New York Attorney General Files Lawsuit Against Celsius Co-Founder

New York Attorney General Letitia James has filed a civil lawsuit against Alex Mashinsky, alleging that the co-founder of the bankrupt crypto lender Celsius Network LLC defrauded investors out of billions of dollars in digital currency.

The lawsuit alleges that the former chief executive made false statements to investors about the soundness of Celsius’s financial condition, then concealed its dire situation when the lender lost hundreds of millions of dollars in risky investments. According to the lawsuit, Mr. Mashinsky falsely claimed that Celsius was safer than a bank and only lent assets to credible entities.

"Alex Mashinsky made false and unsubstantiated promises to investors, leading them to financial ruin," said Ms. James, a Democrat. "The law is clear that making false and unsubstantiated promises and misleading investors is illegal."

The lawsuit against Mr. Mashinsky alleges that he violated the state’s Martin Act, a law that prohibits securities and commodities fraud, and a state general business law that allows the attorney general to investigate fraud.

As a serial entrepreneur, Mr. Mashinsky launched Celsius in 2017 as an alternative to traditional banks. Over five years, the company grew to be one of the largest crypto lenders, managing more than $20 billion in assets at its peak. However, the company filed for bankruptcy protection in July as the crypto market spiraled and after freezing customer withdrawals. Mr. Mashinsky resigned as Celsius’s CEO in September.

Celsius released a statement saying that Mr. Mashinsky is no longer employed by the company. He didn't respond immediately to a request for comment. In a statement issued after the company filed for bankruptcy, he said that the move was "the right decision for our community and company."

A bankruptcy judge ruled on Wednesday that $4.2 billion in cryptocurrency deposits in Celsius's interest-bearing accounts belong to the firm. This is a blow to the thousands of customers who have been fighting to get their money back.

Celsius revealed in a bankruptcy filing in October that it had received a federal grand jury subpoena in June. Customers have filed a proposed class-action suit against Celsius and its founder, Mr. Mashinsky, accusing the company of operating like a Ponzi scheme.

As of December 31, 2021, more than 26,000 New Yorkers had deposited approximately $440 million in Celsius, according to Ms. James's office.

Ms. James is seeking to bar Mr. Mashinsky from engaging in business relating to the issuance or sale of securities and commodities in New York. She also wants to bar him from serving as an officer of companies operating in the state. This would prevent him from being able to take advantage of investors in the future.