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Celsius misled its investors – and on occasion used new customer funds to pay for other customers’ withdrawals, the usual definition of a Ponzi scheme, an independent examiner for the New York bankruptcy court said in a Tuesday filing.
In september, shoba pillay was requested by the court to provide an external view of what is happening to the crypto lender, has now released a report on the company's activities with a view to filing for bankruptcy in July.
“in every key respect—from how celsius described its contract with its customers to the risks it took with their crypto assets—how celsius ran its business differed significantly from what celsius told its customers,” pillay wrote, after questioning the personnel, and former CEO Alex Mashinsky, together with the company's customers and suppliers.
The promises of a community-run loan system offering lavish returns and financial freedom ran up against a reality in which the business itself was largely the creation of the market in indigenous symbolism, and did not speak openly to clients about the risks they were confronted with, pillay said.
This will be April 2022, The Celsius coinage deployment specialist, Dean Tappen, called Celsius practices "very ponzi," Pillay said, adding that staff were aware of the discrepancy between LEC's in-house engineers and the public statements.
The 12th of June, Celsius stopped clients from withdrawing and did not, "New customer deposits would inevitably have become the only liquid source for Celsius coins to finance withdrawals," said Pillay.
In certain circumstances, however, from the 9th to the 12th of June, celsius directly used new client deposits to fund client withdrawal requests," said Pillay, the standard definition of a Ponzi-style plan, where the promised yields cannot be maintained in relation to the actual performance of the market.
In other cases, it was less straightforward, as in May to June 2022, when the company had to cancel its borrowings after crypto returns were insufficient to finance its LEC redemptions.
"Celsius recognized that he should not use the assets of customers to buy the parts needed to cover the responsibilities towards other customers," Pillay said. "They justified their use of customer deposits to fill this gap in their balance sheet on the basis that they were not selling customer deposits but posting them as guarantee for borrowing the required parts."
However, Pillay added, "Celsius’s problems did not start in 2022. Instead, there were serious issues dating back to at least 2020, after Celsius began using client assets to finance operating expenses and rewards."
Another nameless Celsius manager is quoted as saying "we spent all our paying executives in cash and trying to support the alexs [Mashinsky, sic] net worth in the CEL token."
Although he has said a number of times that he does not sell CEL, and even though the in-house employees said the real value of the token was zero, Mashinsky sold 25 million tokens worth at least $68.7 million from 2018 until it went bankrupt, Pillay said. The co-founders of nuke goldstein and s. daniel leon are cited as having $2.8 million and $9.74 million worth of sales.
Pillay said Mashinsky’s claims to the media and on social media to “always have 200% collateral” were “far off the mark," with 14% of Celsius’s institutional loans wholly unsecured in December 2020. This number rose to almost 36 per cent in mid-2021 – and even then part of the collateral was in unstable assets like ftx's ftt token, said Pillay.
"which degree Celsius and M. Mashinsky never did was correct the record after the fact for the thousands of live audience members who heard these misstatements or for those who watched the recorded videos on youtube before they were edited,” pillay said.
Pillay also found "significant breaches of tax compliance" in the enterprise, mining could incur more than $23.1 million in user fees, and set aside $3.7 million for VAT in the United Kingdom.
The Bankruptcy Code of the United States allows for the appointment of an independent reviewer to review allegations of fraud or mismanagement of a bankrupt business or its officers. Pillay is a former federal attorney and associate with the law firm of Jenner.
UPDATE (Jan. 31, 10:30 UTC): Adds quote from Pillay on "serious problems;" adds detail on executives' CEL sales, unsecured lending levels and tax compliance.
