New York AG sues co-founder of bankrupt crypto lender Celsius Network

New York Attorney General Letitia James has filed a lawsuit against the co-founder of bankrupt crypto lender Celsius Networks, accusing him of defrauding investors out of billions.

The suit filed on Thursday accuses Alex Mashinsky, who stepped down as the CEO of Celsius in September, of falsely touting the company as a safe alternative to banks to encourage investors to deposit billions of dollars in digital assets.

Instead, Celsius used the funds to dole out 'risky loans' -- including loans totaling $1 billion to Alameda Research, the crypto hedge fund founded by recently indicted FTX founder Sam Bankman-Fried, the suit alleges.

'As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,' said James in a statement. 'The law is clear that making false and unsubstantiated promises and misleading investors is illegal.'

A lawsuit filed on Thursday  accuses Alex Mashinsky, who stepped down as the CEO of Celsius in September, of falsely touting the company as a safe alternative to banks

Celsius used investor funds to dole out 'risky loans' -- including loans totaling $1 billion to Alameda Research, the crypto hedge fund founded by recently indicted FTX founder Sam-Bankman-Fried (right), the suit alleges

Representatives for Mashinsky did not immediately respond to a request for comment from DailyMail.com on Thursday morning. 

The lawsuit, which seeks unspecified damages and restitution, accuses Mashinsky of violating New York's Martin Act, which authorizes the state's attorney general to seek compensation for citizens of the state in cases of financial fraud. 

Mashinsky is a serial entrepreneur who co-founded Celsius in 2017. The company promised users high-yield returns on crypto deposits, attracting investors from around the world and growing its assets to more than $20 billion.

But in June, Celsius froze withdrawals and transfers for its 1.7 million customers, citing 'extreme' market conditions as the value of most cryptocurrencies plunged.

Celsius, based in Hoboken, New Jersey, filed for Chapter 11 bankruptcy on July 13, listing a $1.19 billion deficit on its balance sheet. 

New York Attorney General Letitia James has filed a lawsuit against the co-founder of bankrupt crypto lender Celsius Networks, accusing him of defrauding investors

The new lawsuit calls Mashinsky the 'public face of Celsius' and claims he 'promoted Celsius as a safe alternative to banks while concealing that Celsius was actually engaged in risky investment strategies.'

'Touting himself and his company as a modern-day Robin Hood .... Mashinsky promised investors some of the highest yields in the industry, as high as 17 percent,' the suit states. 'These promises were false – but proved wildly popular.' 

The suit states that between 2020 and 2022, under Mashinsky’s watch, Celsius made loans totaling roughly a billion dollars to Alameda Research, Bankman-Fried's hedge fund. 

'A substantial portion of Alameda’s assets were held in FTT, a proprietary crypto token created and issued by Alameda’s sister company FTX,' the suit states. 

'FTX propped up the value of FTT by periodically re-purchasing FTT from the market. Celsius accepted FTT as collateral for many of its loans to Alameda,' it adds.

'Those loans were risky because FTX was the largest holder of its proprietary token and therefore the valuation of those tokens was disconnected from market forces and subject to manipulation.' 

The new lawsuit says Mashinsky 'promoted Celsius as a safe alternative to banks while concealing that Celsius was actually engaged in risky investment strategies'

Crypto lenders like Celsius exploded in popularity during the COVID-19 pandemic, drawing depositors with high interest rates and easy access to loans rarely offered by traditional banks. 

They lent out tokens to mostly institutional investors, making a profit from the difference.

But the lenders' business model came under scrutiny after a sharp crypto market sell-off last May, spurred by the collapse of major tokens terraUSD and luna.

The market turmoil played a role in the sudden collapse of FTX in November, after plunging asset values exposed alleged malfeasance, resulting in the company's bankruptcy filing and criminal charges against founder Sam Bankman-Fried.  

On Wednesday, a US bankruptcy judge ruled that Celsius owns most of the cryptocurrency that customers deposited into its online platform, meaning most Celsius customers will be last in line for repayment in the crypto lender's bankruptcy.

The ruling by Bankruptcy Judge Martin Glenn in New York affects approximately 600,000 accounts that held assets valued at $4.2 billion when Celsius filed for bankruptcy in July. 

The company does not have enough funds to fully repay those deposits, Glenn wrote.

The ruling means that most Celsius customers will be lower priority than customers who held non-interest bearing accounts and other secured creditors.