Tag: Alex Mashinsky

Celsius Network: Final report from the examiner — lies, incompetence and Ponzi schemes

We just wrote up the final examiner report for Celsius. This ended up being a 3,000-word post, mainly because the report was loaded with comedy gold. You can read our full analysis on David’s blog. [David Gerard]

Celsius was not just fraudulent. It was an utterly incompetent investment business. Here’s what we cover:

  • History of a scam, how Celsius started.
  • CEL and the flywheel — Celsius’s main business was pumping CEL.
  • Mashinsky knowingly and repeatedly lied to customers.
  • The examiner doesn’t outright say that Celsius operated as a Ponzi, but she demonstrates that it did.  
  • Mashinsky was a horrible investor. Celsius invested 30% of its assets in GBTC just a few months before GBTC started trading at a permanent discount to NAV. He totally missed the boat on that one. 
  • Celsius used Quickbooks for its accounting, just like FTX.
  • We fully expect Mashinsky to be indicted soon. 

Posted on by Amy Castor 2

Celsius hearings, December 5: Whose stablecoins are these? KERP bonuses, new deadline for restructuring plan

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The Celsius Network bankruptcy held two hearings on Monday, December 5. The first was to establish ownership of Earn accounts and see if Celsius can sell $18 million in stablecoins. The second was an omnibus hearing, dealing with multiple motions. Amy sat through six tedious hours of this, so you wouldn’t have to. [Agenda, PDF; Agenda, PDF]

A Chapter 11 bankruptcy generally has two outcomes: a bankruptcy sale (known as a “363 sale”) and the confirmation of a plan of reorganization. Celsius wants to find a buyer for this ransacked corpse. But first, they have to decide who owns what. They can only sell what’s theirs to sell. The morning hearing was bitter arguments about the spare change in the stiff’s pockets.

Celsius is burning cash at a furious rate. They have no idea how to even coherently propose an ongoing business. So they need to keep finding new ways to keep up the farce and pay tens of millions in advisor and professional fees per month.

The word “liquidation” came up a few times in the first hearing. This ice cube is melting fast.

Whose are the stablecoins?

Celsius wants permission to sell $18 million in stablecoins to pay for ongoing business operations. The stablecoins are held in Earn accounts — Celsius’ main product. You would deposit cryptos and be paid interest on them.

But do the stablecoins belong to the bankruptcy estate or do they belong to the individual Earn account holders? This is what Judge Martin Glenn needs to decide.

Celsius will be out of cash to pay ongoing bills — payroll, vendors, and expensive professionals for the bankruptcy — by late February or early March. The burn rate for Chapter 11 legal costs and professional fees is $15 million to $20 million per month. Celsius needs a cash injection by January or March 2023 the latest. [Doc 1328, PDF]

Interim CEO Chris Ferraro says that right now, the bitcoin mining business is cash positive (which surprises us) — but that too will need a cash infusion by March 2023. 

Celsius (the debtors) and the Unsecured Creditors’ Committee (UCC) think the stablecoins belong to the bankruptcy estate, which would give them the right to sell the coins for cash. But the account holders want their personal money back.

The stablecoins that Celsius wants to sell add up to $18,111,551. That’s 16,549,259 USDT, 1,119,089 NCDAI, 360,743 BUSD, and some shrapnel. Alvarez & Marsal’s Robert Campagna, Celsius’ restructuring advisor, admitted that the stablecoins buy them just a month of continued operations.

“If we sell $18 million now and have access to cash, we can always buy stablecoins again later,” said Campagna. LOL, like Celsius is going to have cash later. But anyway.

If Celsius is allowed to sell the stablecoins, the funds will not be used to cover the bitcoin mining operations. [Doc 1325, PDF]

So what happens after they burn through their stablecoins? Other sources of money include the settlement with Prime Trust, worth around $17 million — but Prime Trust will refund in crypto, not cash. Celsius also hopes for $44 million from the potential sale of Celsius’ custody solution GK8 to Galaxy Digital. GK8 is an Israeli firm that Celsius bought in November 2021 for $115 million. So they’ll take a 60% loss.

Other options to keep the business afloat include intercompany loans and debtor-in-possession financing — but those carry their own risks, Ferraro said. “They require us to post collateral and risk that coins would not be returned if the coins drop in value.” 

What company is going to lend money to Celsius? What collateral? What bank? What?

What did I just sign?

The terms of service for the Earn product changed a lot — in ways that contradicted what Celsius founder Alex Mashinsky had told customers.

Celsius updated its terms eight times between 2018 and September 2022, asking customers to accept changes each time by clicking a box. If they didn’t click on the box, they couldn’t access their coins.

Later versions of the terms, such as version six, more clearly asserted that Celsius owned the deposited cryptos — as is normal with any bank or investment firm, who then have a liability to the depositors. Even as Mashinsky said things that sounded like the investors owned their deposits.

Many small creditors objected that they weren’t aware of the important changes, or that they didn’t even agree to the changed terms.  

More than 90% of Earn account holders signed off on version six of the terms of service, per court filings. These customers held the majority of the coins in the Earn program.

Oren Blonstein, Celsius’ chief compliance officer, was called to the stand. Here are his original and supplementary declaration. [Doc 1327, PDF; Doc 1584, PDF]

Blonstein spent his time at Celsius administering the company’s compliance with the Bank Secrecy Act — money laundering law.

