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.
Our work here is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly with our coffee and ibuprofen budgets!
Shoba Pillay, the examiner in the Celsius bankruptcy, filed her first interim report on Saturday at 11:45 p.m. ET. [Report, PDF]
Appointed by the Office of the US Trustee — an arm of the Department of Justice — Pillay is here to work out precisely what on earth happened here. She is already conducting Rule 2004 investigations, which let her look into almost anything.
This interim report specifically examines Celsius’ crypto holdings, where they were and are stored, and the change from Earn accounts to Custody and Withhold accounts in April 2022, during which time Celsius was feeling the heat.
This investigation revealed that Celsius reacted to the regulatory scrutiny by launching its Custody program without sufficient accounting and operational controls or technical infrastructure … As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.
This isn’t the bomb under the Celsius bankruptcy that we have been waiting for — it’s just an interim report ordered by Judge Martin Glenn ahead of the Celsius Custody and Withhold hearings on December 7 and 8.
Nevertheless, it’s jam-packed with the sort of hilarity and horrors that you find when anyone looks inside how any crypto firm actually works. All crypto firms are Quadriga. It’s just that some haven’t exploded yet.
The current report is a window into the fraught issue of whose cryptos are in the Custody and Withhold accounts. It will help the court decide whether the depositors will get back 100% of what they put in or whether the cryptos go into the general bankruptcy estate.
The word “Ponzi” does not appear in this report. Whether the Examiner will look into possible Ponzi scheming by Celsius has yet to be determined. The Unsecured Creditors’ Committee — consisting of seven individuals representing the largest Celsius creditors, who are mostly from the crypto industry — wanted to look into this question themselves.
We think the task should be handed to the examiner, a neutral party — and many of the smaller retail investors concur. Also, we’re impressed by what a relentlessly thorough job the examiner did in this interim report.
Celsius hampered the examiner’s investigation as much as they thought they could get away with:
Documents or information responsive to certain requests were not received until days prior to the filing of this Interim Report, and some were not received at all, which may require the Examiner to further supplement the information contained in this Interim Report when she issues her Final Report.
… In addition, Celsius imposed limitations on interviews of its employee witnesses, including by requesting that the Examiner preview any topics to be covered during the interviews and limiting the time of many interviews to two hours. Further, Celsius claimed privilege over communications between Celsius and the regulators, further limiting her ability to obtain the full scope of relevant facts.
On page 19, the examiner cites one of Amy’s 2017 articles for CoinDesk to define what an ERC-20 token is. [CoinDesk]
Custody accounts
Earn was Celsius’ main product. You would deposit cryptos and be paid interest on them.
Regulators in multiple states had been lining up to shut down Celsius’ Earn product through 2021 and early 2022 — they thought it was the unregistered security that it obviously was. New Jersey in particular said that since Celsius was selling the product from their state, the New Jersey cease-and-desist order would take effect for the whole US. The SEC was also subpoenaing information from Celsius. BlockFi had already suffered cease-and-desists for its similar product.
Regulatory heat was a major factor in the creation of Custody and Withhold accounts. Yarden Noy, who headed regulation for Celsius, told Pillay: “Given the regulators, we came up with Custody.”
Celsius was working under the gun — they worried about having a month unable to accept fresh customer deposits — but they had to release Custody before the regulatory deadline or stop accepting any cryptos from retail US customers.
A lack of fresh cryptos coming in from new investors to pay out previous investors would be a serious issue if Celsius happened to be Ponzi-ing.
Celsius was short of developers. Celsius Engineering Director Steven Koprivica characterized the procedure as: “go back to blackboard, do the minimum of all minimums, this may be manual for the start, involve less developers, let’s discuss deadlines.” So everything about the Custody accounts ended up a mess.
Celsius was already tracking the company’s cryptos in the most advanced software known to cryptocurrency: a Google Sheets spreadsheet called the “Freeze Report.” This was an improvement over Celsius’ previous system, which was to just look at each blockchain address and check the balances by hand.
