According to a court document from the Vermont Department of Financial Regulation, bankrupt cryptocurrency lender Celsius Network made “false and misleading claims” regarding its “financial health and compliance with securities laws”.

Celsius Was Ran Like A Ponzi Scheme

The Vermont Department of Financial Regulation said in a document supporting the Justice Department’s request to appoint an examiner in Celsius’ bankruptcy case that the company may have been paying yields using a Ponzi-like system.

Holders of Celsius Series B shares submitted a limited objection to the motion at the same time, stating that they did not have a position on whether or not an examiner should be appointed and instead requested that the motion’s scope be reduced and that the budget be adjusted to avoid wasting money.

According to the most recent statement, based on a preliminary examination of financial records, Celsius recorded “massive losses” during the first seven months of 2021 and “two material adverse events” during the months of June and July. Furthermore, although being required to disclose its financial statements by state and federal securities regulations, the corporation had withheld its losses from investors.

Additionally, it was claimed in the petition that Celsius might have manipulated the price of its CEL coin. The action might have “artificially” increased the company’s balance sheet CEL holdings.

The filing cites blogs and tweets from Celsius CEO Alex Mashinsky, including one insisting that “all funds are safe” when in fact, says the filing, “the company was insolvent and depositor funds were not safe”.

The filing noted that the company “never earned enough revenue to support the yields being paid to investors.”

It further said:

“This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors.”

The Company “Deceived The Public”

In a related motion, the Texas State Securities Board (SSB) alleged that Celsius had provided incomplete and tardy responses to requests for information and documentation, and that “the representations of the Debtors regarding their financial status in the bankruptcy case have been inconsistent at best.”

The Texas filing agreed with the Vermont claims, citing numerous instances where it thinks Celsius deceived the public. Among other instances, it referenced a blog post from June 7 in which Celsius informed consumers that despite the fact that it was only five days away from stopping withdrawals, it had no trouble processing their requests.

Furthermore, it is alleged in the Vermont petition that Mashinsky publicly misled investors in its regulatory interactions by asserting that it had resolved concerns from state securities regulators in December.

In its filing, Vermont alleges that allegations that Celsius had manipulated the price of its native token were true. Between May 2 and July 1, when the company stopped allowing withdrawals, Celsius boosted its holdings of CEL by more than 40 million tokens, with more than half of the growth occurring after the platform’s suspension. The regulator claims that Celsius also engaged in this activity at one point in 2021. Liabilities would have overtaken assets “since at least” February 2019 absent the CEL position.

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The filing said:

“By increasing its Net Position in CEL by hundreds of millions of dollars, Celsius increased and propped up the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and financial statements. This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors.”

It was previously reported that the lender had asked a US bankruptcy judge’s approval to release $50 million worth of cryptocurrencies that were locked up in Celsius’ “custody accounts” so that it could return them to users who had been shut out. However, it represented a tiny portion of the platform’s more than $200 million that was locked up in custody accounts.

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