The state attorneys — Layla Milligan for Texas and Karen Cordry for multiple other states — went in hard on Blonstein.

Blonstein told Milligan that they tracked customer activity including acceptance of the terms of use.

This is an amazing interchange between Milligan and Blonstein (as quickly noted by Amy, please excuse errors):

Milligan: To your knowledge, was the business ever in compliance with money transmission laws? 

Blonstein: My understanding is based on a discussion with money transmission laws. 

Milligan: But you are not aware if the company was in compliance with state or federal securities laws?

Blonstein: Yes, correct. 

Cordry closely questioned Blonstein on how they flagged the change of terms — if the changes were ever called out to the customers. Judge Glenn asked Blonstein if the change of ownership in particular was brought to the customers’ attention.

Blonstein admits they didn’t flag the changes, but the customers had to tick the box and agree before they could proceed. Nor was the prior version of the terms available for a customer to compare them.

But Blonstein didn’t think any of this was a substantive issue: “I viewed the wording on the Earn program as you are giving coins to the company to use.”

The stablecoins will likely go to the estate

Despite the arguments over ownership of the stablecoins, Judge Glenn was leaning toward putting them into the bankruptcy estate — because that’s what the terms said, and that’s what you’d expect of an investment product.

Judge Glenn seemed skeptical of the terms meaning anything other than that Celsius owned the coins and had a liability to the depositor. “It was a lending platform, so they had to deploy the assets. There wasn’t a commitment to pay back specific assets.”

It wasn’t like Celsius would use the money to gamble in a “slot machine in Monte Carlo” — they’d use it to pay the bills, noted the judge.

He was also more comfortable if the stablecoins were converted to actual dollars anyway, given how crazy crypto is right now: “The dollars will frankly be safer than crypto.”

Shara Cornell for the US Trustee and Layla Milligan for Texas were not happy. Celsius had not complied with state regulations. The terms of service may have been an illegal contract, and thus void, Milligan argued. 

Judge Glenn responded that ownership of Earn cryptos had been a “gating issue” (an obstacle to recovery) ever since Celsius filed for bankruptcy in July 2022. “They didn’t only just spring this on anyone.”

Celsius had failed hard at compliance, but any buyer would have to comply with regulations — and if Celsius had broken securities laws, “you’ll get your pound of flesh against them,” he told Milligan.

Judge Glenn said that he wouldn’t rule on the stablecoins this week. But we think he’s going to let Celsius sell the coins. Matt Levine at Bloomberg concurred — because not having the money to pay back a liability is what “bankruptcy” means. [Bloomberg]

KERP motion

Celsius employees have been running away screaming. In early 2022, the company had over 900 employees. They are now down to 167 employees. Attrition is a real problem. 

In the afternoon omnibus hearing, Judge Glenn approved Celsius’ Key Employee Retention Plan (KERP) to give out up to $2.8 million in bonuses to 59 key employees, so they don’t quit. Previously, he had denied the motion because Celsius and their lawyers had blacked everything pertinent out. [Doc 1426, PDF; Bloomberg]

You can’t really say no to a KERP if a company is trying to stay a going concern. We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise. 

Celsius lawyers also need to look into who transferred crypto within 90 days of the bankruptcy filing. Those employees will not get bonuses.

Most of the KERP payments will be no more than $75,000. Salaries for the KERP employees range from $25,000 to $425,000.

Celsius will totally come up with a plan, honest

Next, Judge Glenn agreed to grant Celsius’ motion to extend exclusivity  — the exclusive right to come up with a new business plan — until February 15.  

After a Chapter 11 filing, you normally have 120 days to come up with a bankruptcy plan. Celsius still doesn’t have a plan. Judge Glenn said that this is not unusual for large companies. The court can extend the period of exclusivity, though the total period with extensions cannot exceed 18 months.

Once that exclusivity period is up, any party in the bankruptcy can introduce their own reorganization plan. There are already some plans being floated by Celsius creditors. More court time — and bankruptcy estate money — will then be spent discussing all the plans.

Kirkland’s Patrick Nash, appearing for Celsius, wanted to avoid such a free-for-all. Celsius is working to sell the GK8 custody business, and they are working with the UCC on a reorganization they can both agree on. The US Trustee also agreed on extending exclusivity. 

Judge Glenn concurred that lifting exclusivity now would lead to a free-for-all. He worried that a pile of new plans would be “a crushing load on my chambers.” Remember, he has to actually read all these hundreds of pages of legal filings.

The judge can see that Celsius is a melting ice cube and it’s just consuming money. But Celsius has to come up with something. He granted the motion.

For Celsius, this is just a game that they have to play to keep shambling forward and paying themselves from creditor funds. 

Celsius v. Stone et al. 

Jason Stone of KeyFi was Celsius’ DeFi trading guy. Stone is suing Celsius for non-payment. Celsius has countersued, calling Stone incompetent and a thief.

Later in the hearing, Judge Glenn denied a motion by KeyFi and Stone to dismiss Celsius’ counterclaims. [Doc 17, PDF]. 

Stone is being represented by Kyle Roche, formerly of Roche Freedman. He is now in his own practice. Roche is not an eloquent courtroom speaker. He rambles interminably, and Judge Glenn was getting noticeably annoyed at him.

Roche said that Celsius’s claim should be dismissed because the issue is a contractual dispute, and Stone was authorized to transfer the assets in dispute to KeyFi under an asset purchase agreement. Celsius argued that Stone was not a party to the cited APA.

