Celsius investors owed judge $4.7 billion to collect life savings

Celsius Network, once a titan in the crypto lending world, is in bankruptcy proceedings and facing allegations that it ran a Ponzi scheme by paying first depositors with money it obtained from new users. Some of the 1.7 million customers trapped in the alleged fraud are now directly begging the Southern District of New York to help them get their money back.

Christian Ostheimera 37-year-old man living in Connecticut, wrote in a letter included in the exhibits that he had trusted Celsius with his retirement savings and that he had lost over $30,000, causing him to led to “insurmountable tax complications”.

“It is in your hands, honorable judge, to make this case a different case if the lawyers, lawyers, big companies and managers are not paid first, but the little man, the mother and the pop, the college graduate, grandma and grandpa — all those many little unsecured creditors — so they’re not as usual at the end of the chain where they lose everything,” Ostheimer writes.

The question of who will be repaid first – should that day ever come – weighs heavily on the bankruptcy proceedings.

At its peak in October 2021, CEO Alex Mashinsky said the the crypto lender had $25 billion in assets under management. