The court-appointed examiner issued a blistering report, saying the bankrupt crypto lender was "Ponzi like" and manipulated its CEL token to enrich founders.
In a blistering final report, bankrupt crypto lender Celsius was accused of lying to its customers, manipulating the price of its native token to enrich executives, and using what one of its own employees called "Ponzi-like" methods.
In the 476-page report, Examiner Shoba Pillay began by saying:
"The business model Celsius advertised and sold to its customers was not the business that Celsius actually operated ... Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect."
Among the sketchy if not outright illegal behaviors Pillay alleged were made by Celsius and its management — and especially majority owner and former CEO Alex Mashinsky — was the firm buying its own CEL token timed to prop up its value while allowing insiders to sell holdings at a big profit.
It eventually bought $558 million in CEL on the open market, Pillay said.
'Ponzi Like'
Beyond that, Pillay alleged that Celsius used new and existing customers' funds to fill holes in its balance sheet and buy CEL tokens, a process Celsius' own coin deployment specialist described as "very Ponzi like" in April 2022.
A former Celsius vice president of treasury said the company "spent all our cash paying execs and trying to prop up alexs [sic] net worth in CEL token."
Mashinsky, the Examiner said, sold $68.7 million in CEL between 2018 and the bankruptcy filing. He added:
"During the height of Celsius's market making, Celsius often sought to protect CEL from price drops that it attributed to Mr. Mashinsky's sales of large amounts of his personal CEL holdings. As a result of Mr. Mashinsky's sales, Celsius often increased the size of its resting orders to buy all of the CEL that Mr. Mashinsky and his other companies were selling."
In effect, Pillay said, "Celsius bought every CEL token in the market at least one time and in some instances, twice."
Beyond Its Means
One of the ways Celsius kept bringing in customers was to offer among the highest interest rates — called yield — in the business. These ranged as high as 18% at a time when banks were offering fractions of 1% on savings accounts, the examiner said.
The way it generated high returns with low risk, Celsius and Mashinsky told clients over and over, was "by doing 'what Celsius does best' — carefully vetting its financial counterparties and ensuring that when those counterparties borrowed crypto assets from Celsius, they pledged 'over 100% collateral' to secure their loans."
While that was true at the beginning, Pillay said, as its customer base exploded with the 2021 bull market "the need to increase yield to close the gap between customer reward rates and revenue led Celsius to make riskier investments."
Unsecured
However, loans that were only partially secured or fully unsecured brought in higher interest rates. Funds were invested heavily in very risky decentralized finance (DeFi) and staking protocols. It started a Bitcoin mining operation. Despite this, Pillay added:
"Celsius boasted that its primary financial product — its Earn program — was the 'safest place for your crypto.'"
Celsius and Mashinsky "continued to promote the idea that it was investing customer funds in low-risk and fully collateralized institutional and retail loans."
This grew more and more dangerous, the company's then CFO warned Mashinsky:
"[B]orrowers with unsecured loans could tell everyone Mr. Mashinsky is a 'liar.'"
By June 2021, the report said, it was "routine" for one-third of Celsius' institutional loans to be unsecured.
Untrustworthy
Then there was the matter of its interest rates, which were wholly detached from its income, despite telling customers that they were getting a minimum of 5% annual interest, with their earnings — called "rewards" — based on an 80% share of its earnings.
This didn't work out as Celsius "had little to no profits to distribute," Pillay said. He added:
"Celsius also made no effort to set its reward rates based on its yield. When regulators asked Celsius how it set its reward rates, Celsius explained that there was no correlation between the interest rates it paid to customers and the yield it generated from investing customer assets ... Instead, Celsius consistently set its reward rates based on what it perceived was necessary to beat the competition."
Beyond that, it was revealed that Celsius' three top managers withdrew $56 million weeks before the company froze withdrawals following a run.
Whose Coins?
Another example of this that the examiner's report noted was the company's emphasis on putting "its community first" and building its business "on trust" and "transparency."
Yet one of the cornerstones of Mashinsky's weekly "Ask Mashinsky Anything" (or AMA) calls was his insistence that customers retained ownership of the cryptocurrency they invested. Pillay said Mashinsky:
"Routinely told customers … that customer-deposited coins 'are your coins, not our coins … it's always your Bitcoin.'"
In case of disaster, he added, "coins are returned to their owners even in the case of bankruptcy."
Which was demonstrably not true. In January, Chief U.S. Bankruptcy Judge Martin Glenn ruled:
"Based on Celsius's unambiguous terms of use ... when the cryptocurrency assets (including stablecoins) were deposited in Earn accounts, the cryptocurrency assets became Celsius's property."
Which left its 600,000 Earn customers at the back of the line of creditors when it comes to getting their investments back.
At the front of the line, the bankruptcy court ruled, was the small number of customers who placed assets not in the Earn program but simply in custody — and was put there more than 90 days before the bankruptcy filing's clawback date. This amounted to $50 million, Celsius' lawyers told the court.
On Jan. 31, Celsius' restructuring management tweeted that the court authorized it to allow custody customers to withdraw up to $7,575, minus gas fees, and up to 94% of the value of the account.