Judge Glenn said he would be denying the motion for now. He told the parties to complete discovery before a scheduled January hearing on Celsius’ motion for a preliminary injunction in the dispute — and he didn’t want them dragging their feet.

Roche said he had collected 150,000 documents as part of discovery. Glenn asked when Roche would produce the documents. Roche said that he had been busy because his grandmother died.

Prime Trust

Judge Glenn approved the settlement with Prime Trust, returning $17 million in cryptos to Celsius that Prime had been holding since the two stopped doing business in June 2021. [Doc 20; PDF]  

Celsius gets cryptos, not the actual dollars it needs to pay the bankruptcy professionals — hence why they want to sell the stablecoins to pay the bills.

Next time

We’ll be writing up the December 7 hearing on who owns the Custody and Withhold accounts and the December 8 hearing on the GK8 sale. Send Amy money for eardrops! [Agenda, PDF; Agenda, PDF]

Posted on by Amy Castor 3

Crypto collapse: States bust Nexo, Terra’s Do Kwon on the run, Celsius CEO resigns, FTX buying Voyager and eyeing Celsius, ETH miners screwed

David Gerard and I just published our latest news roundup and analysis on the ongoing crypto crash.

In this update, we cover:

  • A slew of state regulators drop the hammer on crypto lender Nexo.
  • Terra-Luna: Where in the world is Do Kwon?
  • After a two-week auction, FTX US emerges as the highest bidder for Voyager Digital’s assets. What is SBF buying other than a giant hole in Voyager’s balance sheet?
  • Under pressure from the UCC, Alex Mashinsky steps aside as CEO of Celsius.
  • The US Trustee appoints an examiner to investigate Celsius.
  • Celsius wants to sell off some stablecoins to fund its operations. Texas agencies object! They want the debtor to hold off until the examiner comes out with her report.
  • Crypto miners are unhappy. Good!

Head over to David’s blog to read the full post! [David Gerard]

Image: GPU crypto miners in Vietnam appear to be jet washing their old mining gear before putting the components up for sale.

Posted on by Amy Castor 0

Crypto collapse: Celsius, Voyager, SkyBridge — the liabilities are real, the assets are fake

“To the crowd there assembled, I was the realization of their dreams….The ‘wizard’ who could turn a pauper into a millionaire overnight!”

~ Charles Ponzi

Celsius Network

For years, Celsius founder Alex Mashinsky told people banks were the enemy, and Celsius was your friend. Now everyone is wondering where their money went. Here’s our summary of the current situation at Celsius:

  • The money is gone. There’s almost nothing left for creditors.
  • The lawyers are stripping the last shreds of meat off the bones. 
  • Celsius’ ludicrous plan to run a bitcoin mining operation to get out of debt is a way for execs to put off liquidation a bit longer while they fill their pockets. 
  • Insiders will keep paying themselves with the remaining funds for as long as they can get away with it.
  • An examiner report could lead to a liquidation, possibly more. Any party can file a motion to convert to a liquidation “for cause.” The sooner that happens, the better, as far as we’re concerned. It’s time to close the curtains on this clown show.
  • We can hope for criminal charges — but those would require something like solid evidence of a deliberate Ponzi scheme, which could well come from the examiner, once appointed. 
  • Both the Trustee and the judge have the power to refer a case to the Department of Justice. If the examiner finds evidence of federal crimes, the case will have already been made. 

Let’s review the four types of Celsius customers:

  • Earn: Celsius promised up to 18% APY if you gave them your crypto to invest in … secret things. Crypto deposited into Earn accounts became the property of Celsius. The Earn product resembled an unregistered securities offering. When you give someone your money and they do stuff with it to make more money, that’s an investment contract — a security.

    Not registering such an investment contract when offering it to the public is why BlockFi had to fork over $100 million to state regulators and the SEC, and why Coinbase ultimately had to abandon its Coinbase Lend product.
  • Borrow: Celsius let you take out loans against your crypto assets. Borrow customers were usually crypto gamblers borrowing USDC (casino chips) to play the DeFi markets. You paid interest monthly, and then paid the principal in one lump sum at the end. Similar to Earn, the crypto you put up as collateral became Celsius property.
  • Custody: Celsius launched a Custody solution on April 15, 2022 — 89 days before it filed for bankruptcy, making all of those funds subject to a 90-day clawback under the bankruptcy code.

    Custody was a response to state regulators casting an acerbic eye upon Celsius’ Earn product. “New transfers made by non-accredited investors in the United States will be held in their new Custody accounts and will not earn rewards,” Celsius said. [Celsius blog post, archive]

    Custody essentially served as storage wallets. In the bankruptcy proceedings, this has led to ongoing discussion on whether Custody account holders are secured creditors who will get their money back right away … or unsecured creditors, whose funds are now part of the bankruptcy estate. Judge Martin Glenn, who is preceding over the bankruptcy, says he hopes to resolve the matter sooner rather than later.
  • Withhold: If you lived in a US state where Celsius became unable to offer serviceable Custody accounts, you had to move your Earn funds to Withhold accounts, where they remained frozen. The Withhold group accounts for $14.5 million of the $12 billion in digital assets stuck on Celsius when it stopped withdrawals in June.

