Celsius ‘much like a literal Ponzi scheme’, class action suit alleges

Following its filing for bankruptcy just weeks after freezing customer withdrawals, troubled cryptocurrency lending firm Celsius Network LLC has been slapped with a proposed class action suit accusing the company of a Ponzi-like con job.

Indeed, the class action, proposed to a federal court in the U.S. state of New Jersey, alleges that Celsius incurred $10 billion by selling unregistered securities in a Ponzi scheme and convinced investors to purchase its financial products at inflated rates, Law360 reported on July 14.

The class action suit document was made available by former U.S. Securities and Exchange Commission (SEC) enforcement attorney John Reed Stark, who posted it on his Twitter account on July 15.

According to the lawsuit, plaintiff Taylor Goines “purchased Celsius Financial Products during the Relevant Period and suffered investment losses” as a result of the conduct of the defendants, including Celsius Network, two related entities, CEO Alexander Mashinsky, and three executive directors – David Barse, Alan Jeffrey Carr, and Shlomi Danier Leon.

Alleged Ponzi scheme unravels

Furthermore, the complaint stated that the recent crypto collapse revealed the fragility of the Celsius ecosystem and the fact that Celsius didn’t have enough assets on hand to meet its withdrawal obligations to the investors. In fact:

“Much like a literal Ponzi scheme, Celsius could only maintain its yield rate promises by continually bringing in new investors whose new influx of money would be used to pay off the yield for old investors.”

As per the class action text, Celsius held billions of dollars in leveraged positions on decentralized finance (DeFi) protocols that were threatened with liquidation during the crypto market decline. 

To avoid liquidation, Celsius appeared to be forced to deploy over $750 million of liquid assets that could no longer be used to meet withdrawal obligations, resulting in the company freezing user withdrawals, swaps, and transfers.

False promises and further accusations

Moreover, the plaintiff said that Celsius sold “earn rewards accounts’ to clients who lent crypto assets to the company in exchange for the company’s guarantee to provide a variable monthly interest payment. 

Celsius’s interest was generated by loaning crypto to institutions and corporations, lending U.S. dollars and stablecoins to retail investors, and investing in “other highly speculative cryptocurrency ventures. 

Then, the company pooled these assets together to fund its lending operations and proprietary trading. As the lawsuit explains:

“Despite the additional risk, and lack of safeguards and regulatory oversight, as of March 2021, Celsius held the equivalent of $10 billion from the sale of these unregistered securities in violation of federal and state securities laws, which peaked at over $25 million later that year.”

Meanwhile, Celsius’s former investment manager Jason Stone also launched a lawsuit against his one-time employer on July 7, claiming it was involved in crypto market manipulation without implementing basic accounting measures to protect customer deposits, as Finbold earlier reported.