Alex Mashinsky, the founder and former CEO of bankrupt cryptocurrency startup Celsius Network, was arrested Thursday and charged with defrauding customers and lying about his company’s business model.
Federal prosecutors said Mashinsky, 57, misled customers into believing Celsius was a safe place to keep their money, when in fact it was fraught with risk. He has also been sued by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission.
Mashinsky was arrested at his home in New York, a person close to the investigation said. The charges against him include wire fraud, commodity fraud and stock price manipulation. Prosecutors also filed charges against the company’s chief revenue officer, Roni Cohen-Pavon, accusing him of price gouging and wire fraud, among other crimes.
Founded in 2018, Celsius rose to fame as a kind of crypto bank that promised clients sky-high interest rates and handled tens of billions of dollars in deposits before collapsing last year. As his charismatic promoter, Mashinsky appeared in YouTube videos where he claimed that Celsius was a safer and more equal alternative to traditional banks.
“The message we are sending today is quite simple,” Damian Williams, US Attorney for the Southern District of New York in Manhattan, said in a statement. “If you rip off ordinary investors to line your own pockets, we will hold you accountable.”
At its peak, Celsius controlled around $25 billion worth of crypto assets. But last summer, Celsius filed for bankruptcy amid a broader implosion in crypto markets that sent coin prices tumbling. In the process, Celsius devastated its more than 500,000 users, many of whom lost their savings. Mashinsky resigned from the firm in September, calling his role “an increasing distraction.”
When it filed for bankruptcy, some $4.7 billion in client 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, though the payments will be suspended while the bankruptcy proceeds unfold.
In the charging documents, authorities said the company and Mashinsky repeatedly lied to investors about how it generated interest for clients. He even lied about the number of clients he had and wrongly told investors their deposits were insured, according to regulators.
“Mashinsky portrayed Celsius as a modern bank, where customers could safely deposit crypto assets and earn interest,” the indictment reads. “However, in truth, Mashinsky operated Celsius as a risky investment fund, taking money from clients under false and deceptive pretenses.”
A lawyer for Mashinsky did not respond to a request for comment. It was not immediately clear who represented Cohen-Pavon. Prosecutors said that Mr. Cohen-Pavon, an Israeli citizen, was abroad and was not arrested.
The arrest of Mr. Mashinsky 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 CEO of Binance, the world’s largest cryptocurrency exchange, was sued by the SEC. He is under criminal investigation.
After its launch in 2018, Celsius grew rapidly in size as all crypto assets rose in value, especially during the pandemic when investors and speculators poured in cash invested in crypto.
Investors in Celsius, like clients of FTX, Binance, and other crypto firms, came to believe they were putting money into world-changing assets that were destined to skyrocket in price. Mashinsky and some of his colleagues did their best to convince Celsius clients that this was the case, authorities said.
The company marketed annual returns of up to 18 percent, dwarfing the amount of interest traditional banks offer. “It’s like going to the Olympic Games and getting 15 medals in 15 different fields”, Mr. Mashinsky once said.
Celsius launched its product at a time when traditional banks were paying little interest on savings accounts and money market funds, making the company very attractive to investors seeking above-average returns.
But Celsius never explained in detail how he generated those huge returns. In public comments, Mr. Mashinsky repeatedly asserted that the company 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 lawsuit, the SEC said Mr. Mashinsky and others at the firm discussed Celsius’ internal digital currency, CEL, as if it were the shares of a publicly traded company. But as with so many crypto fraud cases, the Celsius token was unregistered and unregulated.
The story of Mr. Mashinksy selling out to investors began to unravel last year, when cryptocurrency prices plummeted. Last spring, the SEC said, emails from Celsius employees revealed that they knew the company was a proverbial house of cards.
In an email cited by the SEC, an employee described Celsius as a “sinking ship.” In another, an anonymous executive said, “We don’t have any profitable services.”
Celsius filed for bankruptcy last July. Even after the collapse, Mashinsky was convinced that he could start a second act. Before his resignation, he tried to rally support for a revamped version of Celsius, calling it Kelvin, after the unit of temperature.