The big question now in the Celsius bankruptcy is how to classify creditors: who’s first in line to get their money back, and who’s last in line? This is why, in addition to the official Unsecured Creditors’ Committee (UCC), there are currently three ad-hoc groups, all vying to get the judge’s attention. 

Celsius believes that funds held in Earn and Borrow accounts are property of the bankruptcy estate, meaning those customers will have to wait until the lawyers finish to see what’s left. But Celsius wants to return money held in specific Custody and Withhold accounts to customers now. [Motion, PDF]

Celsius argues that $50 million of the $120 million in Custody and Withhold accounts should go back to customers, if they meet one of the following criteria: [Twitter]

  • The accounts are pure Custody or pure Withhold with funds that were transferred from an external wallet — not Earn or Borrow programs.
  • In instances where the Custody and Withhold accounts do contain funds transferred from the Earn or Borrow programs, they want customers to have their money back, if the transfers were less than $7,575, a specific legal threshold under the bankruptcy code clawback provision, 11 U.S. Code § 547(c)(9). This is an adjusted amount. [Twitter; LII; LII]

Much of the discussion at the third bankruptcy hearing on Sept. 1 centered around whether custody holders should be able to get their money back. [Coindesk]

During the hearing Judge Martin Glenn also emphasized: “Nobody is getting their money back if they remain anonymous. Let me make that clear.” [Twitter]

According to new financial docs, Celsius seems to have magically found $70 million “from the repayment of USD denominated loans.” Imagine that! The company originally forecasted it would run out of money by October, but now it has more runway. [Docket #674, PDF; Coindesk]  

Last month, the Trustee called for an independent examiner and filed a motion to show cause. [Motion, PDF] Creditors — the UCC and the ad-hoc groups — are worried that an examiner will drain more of their dwindling pool of funds.

David Adler, a lawyer with the firm McCarter & English, representing four Celsius borrowers, says an examiner will cost too much money. The group thinks the job can be done with a Chapter 11 Trustee. [response, PDF]

The Vermont Department of Financial Regulation says Celsius sure looked like a Ponzi scheme and is urging the court to appoint an examiner. Vermont is concerned about Celsius’ offerings of unregistered securities. “At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.” Vermont also alleges that without Celsius’s holdings of its own native CEL token, the firm has been insolvent since at least February 2019. [FT; court filing, PDF]

Celsius has agreed to the Trustee hiring an examiner — as long as the examiner does not duplicate work already done by the UCC. Celsius says they’ve reached an agreement with the Trustee on this point. [response, PDF]

The next Celsius bankruptcy hearing is set for Sept. 14. There is also a hearing scheduled for Oct. 6 to discuss the custody account holders.

Meanwhile, Celsius has announced a Celsius-themed Monopoly game! It appears to be an unlicensed knockoff — not officially endorsed by Hasbro. This seems to have been in the works since well before the bankruptcy. [Web 3 Is Going Great]

Alex Mashinsky had a favorite slogan: “Unbank Yourself.” His wife Krissy is now selling a new T-shirt: “Unbankrupt Yourself.” [Twitter]

Daniel Leon, one of the founders of Celsius, says his 32,600 shares of Celsius stock are worthless. It looks like he wants to use them as a tax write-off. [Docket 719, PDF] 

Voyager Digital

On Aug. 30, the US Trustee held the first 341 creditors’ meeting for Voyager, where the Trustee and the creditors got to ask CEO Steven Ehrlich questions about the bankruptcy — under oath. The Trustee is an agent of the federal government. If you lie to the Trustee, it is like lying to the FBI — a federal crime. 

(We wrote about Celsius’ 341 meeting previously.)

Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.

Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.

Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]

Staking is risky!

Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.

But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.

Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]

Sam Bankman-Fried’s FTX and Alameda disclosed a joint bid for Voyager in July. Voyager dismissed this as a lowball bid — but we think SBF is the one who is most interested in Voyager. Maybe they’ll up their offer in the auction?

What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?

The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF] 

Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer ​​charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]

The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3. 

SkyBridge

FTX is paying an undisclosed sum for a 30% stake in Anthony Scaramucci’s SkyBridge, and SkyBridge will buy $40 million of crypto to hold “long-term.” Scaramucci is not giving up any of his own share of SkyBridge. [Bloomberg; FT]

SkyBridge used to be a general hedge fund then went hard into crypto. “We will remain a diversified asset management firm, while investing heavily in blockchain,” says Scaramucci.

The weird part of this is that SkyBridge is already an investor in FTX and FTX US. We’re reminded of how FTX “bailed out” Voyager, then it turned out that Voyager owed FTX a bundle.

Other stuff

Three Arrows Capital (3AC) withdrew 20,945 staked ether (worth about $33.3 million) from Curve and $12 million in various assets (wrapped ETH, wrapped bitcoin, and USDT) from Convex Finance. Nobody seems to know why they withdrew the funds. [The Block]

The Algorand Foundation has admitted it had $35 million (in USDC) exposure to collapsed crypto lender Hodlnaut. [Algorand blog]

Another class action has been brought against Terraform Labs. This one was brought by Matthew Albright. He is represented by Daniel Berger of Grant & Eisenhofer. The claim alleges Terraform violated the RICO act by artificially inflating the price of their coins and publishing misleading information following UST and luna’s collapses to cover up for an $80 million money laundering scheme. “UST amounted to a Ponzi scheme that was only sustained by the demand for UST created by Anchor’s excessive yields.” The proposed class is all individuals and entities who purchased UST and luna between May 1, 2019, and June 15, 2022. [Complaint, PDF]

From May: Chancers, the Korean crypto streamer who went to Terraform CEO Do Kwon’s house. [BBC] 

Posted on by Amy Castor 0

Crypto collapse: 3AC yacht ‘Much Wow’ back on the market, Celsius maybe-Ponzi, Voyager pays off the boys, Hodlnaut

“Crypto sceptics are a bit like the boy who cried wolf, except a villager gets eaten every damn time and the rest of them are still going ‘why did you cry wolf, FUDster?'”

