Celsius founder Alex Mashinsky arrested, pleads not guilty to fraud
Danny Park
Thu, July 13, 2023
Alex Mashinsky, founder and CEO of bankrupt cryptocurrency lender Celsius Network Limited, pleaded not guilty after being arrested in the U.S. Thursday for seven criminal charges including securities fraud, commodities fraud and wire fraud, Reuters reports.
See related article: Celsius misled investors, spent customer funds, bankruptcy examiner claims
Fast facts
U.S. federal prosecutors say Mashinsky defrauded customers. According to the indictment released Thursday by the U.S. Attorney for the Southern District of New York, Mashinsky led customers to believe that Celsius was an air-tight storage space for their assets, obscuring associated risks.
Additionally, prosecutors accuse Mashinsky and Celsius’ former chief revenue officer Roni Cohen-Pavon of manipulating the value of CEL, the company’s native cryptocurrency token. The two allegedly arranged the purchase of hundreds of millions of dollars of CEL in the open market with the objective of artificially supporting and inflating the token’s price.
Prosecutors allege that Mashinsky made approximately US$42 million in proceeds from his sales of CEL tokens, with Cohen-Pavon making over US$3.6 million.
In the lead up to June 12, 2022, when Celsius froze customer withdrawals, prosecutors say Mashinsky continued to assure customers that the company was in a strong financial position. He also informed them that the company had sufficient liquidity to meet all customer withdrawal demands. However, he had by that time allegedly removed approximately $8 million-worth of his own crypto assets from Celsius.
The U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission and the Federal Trade Commission all sued Mashinsky and Celsius earlier on Thursday.
Celsius filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York in July 2022 after the spiraling crypto market forced the lender to freeze withdrawals.
Marco Quiroz-Gutierrez
Fri, July 14, 2023
Yuki Iwamura—Bloomberg via Getty Images
Alex Mashinsky, the ex-CEO of bankrupt crypto lender Celsius, insisted publicly that he was clinging to his share of the company’s CEL tokens. But according to the Justice Department, he netted millions of dollars by offloading coins at inflated prices.
The DOJ claims that Mashinsky, with the help of the company's former chief revenue officer, Roni Cohen-Pavon, manipulated the price of CEL by buying millions of dollars worth of the tokens—to help keep it afloat—without revealing it publicly. In some cases, Mashinsky and Cohen-Pavon also caused Celsius to dip into its customer deposits to buy CEL and prop up its price, the DOJ alleges.
At one point, Cohen-Pavon admitted to Mashinsky that the company made up most of the purchases of CEL. “[T]he issue is that people are selling [CEL] and no one is buying except for us,” he said in a private message to Mashinsky, according to the DOJ. “[T]he main problem was that the value was fake and was based on us spending millions (~8M a week and even more until February 2020) just to keep it where it is.”
By selling tokens at inflated prices, Mashinsky took home about $42 million, while Cohen-Pavon reaped $3.6 million. Mashinsky was arrested Thursday and charged with seven counts that include wire fraud and securities fraud. He could face up to 65 years in prison if convicted.
“It's such a flagrant abuse,” said Steven Lubka, head of Swan Private at Swan Bitcoin, a financial services firm.
But a company manipulating its own cryptocurrency isn't a new idea. In December, the Securities and Exchange Commission accused Caroline Ellison, the former CEO of FTX’s trading arm, Alameda Research, of fixing the price of the now-bankrupt crypto exchange’s native coin, FTT. Ellison, at the direction of ex-FTX CEO Sam Bankman-Fried, allegedly purchased large quantities of FTT on the open market to help it maintain its price. FTT was important for FTX because it accepted the coin as collateral for loans of customer funds provided to Alameda Research, and the inflated value of FTT made it seem like the company’s exposure to risk was less than it was, according to the SEC.
The fact that Celsius and Mashinsky were manipulating CEL was not surprising to Lubka. Releasing a crypto token is an effective way for crypto firms to raise money and reward executives and investors, but these coins are also prone to manipulation.
“It's just extremely vulnerable to abuse,” Lubka told Fortune. “All the incentives line up in favor of these companies abusing the unaccountable issuance of tokens.”
Yet these types of tokens remain common. Crypto companies often provide coins to investors or executives in a manner similar to awarding stock options or equity grants in the traditional business world.
The motivation behind sharing TradFi securities is to incentivize employees to work hard to create a viable business, which in theory would increase the value of their shares. With crypto markets, Lubka continued, token grants don’t create the same type of incentive. And tokens, unlike an equity stake, can be offloaded immediately in the open market, generating massive windfalls regardless of that crypto company's success.
“The incentive," Lubka added, "is just to drive a bunch of f****** marketing hype and pump up the value of the token, and then just start selling your tokens as fast as you can."
This story was originally featured on Fortune.com
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