Celsius Founder, Former CEO Arrested Over Fraud Charges as SEC Sues Crypto Firm

Alex Mashinsky, the founder and former CEO of bankrupt cryptocurrency lender Celsius Network, was arrested and charged with fraud, a US prosecutor in New York said Thursday morning, as three federal regulatory agencies sued him and his company.

Mashinsky, 57, was charged with seven criminal counts — including securities fraud, commodities fraud and wire fraud — while Celsius' former chief revenue officer, Roni Cohen-Pavon, was charged with four criminal counts, according to the indictment, which was unsealed on Thursday.

Lawyers for Mashinsky and Celsius did not immediately respond to requests for comment, and Cohen-Pavon's attorney could not immediately be reached.

The US Attorney's Office in Manhattan said it would hold a press conference to provide details on the charges against Mashinsky and Cohen-Pavon. 

Mashinsky and Cohen-Pavon were charged with market manipulation of the Hoboken, New Jersey-based company's crypto token, known as Cel, as well as a fraudulent scheme to manipulate the price of the cryptocurrency and wire fraud related to the manipulation of the token, according to the indictment.

In a related development, the US Securities and Exchange Commission sued Mashinsky and Celsius on Thursday, according to a court filing, alleging he and Celsius raised billions of dollars through the sale of unregistered crypto asset securities and misled investors about the financial success of the company.

The US Commodity Futures Trading Commission and the Federal Trade Commission also filed lawsuits against Celsius and Mashinsky. The FTC said it had reached a settlement with Celsius that will permanently ban it from handling customers' assets.

The regulators accused Mashinsky and his company of touting Celsius as safe, akin to a traditional bank, even as they took increasingly risky steps to deliver high-yield interest payments on customer deposits.

While Celsius lost millions of dollars and customers raced to withdraw funds, the then-CEO and his company continued to claim Celsius was financially secure and had enough funds to meet withdrawals, regulators said.

Celsius, a New Jersey-based crypto lender, filed for Chapter 11 bankruptcy protection in July last year after freezing customer withdrawals.

Celsius was among the first in a series of bankruptcies in the cryptocurrency sector last year as token prices cratered amid rising interest rates and stubbornly high inflation. It filed for bankruptcy shortly after Singapore-based crypto hedge fund Three Arrows Capital and rival crypto lender Voyager Digital did the same.

The SEC's lawsuit said Celsius and Mashinsky raised billions of dollars from investors through "unregistered and fraudulent offers and sales of crypto asset securities" and misled investors about Celsius' financial success.

The agency said Celsius engaged in "risky trading practices" and made uncollateralized loans, despite telling investors that it did not. The company also falsely claimed to have raised $50 million (nearly Rs. 410 crore) from selling its token, and claimed to have 1 million active users when in fact it had only around 5,00,000 depositors, many of whom were no longer active, the SEC said.

The regulators' lawsuits add to a series of challenges for Celsius Network and its founder. In January, New York state's attorney general sued Mashinsky, alleging he defrauded investors out of billions of dollars in digital currency by concealing the lending platform's failing health.

The crypto industry has been on shaky ground since the SEC's lawsuits against major crypto exchanges Binance and Coinbase Global last month raised risks of further regulatory challenges for the sector.

Mashinsky is a serial entrepreneur, having founded eight companies, including telecommunications provider Arbinet, which went public in 2004, and Transit Wireless, which provides Wi-Fi to New York City's subway.

© Thomson Reuters 2023