— GunterWatanabe

Toot toot, I’m a boat

Everyone trusted Zhu Su and Kyle Davies at Three Arrows Capital (3AC). They knew what they were doing, right?

Only now, the pair have disappeared — and their fabulous yacht is back on the market. “The unclaimed yacht looms as a slightly ridiculous avatar of the hubris, greed, and recklessness of the firm’s 35-year-old co-founders.” [Intelligencer] 

Here’s the 3AC yacht in all its glory: the Much Wow. Yes, Zhu was into Dogecoin too. [Much Wow; Boat International, archive]

3AC talked like competent hedge fund guys — which straight away made them look a zillion times smarter than the rest of the crypto bros. But they weren’t good at this at all. They had no clue on how to hedge their bets. The 2021 crypto bubble saved 3AC’s backside — they could keep looking like geniuses a little longer.

3AC used a “spray and pay” strategy: invest in a whole pile of trashy minor altcoins, and hope for a return.

On May 26, 2022 — by which time 3AC had likely already abandoned their Singapore office and skipped the country — Davies tweeted that “it doesn’t matter specifically what a VC invests in, more fiat in the system is good for the industry.” This is correct, if you view crypto as a single unified scam casino. [Twitter]

Articles about the wider crypto collapse talk about 3AC a lot. This gives the impression that 3AC is fundamentally to blame.

3AC deserves a lot of the blame because they were greedy and stupid. But everyone else was also greedy and stupid. 

Terraform’s Anchor protocol paid 20% interest rates — the highest available. 3AC offered the next-highest interest rates available, by putting the money into UST/luna and skimming some off the top.

So everyone else put their money into Anchor and 3AC. Many of these were feeder funds, who skimmed a bit off the top themselves.

You can picture the crypto investment market as an inverted pyramid, where the point is UST/luna — a Ponzi box full of hot air. 3AC was the box above that. Everyone else is in a funnel down to those two. The bottom two Ponzi boxes collapsed, and the whole inverted pyramid came tumbling down with them.

Terraform was running the load-bearing Ponzi box; we put most of the blame on Do Kwon. But we also blame Terraform’s enablers — the rest of the crypto investment firms.

There’s a lot to blame 3AC for — the way that Zhu and Davies just kept going “this is fine” even as they knew it was going to hell. They were greedy fools.

But anyone who put their money into 3AC was also a greedy fool.

Voyage to the bottom of the sea

Voyager Digital’s official unsecured creditors’ committee (UCC) held a town hall on August 11. The meeting was led by UCC counsel Darren Azman and Chuck Gibbs at McDermott Will & Emery. Amy wrote up some notes. [YouTube; presentation]

Azman says: if you want to buy Voyager, hurry! The deadline to submit bids is August 26. Sam Bankman-Fried’s FTX has already submitted a bid. It may have been a low-ball bid, but SBF’s Alameda Research is a borrower from, lender to, and shareholder of Voyager. We expect FTX will want Voyager the most — if anyone really wants it at all. 

Azman and Gibbs say that Voyager is aiming to file a restructuring plan in October — and that creditors might get their money back as soon as November! What money there is, anyway.

This time frame would be welcome, but isn’t plausible — Mt. Gox (2014) and QuadrigaCX (2019) creditors are still waiting for their money years later.

Meanwhile, the boys gotta get paid. Voyager wants $1.9 million to pay bonuses to 38 employees as part of a “Key Employee Retention Plan.” (KERP). In a bankruptcy, KERP is a way to incentivize upper management to keep working throughout the bankruptcy — and not flee the sinking ship.

Voyager is also seeking to file under seal all pertinent information about KERP participants — their names, job titles, supervisors, salary, and proposed bonus. These folks are definitely not insiders, and Voyager can’t give you their names — but trust them.

When your ship is sinking, the last thing you want is people leaving with all your deep, dark secrets. Keep them happy — and quiet. 

The US Trustee objects to the sealing: “The payment of bonuses, let alone bonuses in such a significant sum to such a limited number of individuals under the circumstances that brought Voyager to this Court, should not be countenanced.” 

The UCC also objects — of Voyager’s 350 employees filed, only 12 have resigned so far. Nobody’s leaving. In fact, nobody’s been asked to leave.

Creditors are pissed that Voyager hasn’t bothered to reduce employee headcount at all, given the platform has been frozen since July 1. What are the employees doing, other than collecting paychecks? [motion, PDF; objection, PDF; objection, PDF; Coindesk]

Just days before Bernie Madoff was formally charged by the SEC, he wanted to distribute hundreds of millions of dollars in early bonuses to employees. We’re sure he was just being nice to them too. [National Post, 2008]

Celsius: When you’re in a hole, keep mining

Celsius submitted their Budget and Coin Report, reflecting the funds they were holding as of July 29. (They filed for bankruptcy on July 13.) The company plans to file similar reporting on a monthly basis throughout their bankruptcy. [Notice of filing and coin report, PDF] 

The report shows just how much money Celsius wants to set on fire. Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining, and $33 million to restructuring costs. By the end of October, they’ll be operating hugely in the red.

