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US authorities have arrested Alex Machinsky, the founder of bankrupt cryptocurrency lender Celsius Network and charged him with fraud and market manipulation.
Prosecutors allege that Mashinsky misled investors into pouring billions of dollars into Celsius, calling it “a modern-day bank where customers can securely deposit crypto assets and earn interest.”
By contrast, the cryptocurrency platform acted as a “risky investment fund” that was far less profitable than Celsius led investors to believe, said an indictment unsealed shortly after Mashinsky’s arrest Thursday.
The criminal case, filed by federal prosecutors in Manhattan, added that Celsius also used the funds of some customers to manipulate the market to obtain a cryptocurrency token called CEL. This, they said, allowed Celsius to sell its token holdings at prices that exceeded their market value.
Celsius, now run by a team of restructuring professionals led by former JPMorgan Chase banker Chris Ferraro, has surrendered liability for its role in the alleged scheme, according to a non-prosecution agreement with the Justice Department that was also disclosed Thursday.
Mashinsky was due to appear in court in New York on Thursday afternoon. Roni Cohen-Pavon, the former chief revenue officer at Celsius who was also charged in the case, lives in Israel and prosecutors said they believe he is abroad.
Three US regulators issued parallel civil lawsuits on Thursday.
The Securities and Exchange Commission is seeking to fine Mashinsky and ban him from the cryptocurrency industry, while the Commodity Futures Trading Commission and the Federal Trade Commission are seeking financial fines.
Gurbir Grewal, director of enforcement for the SEC, said his agency is working to protect investors who have lost out. “Ultimately, the elaborate cryptocurrency fraud on the part of the defendants collapsed, when their lies . . . could no longer support the Celsius platform,” he said.
Mashinsky’s attorney said: “Alex vigorously denies the allegations made today. He looks forward to vigorously defending himself in court against these baseless accusations.”
Celsius said he was “committed to continued cooperation with regulators and government agencies [and] Focused on maximizing value for stakeholders.”
Celsius filed for bankruptcy last July after the 2022 rout in the cryptocurrency markets, when popular tokens like bitcoin and ether lost more than half of their value.
In the previous month, hundreds of thousands of investors had locked out of their funds in response to steadily increasing withdrawal requests.
Mashinsky was sued by New York Attorney General Letitia James in January for “defrauding hundreds of thousands of investors . . . out of billions of dollars in cryptocurrency.” He has denied any wrongdoing.
His lawyers said in May that James’ claim was based on “unsubstantiated conclusions” and that “Celsius’s final fall was caused by a series of disastrous external events”.
However, in the lawsuit it filed Thursday, the SEC accused Celsius of engaging in “risky business practices” and making unsecured loans to generate revenue, “putting the entire Centennial project at serious risk.” It added that Celsius “often paid out more than 80 percent of its revenue to meet the company’s interest payment obligations — a business practice that was hidden from investors.”
The SEC added that Celsius and Mashinsky falsely claimed that the platform had 1 million active users, claiming that by contrast, the company’s internal data showed that nearly 500,000 users had deposited crypto assets with it.