An independent examiner has found that cryptocurrency lender, Celsius, misled its investors and, at times, used new customer deposits to pay for other customers’ withdrawals, a hallmark of a Ponzi scheme.
Shoba Pillay, appointed by the New York bankruptcy court in September 2022, was tasked with providing an objective view of Celsius’s operations before its bankruptcy declaration in July.
Pillay discovered that Celsius was manipulating the market for its native token, CEL, but failed to disclose the risks to its customers. The company’s claims of high returns and financial freedom through a community-led lending system were far from reality.
Some employees were aware of the discrepancy between Celsius’s internal operations and public statements.
By June 2022, Celsius had to pause customer withdrawals and sometimes used new customer deposits to fund withdrawal requests. In other instances, the company used customer assets to purchase coins to cover liabilities to other customers, citing the funds as collateral to borrow the necessary coins.
However, Pillay stated that Celsius’s problems date back to 2020 when it used customer assets to fund operational expenses and rewards.
An unnamed manager at Celsius stated that the company spent all its cash on executive pay and propped up CEO Alex Mashinsky’s net worth in CEL tokens. Despite Mashinsky’s claim that he was not selling CEL and employees stating its value was zero, Mashinsky sold 25 million tokens for at least $68.7 million between 2018 and bankruptcy.
Pillay also found “significant tax compliance deficiencies” in the company, including over $23.1 million in potential use taxes owed by its mining arm and a reserved liability of $3.7 million for U.K. value-added tax. Pillay concluded that Celsius never corrected its misstatements to customers and the public.
The U.S. bankruptcy code permits the appointment of an independent examiner to investigate allegations of fraud or mismanagement by a bankrupt company or its executives. Pillay, a former federal prosecutor, conducted interviews with former employees, customers, and vendors.
It is worth mentioning that in July 2022, Celsius filed for bankruptcy protection due to ongoing financial struggles and its inability to pay its debts.
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