Those negative numbers were the elephant in the room during Celsius’ second-day hearing on August 16. Amy summarized this hearing previously. Here’s the slide deck that Celsius lawyers from Kirkland & Ellis presented. [presentation, PDF]

Celsius has this mad idea that they can crypto-mine their way out of bankruptcy. First, they plowed customers’ money into stunningly risky investments. [Twitter thread] Now they want to feed the remaining customer funds into their money-gobbling bitcoin mining operation.

Celsius sought approval from the court to sell their mined bitcoin — so they could use the proceeds to fund Capex for their Texas mining operation. 

The US Trustee’s attorney, Shara Cornell, objected on the grounds that Celsius wasn’t being transparent about what bitcoin it planned to sell, or how much the mining business was expected to generate.

Despite those objections, Judge Martin Glenn approved the motion — though he had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.”

We think he should have had stronger reservations. Celsius says its mining will be profitable in January, but the numbers don’t add up. 

Celsius expects to generate 10,118 BTC this year and 15,000 BTC next year. Last year, they only mined 3,114 BTC, according to filings. The company has paid for 120,000 rigs, of which 49,000 are in operation.

Even if Celsius mines and sells 1,000 BTC per month, that’s only $2 million when their hosting costs are $19 million per month, with only half the rigs operational. This business simply isn’t viable. It’s just an attempt by Celsius CEO Alex Mashinsky to postpone his company’s liquidation.

Well, that was a huge arithmetic error. Sorry about that. We blame the intern. (i.e.,ourselves.)

A question of trust

Celsius also wanted to sell some de minimis assets. These turned out to be notes/bonds and equity in other crypto companies — but Celsius hadn’t bothered to mention that bit.

Cornell from the US Trustee said, “The motion makes it sound like the debtor is selling office furniture.” Judge Glenn said he had “no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses.” He did not approve the motion.

US Trustee William Harrington has had enough of Mashinsky messing around. Days after the hearing, Harrington filed a motion requesting the court appoint an examiner to investigate what’s really going on inside Celsius and present their findings to the court. [motion, PDF] 

As grounds for hiring an examiner, the Trustee lists allegations of incompetence or gross mismanagement — including the offering of unregistered securities — significant transparency issues, and widespread mistrust in the debtors. 

Under US bankruptcy laws, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company’s debts exceed $5 million. We have no doubt Judge Glenn will approve the request.

The language in the motion suggests that Mashinsky can’t be trusted. (We concur.) Among other things, it points out that Celsius owes $20 million in back taxes. Unpaid taxes are senior debt. The IRS gets first dibs on the remaining assets before the unsecured creditors.

The Celsius UCC is “concerned” about the Trustee hiring an examiner because “It will run up millions in costs.” [Twitter] 

We know for sure that it’ll be costly — the examiner in Lehman Brothers’ 2008 bankruptcy cost $100 million, up from a projected cost of only $23 million. The examiner for Enron was $90 million. So our guess is the examiner will probably cost creditors $25 million, if not more. 

The seven-member UCC feels it can conduct its own investigation and doesn’t need an examiner. The problem there is that the UCC is selected from a list of the largest Celsius creditors. These people represent companies that have a vested interest in the crypto space succeeding. They are not in any way neutral.

The P-word

A “341 meeting” was held on August 19 — a creditors’ meeting, named after section 341 of the Bankruptcy Code, where the debtor answers questions about their financial status under oath.[LII]

At the 341 meeting, Celsius CFO Chris Ferraro admitted that Celsius was paying old investors rather more money in rewards than they were actually getting in yield.

“In hindsight, we did not generate enough yield to support the return,” says Ferraro. He confirms Celsius was paying “over 100%” at times — 120% to 130% of the actual yield. There’s no transcript, but Kadhim Shubber from the Financial Times and Thomas Braziel from 507 Capital live-tweeted the call. [Twitter; Twitter]

If Celsius was paying this excess yield from incoming investor money … then that’s literally a Ponzi scheme. (A lawsuit filed against Celsius on July 7, also claimed Celsius was operated as a Ponzi.)

Ferraro said, “I don’t think it was that connected” — but he didn’t answer where else the money could have been coming from. It was just “hyper-growth mode,” see. [Twitter; Twitter]

A question of competence

Mashinsky is a good salesman — but he’s not so great at any other part of the job. In January, Mashinsky ordered Celsius’ in-house investment team to sell bitcoin worth hundreds of millions of dollars. A day later, Celsius had to repurchase it all at a loss. “He was ordering the traders to massively trade the book off of bad information,” said one of the traders. “He was slugging around huge chunks of bitcoin.” [FT, archive] 

Mashinsky is selling his $2.5 million home in Austin, Texas. He bought it only a year ago. [Twitter]

Canadian pension fund CDPQ has written off its CA $200 million investment in Celsius. “We arrived too soon in a sector which was in transition.” Whoever authorized the investment definitely wasn’t a foolish and greedy investor in a bubble, who didn’t look into the already-insolvent company at all. [La Presse, in French]

