Embattled crypto lender Celsius is a ‘fraud’ and ‘Ponzi scheme,’ lawsuit alleges

Crypto lender Celsius artificially inflated the price of its own digital coin, failed to hedge risk and engaged in activities that amounted to fraud, a lawsuit alleges.

Celsius on Thursday was sued by former investment manager Jason Stone, as pressure continues to mount on the firm amid a crash in cryptocurrency prices.

The lawsuit in New York state court comes after Celsius, which offers customers interest for depositing their crypto, was forced to pause withdrawals for its users as it faces a liquidity crisis.

Celsius was not immediately available for comment on the lawsuit when contacted by CNBC.

Celsius acts like a bank in that it offers customers yield, sometimes as high as nearly 19%, if they deposit their crypto with the company. The firm then lends that crypto out to others willing to pay a high interest rate to borrow. Then it tries to pocket that money in order to give the yield back to customers.

Stone founded a company called KeyFi which specialized in crypto trading strategies. Celsius and KeyFi cut a “handshake deal” whereby the latter firm would “manage billions of dollars in customer crypto-deposits in return for a share of the profits generated from those crypto-deposits,” the lawsuit alleges.

There was “no formal written agreement between the parties,” the lawsuit said.

From August 2020, Celsius began “transferring hundreds of millions of dollars in crypto-assets” to Stone and his team, according to the lawsuit. Celsius set up a wallet on the Ethereum blockchain referred to as “0xb1.” That’s where the company sent the assets Stone was to deploy, the lawsuit claims.

Stone makes a number of allegations against Celsius in the lawsuit.

Celsius and Stone decided to engage in crypto trading strategies that required an effective hedging strategy to manage risk and guard against price fluctuations of certain digital coins, the lawsuit alleges. It adds that Celsius had full view of what trading activities KeyFi was engaging in.

Stone claims Celsius executives “repeatedly assured” him that the company had entered the necessary hedging transactions to ensure price fluctuations of certain crypto assets would not materially and negatively impact the company or its ability to repay depositors. Stone and his team relied on these representations, the lawsuit adds.

“But these promises were lies. Despite its repeated assurances, Celsius failed to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies,” the lawsuit claims.

Stone alleges there were “multiple incidents” in which Celsius’ “failure to perform basic accounting endangered customer funds.”

Another allegation revolves around the digital coin called CEL. That is Celsius’ own token. Celsius says that if users accept their interest payment in the form of CEL, they could earn higher interest than those who don’t.

The lawsuit alleges, however, that Celsius engaged in transactions to artificially inflate the price of CEL.

“The purpose of this scheme was both fraudulent and illegal: Celsius induced customers to be paid in CEL tokens by providing them with higher interest rates,” the lawsuit claims. “Then by purposefully and artificially inflating the price of the CEL token, Celsius was able pay customers who had elected to receive their interest payments in the form of the CEL token even less of the crypto-asset.”

Stone also alleges that Celsius CEO Alex Mashinsky was “able to enrich himself considerably.”

Finally, Stone claims in the lawsuit that Celsius was running a “Ponzi scheme.”

Because of Celsius’ failure to hedge against trading risks, it had “massive liabilities” to depositors denominated in the cryptocurrency ether but had not maintained holdings in that digital coin equal to those liabilities, the lawsuit claims.

As customers sought to withdraw either deposits, Celsius was forced to buy more ether in the open market at high prices (around January 2021) and suffered heavy losses, the lawsuit claims. Stone alleges that Celsius then began to offer double-digit interest rates in order to lure in new depositors whose funds were used to repay earlier depositors and creditors.

“Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme,” the lawsuit claims.

Stone left Celsius in March 2021. He claims in the lawsuit that at the time of his departure Celsius had a $100 million to $200 million hole in its balance sheet that “it could not fully explain or resolve.”

He claims that Celsius maintains control of the “0xb1” Ethereum wallet and that the CEO of Celsius uses it “for his own personal benefit.”

In one instance, Stone alleges, Mashinsky transferred valuable non-fungible tokens, or NFTs, from the accounts to his wife’s wallet.