraud action filed by New York Attorney General Letitia James.

According to Justice Margaret Chan, the attorney general alleged enough that Mashinsky misled investors by advertising Celsius as a safe alternative to banks while concealing its hazards, which included hundreds of millions of dollars in investment losses.

Chan also said James could pursue some claims under the Martin Act, a powerful state securities law, and that the “earned interest accounts” that Celsius offered customers qualified as securities under state law.

The attorney general’s lawsuit “supports a reasonable inference that the harm suffered by investors flowed, at least in part, from Mashinsky’s alleged misrepresentations made in New York concerning Celsius’ overall financial health and investment safety,” Chan wrote in a 25-page decision.

Mashinsky has separately pleaded not guilty to criminal fraud charges brought by the U.S. Department of Justice tied to Celsius’ demise.

He also faces related civil lawsuits by the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission and U.S. Federal Trade Commission.

Lawyers for Mashinsky in the New York civil case did not immediately respond to requests for comment.

James, in a statement, said the decision “should serve as another reminder to crypto companies that we will use the full extent of the law against those who defraud investors.”

Cryptocurrency lenders such as Hoboken, New Jersey-based Celsius grew rapidly as digital asset prices surged higher during the COVID-19 pandemic.

The lenders promised easy loan access and high interest rates to depositors, and lent tokens to institutional investors, hoping to profit from the difference.

Celsius was founded in 2017 and had offered 17% interest on some deposits, but had a $1.19 billion balance sheet deficit when it sought Chapter 11 protection in July 2022, according to regulators and court filings.

The bankruptcy came one month after Celsius froze withdrawals and transfers for its 1.7 million customers, citing what it called “extreme” market conditions.

The case is New York v. Mashinsky, New York State Supreme Court, New York County, No. 450040/2023.

  • Reuters