Shoba Pillay was appointed by a New York bankruptcy court to look at whether the crypto lender operated as a Ponzi scheme

Celsius misled its investors – and on occasion used new customer funds to pay for other customers’ withdrawals, the usual definition of a Ponzi scheme, an independent examiner for the New York bankruptcy court said in a Tuesday filing.

In September, Shoba Pillay was asked by the court to offer an outside view of goings-on at the crypto lender, has now published an account of the firm’s operations in the run up to bankruptcy being declared in July.

“In every key respect—from how Celsius described its contract with its customers to the risks it took with their crypto assets—how Celsius ran it business differed significantly from what Celsius told its customers,” Pillay wrote, after interviewing staffers, including former chief Executive Officer Alex Mashinsky, as well as customers of and vendors to the company.

Promises of a community-led lending system offering lavish returns and financial freedom clashed with a reality where the company itself was largely creating the market in native token CEL, and wasn’t open with customers about the risks they faced, Pillay said.

In April 2022, Celsius’s Coin Deployment Specialist Dean Tappen described Celsius’s practices as “very ponzi like,” Pillay said, adding that staff were aware of the discrepancy between internal CEL mechanics and public pronouncements.

On June 12, Celsius paused customer withdrawals and had it not done so, “new customer deposits inevitably would have become the only liquid source of coins for Celsius to fund withdrawals,” Pillay said.

“In some instances, however, between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests,” Pillay said – the usual definition of a Ponzi scheme, where promised returns can’t be sustained from genuine market performance.

In other cases the arrangement was less direct, such as between May and June 2022 when the company had to unwind borrowing after crypto returns were insufficient to fund buybacks of its CEL.

“Celsius recognized that it should not use customer assets to purchase the coins necessary to cover liabilities to other customers,” Pillay said. “It justified its use of customer deposits to fill this hole in its balance sheet on the basis that it was not selling customer deposits but instead posting them as collateral to borrow the necessary coins.”

Another unnamed Celsius manager is quoted as saying “we spent all our cash paying execs and trying to prop up alexs [Mashinsky, sic] net worth in CEL token.”

Pillay said Mashinsky’s claims to the media and on social media to “always have 200% collateral” were “far off the mark, with 14% of Celsius’s institutional loans wholly unsecured.

“What Celsius and Mr. Mashinsky never did was correct the record after the fact for the thousands of live audience members who heard these misstatements or for those who watched the recorded videos on YouTube before they were edited,” Pillay said.

The U.S. bankruptcy code allows the appointment of an independent examiner to examine allegations of fraud or mismanagement by a bankrupt company or its executives. Pillay is a former federal prosecutor and partner at law firm Jenner & Block.

The post Celsius Used New Customer Funds to Pay for Withdrawals: Independent Examiner appeared first on Crypto Insider.

Sam Ikkurty and Ravishankar Avadhanam are accused of using YouTube videos to dupe would-be clients into investing in various crypto funds.

Two U.S. residents have been charged with running a crypto Ponzi scheme that allegedly defrauded hundreds of investors out of a collective $44 million.

Officials with the Commodity Futures Trading Commission (CFTC) allege Sam Ikkurty (also known as Sreenivas I Rao), of Portland, Ore., and Ravishankar Avadhanam of Aurora, Ill., as well as several corporate entities controlled by the defendants, worked together to convince their victims to invest in a “so-called income fund invested in digital assets.”

The defendants have also been charged with operating an illegal commodity pool and failing to register as a Commodity Pool Operator with the CFTC.

Beginning in 2017, Ikkurty and Avadhanam allegedly told would-be investors in Ikkurty Capital, Rose City Income Fund and Seneca Ventures that the pair would use their funds to invest in various cryptocurrencies, promising very high returns – some as high as 62% annually. According to the complaint, the pair advertised via a website as well as videos posted on YouTube.

Instead, the CFTC said, Ikkurty and Avadhanam pooled the investor funds and “distributed the majority of those funds as profits to other participants in a manner akin to a Ponzi scheme.”

Additionally, the CFTC said Ikkurty and Avadhanam kept $18 million for themselves, transferring the funds to “other participants” and off-shore entities under their control.

A federal court in Illinois has issued a restraining order that freezes the assets in question, preserves documents relating to the alleged scheme, and appoints a receiver for investor funds.

The CFTC is seeking restitution, disgorgement, civil monetary penalties, and permanent trading bans and injunctions against future violations of the Commodity Exchange Act (CEA).

The post CFTC Charges 2 Men With Running a $44M Crypto Ponzi Scheme appeared first on Crypto Insider.