Elsewhere amongst the wreckage 

Last week, we talked about Coinbase’s horrific $1.2 billion Q2 loss. Frances Coppola took a deeper dive into the company’s 10-Q. She explains why Coinbase’s balance sheet has massively inflated. [Coppola Comment]

Genesis Trading CEO Michael Moro has quit, effective immediately — definitely a thing that happens all the time in healthy companies where things are going well. Moro “will continue to advise the company through the transition.” Genesis is also laying off 20% of its staff. The company had lent $2.36 billion to 3AC, and Genesis’ parent company DCG has made a claim against 3AC for $1.2 billion. [press release; The Block]

BlueBenx, a Brazilian crypto lending platform, has bitten the dust following a $32 million hack — or, its users think, a “hack.” Withdrawals have been halted, and employees have been laid off. [CoinTelegraph]

Hodlnaut has applied for creditor protection in Singapore. This is the equivalent of Chapter 11 in the US. They’re insolvent. [Hodlnaut announcement, archive; CoinDesk] 

In court filings, Hodlnaut formally admitted that they had lost money in the Terra-Luna crash via their Hong Kong entity. Hodlnaut had previously told customers they had no Anchor exposure. We knew they had, and wrote about it in our previous update. [Twitter; CryptoBriefing]

All deposits are part of the bankruptcy estate. If Hodlnaut is liquidated, even stablecoin depositors will only get a fraction of what they had on account at the company.

Hodlnaut is now facing a probe from the Attorney-General’s Chambers and the Singapore Police Force — “pending proceedings,” though they didn’t give any other details. About 40 out of the 50 employees the company had have been laid off. [Straits Times] 

Posted on by Amy Castor 2

Celsius second bankruptcy hearing — court approves setting more customer funds on fire

On August 14, Celsius filed a Budget and Coin Report, which put into full view the ongoing train wreck. The company is burning through piles of “cash,” while creditors watch in horror as their remaining hopes of recovering lost money go up in smoke before their eyes. [Docket 447] 

To generate 18% returns on its Earn product, Celsius dived head-first into some stunningly risky “investments” and lost $1.2 billion in customer funds, at least. The company filed for Chapter 11 on July 13. 

Now, Celsius founder Alex Mashinsky wants creditors to put their faith into another reckless gamble. The company is shifting its entire business model from crypto lending to bitcoin mining — with ludicrous plans to mine its way out of bankruptcy. 

Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining,* and $33 million to restructuring costs. By the end of October, Celsius will be operating hugely in the red.

Bitcoin mining is a money-losing proposition, as David Gerard and I detailed in an earlier report. Celsius’ mining business, headquartered in Texas, is currently burning through $19 million of customer money per month. In July, they only mined 432 BTC, worth $8.6 million!

Celsius argues this is because its facilities aren’t fully operational yet — but the facilities will be fully operational if the court will allow them to keep throwing more money into the flames.

All Celsius and its lawyers need to do is to convince creditors — and the judge — that the business will be profitable one day in the fabulous future.    

On August 16, two days after filing its budget report, Celsius had its second-day bankruptcy hearing. The judge ultimately signed off on a motion allowing Celsius to sell mined bitcoin to fund its mining operations but withheld approving a motion authorizing the debtor to sell stocks and shares due to Celsius obfuscating what they were really selling. 

What follows are my notes and comments on the hearing. 

Second-Day Hearing

Judge Martin Glenn began the two-hour hearing by noting that the court has received hundreds of letters from Celsius customers. The letters are all being filed in the docket. “Some have raised important issues that will have to be addressed in this case,” he said.

Molly White has been pulling out excerpts of these letters, and they are indeed heart-wrenching. These are real people, some of whom have lost their life savings because they believed the promises of Celsius founder Alex Mashinsky. [Molly White]

Celsius’s lead lawyer at Kirkland & Ellis, Josh Sussberg, was the first to present at the hearing. Before delving into a nine-page PowerPoint, he took a moment to rant about the “relentless” and “inaccurate” media coverage surrounding the bankruptcy. Sussberg said he’s told Celsius “to take the repeated punches,” and not respond. [Celsius presentation]

Sussberg has clearly been in close talks with Mashinsky, who has a pattern of deflecting blame. When Celsius initially filed for bankruptcy, Mashinsky pinned his company’s failure on “misinformation” in the media and on social media for encouraging customers to withdraw $1 billion in funds over five days in May. Mashinsky’s new message is that the banks are lying, the media is lying, but you can trust me with your money, even though I just lost it all.  

Sussberg noted the elephant in the room: everyone knows that Celsius will run out of money by the end of October. He said that Celsius is working to expedite a restructuring plan that will lead to the company being liquid.  

Celsius is also trying to sell its business and its digital assets to a third party. “We have multiple offers outstanding with several more coming in,” said Sussberg. 

In addition to the official unsecured creditors’ committee, two ad-hoc creditors’ groups have formed. One is for custodial holders, represented by Togut, Segal & Segal. They have $180 million in claims. The other, represented by Troutman Pepper, is for withhold account holders. These were customers in states where Celsius was not licensed. When they tried to withdraw funds, the money went into holding accounts. They represent $14.5 million in claims. Kirkland has been in talks with both groups, Sussberg said. 

Celsius is not seeking to dollarize claims on the petition date. Instead, it wants to return crypto. In other words, Celsius is counting on the markets to rebound — i.e., bitcoin will moon again and everyone’s problems will be solved.  

