Former Celsius CEO faces securities fraud charges; crypto platform to pay billions in FTC settlement

Alex Mashinsky, former CEO of the failed cryptocurrency lending platform Celsius Network, was arrested Thursday on federal securities fraud charges.

In an indictment unsealed Thursday by federal prosecutors, Mashinsky faces seven counts of fraud. Roni Cohen-Pavon, Celsius’s former chief revenue officer, is charged as a co-conspirator, according to the Justice Department.

Federal prosecutors allege Mashinsky falsely portrayed Celsius as a safe and secure institution, leading Celsius’s customer base to grow exponentially, with many retail investors rather than large institutions. The U.S. Attorney’s Office for the Southern District of New York said the company went on to become one of the largest crypto platforms in the world, with around $25 billion in assets at its peak.

“Mashinsky and Cohen-Pavon, and others working at Celsius also orchestrated a yearslong scheme to mislead customers and market participants regarding the market value and interest in Celsius’s proprietary crypto token CEL,” the U.S. Attorney’s Office said in a statement.

In what led to the company’s “pause” of Celsius customer withdrawals on June 12, 2022, federal prosecutors allege Mashinsky continued to assure customers the company was in a strong financial position, having enough liquidity to meet the withdrawal demands. Meanwhile, Mashinsky removed around $8 million worth of his non-CEL crypto assets from the platform.

Separately, the Securities and Exchange Commission (SEC) has sued Celsius and Mashinsky for allegedly defrauding customers and misleading them about the core aspects of the company.

And according to a separate complaint filed Thursday by the FTC, Mashinsky and co-founders, Shalomi Daniel Leon and Hanoch “Nuke” Goldstein, are accused of tricking customers into transferring cryptocurrency to the platform with the false promise that deposits would be safe and always available. The FTC complaint alleges the platform engaged in risky investments and not telling investors when those investments failed.

The FTC reached a proposed settlement with Celsius that will “permanently ban the companies from offering, marketing, or promoting any product or service that could be used to deposit, exchange, invest, or withdraw any assets.” It sets a judgment at $4.7 billion.

“Celsius touted a new business model but engaged in an old-fashioned swindle,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection, in a statement. “Today’s action banning Celsius from handling people’s money and holding its executives accountable should make clear that emerging technologies are not above the law.” 

The New Jersey-based company marketed its cryptocurrency products and services, which included interest-bearing accounts, personal loans secured with cryptocurrency deposits and a cryptocurrency exchange.  

The FTC complaint said Mashinsky, Leon and Goldstein told customers their platform is safer than banks because “we have less risk, much less risk.”

It alleges the former executives misappropriated a total of $4 billion of customers’ deposits instead of securing them as promised. The complaint said the company used these funds for its operations, paying rewards to other customers, borrowing money and making high-risk investments, which the company admitted sometimes lost money. 

“The FTC says the company and its top executives deceived users by falsely promising them that they could withdraw their deposits at any time, that the company maintained a $750 million insurance policy for deposits, that it had sufficient reserves to meet customer obligations, and that those in its Earn program could earn rewards on deposits of cryptocurrency assets as high as 18 percent annual percentage yield (APY),” the FTC wrote in a statement.  

According to the complaint, the company did not hold the $750 million insurance policy and only had a small capital reserve allowing a fraction of its customers to withdraw their cryptocurrency within one week. The complaint said it was not until mid-2021 when the platform used a system to track its assets and liabilities.  

The company filed for Chapter 11 bankruptcy protection in 2022 after it halted its operations in June.

The Associated Press contributed.