Alex Mashinsky, the founder and former CEO of bankrupt cryptocurrency firm Celsius Network, was arrested on Thursday and charged with defrauding customers and misrepresenting the company’s business model.
Federal prosecutors say Mashinski, 57, misled clients into believing Celsius was a safe place to store money when in fact it was fraught with risks. He has also been sued by the SEC, the Commodity Futures Trading Commission and the Federal Trade Commission.
Mashinski was arrested at his New York home, a person familiar with the matter said. The charges against him include wire fraud, commodities fraud and securities price manipulation. Prosecutors also charged Roni Cohen-Pavon, the company’s chief revenue officer, with price fixing and wire fraud, among other crimes.
Founded in 2018, Celsius rose to prominence as a cryptocurrency bank promising sky-high interest rates to clients and processing tens of billions of dollars in deposits before it collapsed last year. A charismatic propagandist, Mr Mashinski has appeared in YouTube videos in which he claims that Celsius is a safer and more equal alternative to traditional banks.
“Our message today is very simple,” Damian Williams, U.S. Attorney for the Southern District of New York in Manhattan, said in a statement. “If you defraud ordinary investors to enrich yourself, we will hold you accountable.”
At its peak, Celsius controlled approximately $25 billion in crypto assets. But Celsius filed for bankruptcy last summer amid a broader implosion in the cryptocurrency market that sent cryptocurrency prices plummeting. In the process, Celsius wiped out more than 500,000 users, many of whom lost their savings. Mr Mashinski resigned from the company in September, saying his role was “increasingly distracting”.
About $4.7 billion in customer assets on the company’s platform were frozen when the company filed for bankruptcy. In a settlement with the FTC announced Thursday, Celsius agreed to make the payments to customers as compensation, though the payments will be suspended while the bankruptcy proceedings unfold.
Authorities said in charging documents that the company and Mashinsky repeatedly lied to investors about how it benefited clients. The company even lied about the number of its customers and falsely told investors their deposits were insured, according to the regulator.
“Mashinski portrayed Celsius as a modern bank where customers could securely deposit crypto assets and earn interest,” the complaint states. “In reality, however, Mashinski operated Celsius as a venture capital fund. , soliciting client funds under false and misleading pretenses.”
Mashinski’s lawyer, Jonathan Olin, said the Celsius founder “strongly denies the allegations.” It was not immediately clear who represented Mr. Cohn-Pavon. Cohen Parvin, an Israeli citizen, was abroad at the time and was not arrested, prosecutors said.
Mr. Mashinski signed a $40 million personal bond secured by his New York home and a First Republic brokerage account before being released on bail.
Mashinsky’s arrest adds to a growing list of cryptocurrency executives facing intense scrutiny from law enforcement since the market crashed last year. In December, Sam Bankman-Fried, founder of the defunct FTX exchange, was arrested on fraud charges. In March, federal agents raided the home of Jesse Powell, founder of Kraken, the second-largest U.S. exchange. And in June, Zhao Changpeng, CEO of Binance, the world’s largest cryptocurrency exchange, was indicted by the SEC and is under criminal investigation.
After launching in 2018, Celsius has scaled rapidly as all cryptoasset values soared, especially during the pandemic, when investors and speculators poured cash into cryptocurrencies.
Like clients of FTX, Binance and other cryptocurrency firms, Celsius investors have come to believe they are putting money into a world-changing asset destined to rise in price. Authorities say Mashinski and some of his colleagues went to great lengths to convince Celsius customers that this was the case.
The company advertises an annual yield of up to 18%, dwarfing the interest amounts offered by traditional banks. “It’s like going to the Olympics and getting 15 medals in 15 different fields,” Mr. Mashinski said. someone once said.
Celsius brings its product to market at a time when traditional banks pay little interest on savings accounts and money market funds, making the company extremely attractive to investors looking for higher-than-normal yields.
But Celsius never explained in detail how it produced such a huge yield. Mashinski has repeatedly claimed in public comments that the firm avoids risky practices, such as lending money without requiring collateral.In fact, Celsius made millions of dollars in loans without any collateral backing them, according to the SEC
The SEC said in the complaint that Mashinski and others at the company discussed Celsius’ internal digital currency, CEL, as if it were stock in a public company. But like many cases of crypto fraud, Celsius’ token was neither registered nor regulated.
The story of Mashinksy’s sale to investors began to unravel last year when cryptocurrency prices plummeted. By last spring, emails from Celsius employees revealed they knew the company was known as a house of cards, the SEC said.
In an email cited by the SEC, an employee described Celsius as a “sinking ship.” In another message, an unnamed executive said, “We don’t have any profitable services.”
Celsius filed for bankruptcy last July. Even after the breakdown, Mr. Mashinski remains convinced he can start Act Two. Before resigning, he tried to win support for an improved version of the Celsius degree, named the Kelvin after the unit of temperature.