Interestingly, the creditors also do not want to dollarize claims. Greg Pesce at White & Case, the lead lawyer for the creditors’ committee, said that they too want an in-kind recovery of coins. 

Pesce said the committee has begun its own investigation into Celsius in the hopes of recovering more money for creditors, as they believe they are the only ones able to fight for the customers’ interests. Their search will take them “across the globe, across the country, and across the blockchain.”  

In addition to the possibility of identifying potential insider trading, Pesce seems to be alluding to the Tether loan. Tether loaned Celsius $840 million in USDT backed by bitcoin, and then sold the bitcoin Celsius loaned as collateral just before Celsius filed for bankruptcy. Any attempts to retrieve that bitcoin will be a sideshow in and of itself.

Judge Glenn notes that Celsius’ Earn product attracted lots of government investigations into whether Celsius was selling unregistered securities. The Securities and Exchange Commission has been looking into Celsius since January. Celsius had already been thrown out of Alabama, New Jersey, Texas, and Kentucky for unregistered offerings of securities.

“Since the debtor business model was so heavily dependent on the so-called Earn accounts, and given the number of securities regulator investigations as to whether the debtors were engaged in the sale of unregistered securities, what is the business model going forward?” 

“That’s the $64,000 question,” Pesce responded.

Celsius had 1.7 million customers at the time it filed its petition. About 58,000 held crypto in Celsius’ custody accounts — they might get their crypto back first depending on whether they are deemed secured or unsecured creditors. 

Judge Glenn wants to resolve the custodial accounts sooner rather than later. But Celsius didn’t set up its custodial business until April 2022, and he wants to make sure custodial accounts weren’t a vehicle for insider trading: 

“I am certainly going to want to know whether there are insiders and employees with custodial accounts and whether any of them were able to transfer crypto assets from other accounts into the custodial accounts — and what did they know at the time they made the transfer? Were they contemplating that the business was trending negative and the best way for them to individually protect the value of their accounts was to try and transfer assets into custodial accounts?”

Judge Glenn previously ordered all versions of Celsius’ terms of service going back to 2018. He wanted to trace through all of the changes made over time to determine what is and what isn’t the property of the bankruptcy estate. “Little did I know there were going to be 1,100 pages of them,” he said.   

Bitcoin sell motion

After the presentations, the hearing moved on to the motions.  

Celsius wants to sell bitcoin generated by its mining business and use the cash to fund its mining operations. “We are still in the capital-intensive part of the business and also, importantly, we don’t have all of the mining rigs,” said Sussberg.  

US Trustee attorney Shara Cornell said the Trustee needs more information to form an opinion on the matter: “As of today, we still do not know what expenses are being paid or what bitcoin is being sold,” she said. “We know what the debtors expect to generate but we have no idea what it is going to cost to generate any of that.” 

Cornell said that the Trustee is considering hiring an examiner to address Celsius’ rampant transparency issues. She noted that Celsius said it planned to file a long-term mining plan. “Maybe what we need to do is put this motion on hold until we have more information.”

(Update: Just after I published this story, the Trustee entered a motion for the appointment of an examiner. This is a big deal!)

Surprisingly, Pesce said the creditors’ committee has not made a decision on the mining. Frankly. I was sort of expecting the creditors to push for a liquidation.  

Not all Celsius customers support the idea. 

If they raised a virtual hand during the Zoom hearing, creditors were allowed to speak. One creditor said: “We didn’t sign up to be part of the mining business. We signed up to be part of an exchange. As a fellow miner, I don’t see it being very profitable in the long run.” 

Judge Glenn approved a motion to allow Celsius to sell bitcoin generated from its mining business, but he clearly had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.” [Order 187]

Not so ‘de minimis’ after all

Celsius wants to sell assets that they claim are “de minimis” and “non-core” to the business to bring in more cash for operating expenses. It turns out these are notes/bonds and equity in other crypto companies, but Celsius never bothered to tell anyone. 

De minimus means too small to be taken into consideration. Debtors can sell assets free and clear of liens. But sales of bankruptcy estate property must be approved by the bankruptcy court.  

Prior to the hearing, the Trustee had objected to the motion, saying the debtor hadn’t provided enough information for the Trustee to evaluate the motion. [Docket 400]

Trustee attorney Shara Cornell told Judge Glenn: “The motion makes it sound like the debtor is selling office furniture or similar hard-type assets that they no longer need. One of our questions in objection had to do with whether or not that might be mining equipment. But what they are actually looking to sell are equities and stocks. And that, in our opinion, is not a de minimis.” 

Judge: “Did you find out what stock they were talking about?” Cornell: “No.” 

Judge Glenn declined to approve the de minimis sales motion and told Celsius to work it out further with the Trustee. Even he was surprised. 

“Certainly I had no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses. Those were not what I would normally consider to be de minimis assets, so I want some better definition.”  

Celsius’ business model going forward is all predicated on number go up and making sure the boys get paid. I’m not sure how long this will drag on before the “restructuring” turns into a liquidation, and Celsius management is booted. Likely not before Celsius burns through the rest of their customers’ funds, pays as many of their friends as possible, and the bankruptcy attorneys make their millions. 

The next Celsius hearing is September 1. 

*Celsius calls running mining rigs “hosting.” 

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Posted on by Amy Castor 0