It wasn’t even clear precisely what the “Custody” product was. The accounts certainly weren’t “custody” in the sense that every other crypto custody firm uses the word — storing the keys for a customer’s large crypto holding securely. Different groups in Celsius had different understandings of what the accounts were supposed to do.
Celsius Custody launched on April 15, 2022. Celsius didn’t tell anyone about Custody ahead of its launch — they worried that customers would leave the platform, and they worried that regulators would give them a hard time about the Custody product itself.
Custody was run badly. Celsius didn’t have time to do anything properly. Rather than relying on software, Celsius used manual reconciliation and hoped to add a more robust process later.
Employees were told to tell customers: “Celsius continues to safeguard customer assets.” In fact, Celsius did not safeguard customer assets. Celsius represented each customer’s Custody account as separate — but in practice, they aggregated all of the crypto, lumping everything into one big pile and kept track of the amounts … shoddily.
Celsius had to manually reconcile the amount of crypto listed in each Custody account with the actual cryptos in the aggregate Custody wallet. This was entirely ad-hoc. On 16 dates, there were shortfalls; Celsius topped up the Custody wallet from the Main wallet as needed, and vice versa. (The report details every occasion in Schedule 2, and there’s a graph on page 12. This report is thorough.)
But the key point is that “the Custody wallets ran a substantial deficit relative to Celsius’s Custody liabilities.”
Custody had new terms of service that changed conditions in important ways, such as who owned the cryptos — but customers weren’t necessarily required to click their acceptance, or to read the terms before clicking. This has been a point of serious contention in the bankruptcy — many customers didn’t agree to the terms.
Withhold accounts
Earn customers who were in states where Celsius didn’t feel safe to offer Custody accounts were transferred to a new group, called “Withhold.” This was supposed to just be Celsius holding the coins for customers to then take out later.
Customers didn’t understand this:
Withhold customers expressed confusion about their accounts. For example, one user explained that he “discovered that [he] had a ‘Withhold Account’” only because it “appeared without explanation on the Celsius app.”
Celsius didn’t consider Withhold a product, so it didn’t create a Terms of Use for Withhold.
But that didn’t stop Celsius from using cryptos in Withhold for revenue generation — loans, rehypothecation, and so on. Also, Celsius didn’t put Withhold funds into separate wallets per customer or even segregate Withhold accounts from their large general pool of cryptos.
The asteroid strikes
The Terra-Luna collapse blew a hole in the Celsius accounts: “In its May 2022 Board Minutes, Celsius reported that its ‘capital sits near zero.’”
Spooked customers withdrew $1.4 billion in crypto between May 9 and May 24, 2022. Cryptos on hand ran so low that Celsius could no longer honor withdrawals — despite CEO Alex Mashinsky’s frequent tweets of reassurance around this time.
Celsius paused all withdrawals on June 12, citing “extreme market conditions” — specifically, that customers wanted their money back.
Custody and Withhold balances increased after withdrawals were cut off — because customers could still deposit, and “customer assets were allocated to Custody when they attempted to withdraw their coins from Earn.”
What happens next?
Pillay’s report outlines the most contentious issues in the bankruptcy in detail — but it doesn’t point to any clear resolutions for them. Judge Glenn is going to have to untangle all of this himself.
The Examiner and the UCC have to resolve who will investigate the “so-called Ponzi schemes” by Celsius. There’s no clear date for this, but the next omnibus hearing is December 5.
The next interim Examiner’s report is due in the first half of December.
Other news in Celsius
Celsius now has an approved bar date. Creditor claims must be in by January 3, 2023. Government claims need to be in by January 10, 2023. [Order, PDF]
Celsius hasn’t put together any plausible business plan as yet. They are asking the court if they can have until March 31, 2023, an extra 141 days to come up with one. [Doc 1317, PDF]
“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”
~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds
Celsius: dodge the cops by diving down the drain
Celsius Network seems to be admitting the company’s dead and it’s not coming back. The debtor companies filed a motion on September 29 to sell off whatever assets remain.
