Alex Mashinsky, the founder and former chief executive of bankrupt cryptocurrency firm Celsius Network, was arrested on Thursday and charged with defrauding customers and lying about his company’s business model.
Federal prosecutors said Mr. Mashinsky, 57, tricked customers into believing Celsius was a safe place to park their money, but in reality it was fraught with dangers. He was also sued by the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Trade Commission.
Mr. Mashinsky was arrested at his home in New York, said a person close to the investigation. The charges against him include wire fraud, commodities fraud and manipulation of securities prices. Prosecutors also filed charges against the company’s chief revenue officer, Roni Cohen-Pavon, accusing him of price manipulation and wire fraud, among other offenses.
Founded in 2018, Celsius rose to fame as a type of crypto bank that promised customers high interest rates and held tens of billions of dollars in deposits before it collapsed last year. As its charismatic pitchman, Mr. Mashinsky in YouTube videos where he says Celsius is a safer, more egalitarian alternative to traditional banks.
“The message we’re sending today is pretty simple,” Damian Williams, the US attorney for the Southern District of New York in Manhattan, said in a statement. “If you hire ordinary investors to line your own pockets, we will hold you accountable.”
At its peak, Celsius controlled about $25 billion in crypto assets. But last summer, Celsius filed for bankruptcy amid a broader explosion in crypto markets that sent coin prices plummeting. In the process, Celsius screwed over 500,000 of its users, many of whom lost their savings. Mr. Mashinsky resigned from the firm in September, calling his role “an increasing distraction.”
When it filed for bankruptcy, about $4.7 billion in customer assets were frozen on the company’s platform. In a settlement with the FTC announced Thursday, Celsius agreed to pay that amount in restitution to customers, although payments will be suspended while the bankruptcy process unfolds.
In charging documents, authorities said the company and Mr. Mashinsky repeatedly lied to investors about how it generated interest for customers. It even lied about the number of customers it had and falsely told investors their deposits were insured, according to regulators.
“Mashinsky described Celsius as a modern bank, where customers could safely deposit crypto assets and earn interest,” the indictment said. “In reality, however, Mashinsky operates Celsius as a risky investment fund, taking customer money under false and fraudulent guises.”
Jonathan Ohring, a lawyer for Mr. Mashinsky, said the Celsius founder “vehemently denies the allegations.” It was not immediately clear who was representing Mr. Cohen-Pavon. Prosecutors said Mr. Cohen-Pavon, an Israeli citizen, was abroad and was not arrested.
Mr. Mashinsky was set to be released on bail after he signed a $40 million personal recognizance bond secured by his New York home and a brokerage account with First Republic.
Mr. Mashinsky’s arrest adds to a growing list of crypto executives who have faced intense scrutiny from law enforcement since the market crashed last year. In December, Sam Bankman-Fried, the founder of the failed FTX exchange, was arrested on fraud charges. In March, federal agents searched the home of Jesse Powell, the founder of Kraken, the second largest US exchange. And in June, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, was sued by the SEC He is under criminal investigation.
After its launch in 2018, Celsius grew rapidly as all crypto assets rose in value — especially during the pandemic, when investors and speculators flushed cash poured into crypto.
Investors in Celsius, like customers of FTX, Binance and other crypto firms, all believed they were putting money into world-changing assets that were set to rise in price. Mr. Mashinsky and some of his associates did everything in their power to convince Celsius customers that was the case, the authorities said.
The company has sold annual yields as high as 18 percent, dwarfing the interest rates offered by traditional banks. “That’s like going to the Olympics and getting 15 medals in 15 different fields,” Mr. Mashinsky when said.
Celsius brought its product to market at a time when traditional banks paid little interest on savings accounts and money market funds, making the company highly attractive to investors looking for higher than normal yields.
But Celsius never explained in detail how it generated such large yields. In public comments, Mr. Mashinsky repeatedly claimed that the firm avoided risky practices, such as lending funds without requiring collateral. In reality, Celsius made millions of dollars in loans that were not backed by any collateral, according to the SEC
In its complaint, the SEC said Mr. Mashinsky and others at the firm discussed Celsius’ in-house digital currency, CEL, as if it were the stock of a publicly traded company. But like so many cases of crypto fraud, Celsius’ token is not registered or regulated.
The story that Mr. Mashinksy sold to investors began to unravel last year, when crypto prices plummeted. Last spring, the SEC said, emails from employees at Celsius revealed they knew the firm was a well-known house of cards.
In an email cited by the SEC, one employee described Celsius as a “sinking ship.” In another, an unnamed executive said, “We don’t have any profitable services.”
Celsius filed for bankruptcy in July. Even after the collapse, Mr. Mashinsky that he can start a second action. Before his resignation, he tried to rally support for a modified version of Celsius, calling it the Kelvin, after the unit of temperature.
