NY Attorney General Accuses Alex Mashinsky of Defrauding Crypto Investors in $20 Billion Collapse

New York Attorney General Letitia James has filed a lawsuit against former Celsius Network CEO Alex Mashinsky, alleging that he defrauded hundreds of thousands of investors at the now-bankrupt cryptocurrency exchange.

Mashinsky publicly assured his customers that investing with Celsius was both safer and more lucrative than leaving their investments in a traditional bank. At one point, deposits at the crypto exchange were valued at $20 billion. However, James alleges that Mashinsky's statements were false and became part of his efforts to hide deep losses on risky crypto-lending investments.

James said in a statement that Alex Mashinsky, the former CEO of Celsius, promised to lead investors to financial freedom but instead led them down a path of financial ruin.

The attorney general’s office is seeking to fine Mashinsky and levy monetary damages, and bar him from leading a company or working in the securities industry in New York. This is in response to Mashinsky allegedly misleading investors and violating state securities laws.

This civil action was brought under the Martin Act, New York state's wide-ranging securities law. The Martin Act gives prosecutors sweeping search and subpoena powers to investigate potential wrongdoing.

Celsius offered high yields that attracted investors and boosted the exchange’s revenue. Celsius, like Voyager Digital, which is also bankrupt, was able to pay out yields of up to 17% by lending customer assets to crypto hedge funds, including Three Arrows Capital, which has now collapsed, and Sam Bankman-Fried’s Alameda Research.

The crash of cryptocurrencies terra and luna in 2022 forced 3AC into bankruptcy and deepened an ongoing “crypto winter.” Celsius was exposed to the fall of terra and luna both through loans to 3AC and through $935 million of direct investment in terra, all funded by investor funds, the complaint said.

Mashinsky said that Celsius had "very small losses" and that the exchange had "basically reduced or eliminated any exposure" to borrowers with investments in terra or luna.

James' complaint alleges that those statements were false, and were part of a wider campaign to prevent user outflows that could have precipitated a run on the bank similar to what happened at FTX, another bankrupted exchange.

According to the complaint, Mashinsky made "materially false and misleading" statements designed to hide the actual extent of Celsius' exposure. The complaint alleges that Mashinsky claimed that the crypto exchange had "billions in liquidity" just days before Celsius filed for bankruptcy on July 13, 2022.

Celsius investors were left feeling angry and disappointed after the company's share price fell sharply, CNBC previously reported. Some even considered suicide.

According to the complaint, Mashinsky never disclosed that Celsius had a close to billion-dollar deficit. Celsius entered bankruptcy proceedings with only $1.75 billion in crypto assets, which is a far cry from the $4.7 billion it owed users.

Mashinsky resigned from his position as CEO in September. At the time, he apologized for the “increasing distraction” that his leadership had caused. He said that he was stepping down so that the company could focus on its core mission.

A spokesperson for Celsius told CNBC that Alex Mashinsky is no longer employed by the company and is not involved in its management.

Mashinsky did not respond to requests for comment immediately.