The leading contender is, wait for it, Sam Bankman-Fried of FTX, who was previously noted to be sniffing around the gaping balance sheet hole called Celsius. [Bloomberg]
Here’s the filing to sell off everything, with its marvelous title in full: Debtors’ Motion Seeking Entry of an Order (I) Approving the Bidding Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Scheduling Certain Dates with Respect Thereto, (III) Approving the Form and Manner of Notice Thereof, (IV) Approving Contract Assumption and Assignment Procedures, and (V) Granting Related Relief. [Motion, PDF]
The filing asks to start a bidding process, in a conventional manner, for any remaining spare change to be found in the stiff’s pockets. Celsius would like bids to be put in by November 15, with a hearing to approve the winner around November 28. Celsius hopes to sell any remaining assets by December 20. The auction would be advertised in the New York Times and CoinDesk.
This isn’t actually a bad idea. We’ve said repeatedly that taking Celsius out of everyone’s misery is the right move. Celsius is an ex-parrot. It is bereft of life. There’s no viable business here. In any ordinary bankruptcy, selling off whatever’s left would be the correct thing to do at this point.
But this isn’t an ordinary bankruptcy. Vermont’s filing sets out the issues. There have been shenanigans here, and Vermont doesn’t want those put aside before the examiner can report: [Objection, PDF]
“As of the Petition Date, at least 40 state securities regulators were engaged in a multistate investigation arising from, inter alia, concerns about potential unregistered securities activity, mismanagement, securities fraud, and market manipulation by Celsius and its principals. At least six of those states had taken regulatory enforcement action against Celsius as of the Petition date, and several more states have done so since then.”
Ownership of the “custody” and “withhold” accounts have yet to be resolved. Do the accounts belong in full to the named creditors or are they part of the general pool of assets? (See our list of Celsius account types.) And who owns the stablecoins?
If any of the assets constitute securities, Vermont wants those to be registered as offerings of securities. (Spoiler: many of them are likely to constitute securities, and none are registered.)
Texas, Alabama, Arkansas, California, the District of Columbia, Hawaii, Maine, Missouri, New York, North Dakota, and Oklahoma all concur with Vermont’s objections. The states want to see the examiner’s report before any sale goes forward. They also want to approve the bidders to verify that they are compliant with state regulations, or can become compliant in a timely manner. [Texas objection, PDF; Coordinating states’ objection, PDF]
The US Trustee also objects to the auction. As well as the above objections, the Trustee asks that a privacy ombudsman be appointed, as “customers of these Debtors have significant concerns regarding transparency and irregularities.” [Objection, PDF]
Some individual creditors object on the same grounds — e.g., Daniel Frishberg, who thinks the examiner’s report may show that Celsius was a Ponzi scheme. Immanuel Herrmann has objected on behalf of an unofficial “Steering Committee” of Earn, Loans, and CEL depositors — they don’t object to an asset sale but do feel this current proposal is rushed. [Frishberg objection, PDF; Herrmann objection, PDF]
The forlorn quest for your money
The US Trustee held a 341 creditors’ meeting on October 13. Celsius interim CEO Chris Ferraro responded to questions under oath — and Ferraro knows nothing, nothing! Most of his answers amounted to “I’ll have to follow up on that,” “I don’t know,” and “I need to consult with my lawyers.” [Reddit]
The next Celsius hearing is on October 20 at 10 am ET. There’s an omnibus hearing on November 1 at 11 a.m. ET. Custody and withhold hearings are scheduled for December 7 and 8 at 9 a.m. ET. [Schedule, PDF]
Celsius has requested to set a “bar date,” the deadline for customers to submit proofs of claims, of December 13, 2022. [Motion, PDF]
If you agree with the schedules of assets and liabilities that Celsius filed earlier, you don’t need to file a claim. Go to page 92 to check your claim. [Schedule, PDF]
If you do need to file a claim, Celsius has submitted a form for approval with the bar date motion.
An inspector calls
As soon as she was appointed examiner in the Celsius bankruptcy on September 29, Shoba Pillay, previously an assistant US attorney, set to work.
