Alex Mashinsky, the founder and former chief executive of bankrupt cryptocurrency firm Celsius Network, was arrested on Thursday and charged with defrauding clients and lying about his firm’s business model.
Federal prosecutors said Mr Mashinsky, 57, misled customers into believing Celsius was a safe place to park their money, when in fact it was fraught with risks. He was also sued by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Federal Trade Commission.
Mr. Mashinsky was arrested at his home in New York, said a person close to the investigation. The charges against him include wire fraud, commodity fraud and manipulation of securities prices. Prosecutors also filed charges against the company’s chief revenue officer, Ronnie Cohen-Pavone, alleging price manipulation and wire fraud, among other crimes.
Founded in 2018, Celsius rose to prominence as a crypto bank of sorts, promising customers exorbitant interest rates and managing billions of dollars in deposits before collapsing last year. As its charismatic pitchman, Mr Mashinsky appeared in YouTube videos where he claimed Celsius was a safer, more egalitarian alternative to traditional banks.
“The message we sent today is quite simple,” Damian Williams, US attorney for the Southern District of New York in Manhattan, said in a statement. “If you defrauded ordinary investors to line your pockets, we will hold you accountable.”
At its peak, Celsius controlled approximately $25 billion in crypto assets. But last summer, Celsius filed for bankruptcy amid a widespread explosion in crypto markets, causing coin prices to collapse. In the process, Celsius wiped out more than 500,000 of its users, many of whom lost their savings. Mr Mashinsky resigned from the firm in September, citing his role as an “increasing distraction”.
When it filed for bankruptcy, approximately $4.7 billion in customer assets on the company’s platform were seized. In a settlement with the FTC announced Thursday, Celsius agreed to pay that amount as restitution to customers, although payments will be suspended until the bankruptcy process begins.
In charging documents, authorities said the company and Mr Mashinsky repeatedly lied to investors about how it generated interest for customers. According to regulators, it also lied about the number of its customers and misrepresented investors that their deposits were insured.
“Mashinsky portrayed Celsius as a modern bank where customers could safely deposit crypto assets and earn interest,” the indictment states. “However, the truth is that Mashinsky operated Celsius as a risky investment fund, taking clients’ money under false and misleading pretenses.”
A lawyer for Mr. Mashinsky did not respond to a request for comment. It was not immediately clear who was representing Cohen-Pavone. Prosecutors said Mr Cohen-Pavon, an Israeli citizen, was abroad and had not been arrested.
Mr Mashinsky’s arrest joins a growing list of crypto executives who have faced intense scrutiny by law enforcement since last year’s market collapse. In December, Sam Bankman-Fried, the founder of the failed FTX exchange, was arrested on charges of fraud. In March, federal agents searched the home of Jesse Powell, the founder of Kraken, the second largest US exchange. And in June, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, was sued by the SEC, subject to a criminal investigation.
Since its launch in 2018, Celsius grew in size rapidly as the value of all crypto assets soared – especially during the pandemic, when investors and speculators were pouring cash into crypto.
Like clients of FTX, Binance and other crypto firms, investors in Celsius came to believe that they were putting money into a world-changing asset that was bound to soar in price. Officials said Mr. Mashinsky and some of his associates made every effort to convince Celsius customers of the matter.
The company raised annual yields of up to 18 percent, which dwarfed the amount of interest offered by traditional banks. “It’s like going to the Olympics and getting 15 medals in 15 different areas,” Mr Mashinsky once said,
Celsius brought its product to market at a time when traditional banks were offering very low interest rates on savings accounts and money market funds, making the company highly attractive to investors seeking higher-than-normal yields.
But Celsius never explained in detail how it produced such a large yield. In public comments, Mr. Mashinsky has repeatedly claimed that the firm has abandoned risky practices such as lending money without the need for collateral. In fact, according to the SEC, Celsius made millions of dollars in the form of loans that were not backed by any collateral.
In its complaint, the SEC said Mr. Mashinsky and others at the firm discussed Celsius’ in-house digital currency, CEL, as if it were stock in a publicly traded company. But like many crypto fraud cases, Celsius’ token was neither registered nor regulated.
The story that Mr. Mashinxy sold to investors began to unfold last year, when crypto prices plummeted. The SEC said, as far back as last spring, emails from Celsius employees showed they knew the company was a proverbial house of cards.
In an email cited by the SEC, an employee described Celsius as a “sinking ship”. In another, an unnamed executive said, “We don’t have any profitable services.”
Celsius filed for bankruptcy last July. Even after the collapse, Mr. Mashinsky was convinced that he could start another act. Before his resignation, he tried to garner support for a modified version of Celsius, calling it the Kelvin after the unit of temperature.