’A Classic Ponzi Scheme’ - Celsius Faces Major Fraud Complaint From Former Asset Manager

July 11, 2022
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An asset manager who worked with crypto-lending platform Celsius has filed a fraud complaint in which he accuses his former partner of operating a “classic Ponzi scheme”.

An asset manager who worked with crypto-lending platform Celsius has filed a fraud complaint in which he accuses his former partner of operating a “classic Ponzi scheme”.

In the lawsuit filed in New York on Thursday (July 7), plaintiff Jason Stone alleges that Celsius failed to honour a profit-sharing agreement with his firm, KeyFi, while at the same time defrauding its own customers.

From August 2020 to March 2021, Stone claims to have managed billions of dollars worth of crypto-assets for Celsius, using a range of decentralised finance (defi) investment strategies.

But when the terms of their profit-sharing agreement were not honoured, Stone, as the founder and CEO of KeyFi, says he terminated the relationship.

According to the complaint, the termination took place in March 2021, after Stone discovered that Celsius had been leveraging its customer deposits to “manipulate” the crypto-asset markets.

In the “most egregious example” of this, according to Stone, Celsius had been using customers’ bitcoin deposits to inflate the value of Celsius token (CEL), its own proprietary crypto-asset.

At the same time, Stone says he discovered that Celsius had “failed to institute basic accounting controls which endangered those same deposits”.

In one such case, Celsius is alleged to have wrongly accounted for certain payments owed to customers, resulting in a $200m liability that the company did not know how or why it owed.

“These incredible losses meant that the billions of dollars of customer deposits could not be returned to those customers in the event that the customers sought their funds back,” the complaint reads.

Stone allegedly “expressed concern” regarding Celsius’ use of customer funds without appropriate risk management, but Celsius executives assured him that they were hedging when necessary to protect against price fluctuations.

“These promises were lies,” the complaint continues. “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.

“These failures not only harmed Plaintiff by negatively impacting the profit share, but have now caused Celsius to refuse to honour customer withdrawal requests.”

The introduction to the complaint ends with an analysis of Celsius’ Terms of Use, a document that Stone describes as one-sided and “buried” on Celsius’ website.

Stone takes issue with the fact that, in certain contexts, user funds are effectively “owned” by Celsius and not by the user.

“Celsius, for its part, was not concerned about these risks because it believed that the billions of dollars of customer deposits it manages are its property,” the complaint notes.

On June 12, Celsius suspended all customer withdrawals until further notice, citing “extreme market conditions”. This suspension remains in place at the time of writing.

The business model

Celsius operates a crypto-lending platform that receives crypto-asset deposits from customers seeking to earn interest on their crypto holdings.

As noted in the complaint, Celsius’ business model depends on it using this pool of assets to generate income by lending those assets to others or by investing them in the crypto markets.

Celsius must, therefore, generate enough income both to pay back its customers’ deposits when required, and to turn a profit for itself.

“Prior to Plaintiff coming on board, Defendants had no unified, organised or overarching investment strategy other than lending out the consumer deposits they received,” the complaint notes.

“Instead, they were desperately seeking a potential investment that could earn them more than they owed to their depositors

“Otherwise, they would have to use additional deposits to pay the interest owed on prior deposits, a classic ‘Ponzi scheme.’

“The recent revelation that Celsius does not have the assets on hand to meet its withdrawal obligations shows that Defendants were, in fact, operating a Ponzi-scheme.”

However, the main question mark that hangs over the entire complaint is Stone’s admission that, for “most” of their relationship, KeyFi and Celsius operated “without any formal written agreement”.

Instead, the two parties were engaged in an enterprise for “mutual benefit based on mutual respect and trust”.

Still, Stone claims that KeyFi’s “asset purchase agreement” (APA) with Celsius is a valid and enforceable contract in the state of New York, and that all damage to KeyFi caused by Celsius will be quantified during the trial.

Key to Stone’s case is his accusation that Celsius negligently (on one count) and fraudulently (on another count) induced him into providing services to Celsius.

Had he not been subject to Celsius’ misrepresentations, Stone says he would not have entered the APA.

VIXIO contacted Celsius for comment, but has not yet received a reply.

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