She has already spoken to the debtors. She has outlined the various documents she will be requesting and has set forth a plan on how to avoid duplicating work already done.
Pillay has also filed a “Rule 2004 Motion,” to collect almost anything she might need. This motion will be heard on October 20 and is sure to be granted. [Rule 2004 motion, PDF; Notice motion, PDF]
Federal Rule of Bankruptcy 2004 — that’s a rule number, not a year — allows tremendously broad discovery and deposition. A witness in a 2004 examination is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be, in order to do their job. [Cullen Dykman; Nolo]
Hire professionals as needed. She’s already put forth a motion to retain as counsel Jenner & Block, the Chicago law firm where she serves as a partner.
Hire Huron Consulting Group as her forensic accounting and financial advisor.
Ascertain if the scope of the investigation needs to be expanded.
Hosting services
Core Scientific provides hosting services to Celsius Mining. Core claims the bankrupt company owes them $5.4 million. They’re tired of subsidizing Celsius’ failing mining business. They want their money, or they want out of their contract before Celsius turns them into a dead parrot too.
Celsius argues that Core breached their agreement by failing to deploy mining machines on time, and is unjustly trying to pass on power charges. They say Core is in violation of the automatic stay, which stops creditors from trying to collect debts until court bankruptcy proceedings are completed. They have called for a hearing on October 20 to ask the court to enforce the stay. [Filing, PDF; Coindesk; The Block]
Core responded saying that Celsius’ claims were “premised on the incorrect notion that Core Scientific must subsidize the Debtors’ money-losing mining business to the tune of millions of dollars a month.”
Core says they have deployed all of the mining equipment Celsius gave them and are paying out of pocket to keep the machines running. They are seeking relief from the court to either terminate their contract or to get paid. They want to delay the hearing on October 20 and they are requesting a status conference. [Letter, PDF]
Celsius’s lawyers responded that Core’s request for a status conference is “unwarranted and premature.” We think Celsius is dragging this out for as long as they can run up a tab with Core that will never be paid. [Letter, PDF]
Cold, so cold
There’s a new tool that lets you search the Celsius creditor database with your name and find your coinage! You can use the leaderboard to find the top losers. [Celsiusnetworth; Gizmodo]
US federal prosecutors from the Southern District of New York subpoenaed Celsius days after it blocked withdrawals in June. The subpoena was issued by a grand jury. Federal grand juries are used by Department of Justice prosecutors to conduct criminal investigations and potentially issue indictments. [FT, archive]
The SDNY subpoena is disclosed on p. 48 of this October 5 filing. Pages 48-50 list investigations by multiple state regulators. [Filing, PDF]
Celsius has filed its proposal for a key employee retention plan (KERP). They want to divvy up $2.96 million amongst 62 key non-insider employees — so as to keep them working on the dumb “Kelvin” plan to revive this dead parrot. Celsius currently has 275 employees in total. [Motion, PDF]
Alex Mashinsky, who recently stepped down as Celsius CEO, is dumping his CEL tokens for USDC dollar-equivalent stablecoins. [Twitter, Twitter]
Celsius cofounder Daniel Leon, who also just stepped down, sold $11.5 million worth of CEL in 2020 and 2021. [FT]
Jason Stone of KeyFi, a.k.a. DeFi whale 0x_b1, used to manage Celsius’ investments. Stone sued Celsius in July, saying they hadn’t paid him and called Celsius a Ponzi scheme. Celsius countersued in August, claiming Stone was an incompetent thief. Anyway, Celsius has just updated their counterclaim. [Complaint, PDF]
Voyager Digital, FTX, and Texas
In a Chapter 11 bankruptcy, the debtor has to file a disclosure statement with their bankruptcy plan. The statement needs to provide “adequate information” about the debtor’s financial affairs so creditors can make an informed decision when they go to vote on the bankruptcy plan.
Voyager filed its first amended disclosure statement related to its second amended joint plan on October 5. The plan involves selling off all of its assets to FTX US. [Statement, PDF]
The US Trustee objected to Voyager’s disclosure statement. The plan doesn’t say it’s a liquidation plan, but the proposal is basically to liquidate Voyager. The plan also shields Voyager CEO Stephen Ehrlich and his assets from third-party claims. The Trustee wants clearer disclosure for creditors of precisely what this statement is. [Objection, PDF]
The Texas State Securities Board objects to the sale of Voyager to FTX, “because, at this time, the Debtor and FTX are not in compliance with Texas law.” Texas thinks the plan “attempts to limit the Debtors’ liability for unlawful post-petition — but pre-sale closing — conduct for which state-regulatory fines and penalties may apply.” That is, they think the quick sale is an attempt to hide malfeasance. [Objection, PDF]
Specifically, Texas thinks FTX has been offering investment contracts that constitute unregistered securities to Texas residents. The affidavit from Joe Rotunda, Director of the TSSA Enforcement Division, details Texas’ ongoing case against Voyager since April 2022 for unlicensed offerings of securities — and then it gets stuck into FTX.
Rotunda states that the interest-bearing accounts offered by FTX US are likely unregistered securities. FTX US claims to be registered with FinCEN as a money transmitter — but it isn’t registered with Texas as a money transmitter. FTX Capital is registered with Texas as a broker-dealer, so that’s nice.
The FTX trading app lets US customers use FTX non-US despite FTX Trading’s claims not to serve US customers, and despite Rotunda correctly entering his address as Austin, Texas. Rotunda transferred ether to a wallet on FTX. Rotunda is pretty sure the FTX (US or not) yield program is an investment contract and not a registered one.
Rotunda also confirms that “The Enforcement Division is now investigating FTX Trading, FTX US, and their principals, including Sam Bankman-Fried.” [Affidavit, PDF]
The lawyers want their money
Bankruptcies are expensive. The professionals operating on behalf of Voyager Digital and Celsius Network have begun submitting their bills.
Kirkland & Ellis in Voyager: $2,994,615.46 for July 5 to July 31. [Fee statement, PDF]
Kirkland & Ellis in Celsius: $2,570,322.67 for July 13 to July 31 July — yes, that’s only two and a half weeks. [Fee statement, PDF]
Akin Gump in Celsius: $741,898.56 for July 13 to Aug. 31. [Fee statement, PDF]
Alvarez & Marsal in Celsius: $2,961,249.80 for July 14 to Aug. 31. [Fee statement, PDF]
Other good news for crypto finance
South Korean crypto investment firm Blockwater Technologies defaulted on a loan from TrueFi, a decentralized lending protocol. TrueFi issued a “notice of default” to Blockwater on October 6 after Blockwater missed a payment on a loan of 3.4 million BUSD. TrueFi said the debt represents about 2% of its total outstanding value. Blockworks’ loan was “restructured” in August, and they paid back 654,000 BUSD at that time. TrueFi wants “a potential court-supervised administrative proceeding” —i.e., putting Blockwater into something like bankruptcy. [TrueFi blog; Bloomberg; Twitter]
Do Kwon is the founder of Terraform Labs, whose UST “stablecoin” collapsed in May, took the rest of crypto down with it, and started us on writing this newsletter series. Kwon talked to Laura Shin for her Unchained podcast on October 14 from a totally legitimate unknown location where he definitely isn’t on the run. The podcast comes out on October 18. [Twitter; Unchained]
Grayscale runs crypto investment funds, most notably GBTC, which Amy has dissected at length. Grayscale is now creating Grayscale Digital Infrastructure Opportunities, to buy up used bitcoin mining rigs from distressed mining companies. These will be used for mining by Foundry Digital, which is also owned by Grayscale owner Digital Currency Group. This will be made available as a fabulous investment opportunity to “accredited investors such as hedge funds and family offices at a minimum investment of $25,000.” [Bloomberg]
The Department of Justice has issued a new report on crypto crime: “The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets.” This report was as required by President Biden’s March 2022 executive order on crypto. [DOJ, PDF]
Amy Castor 
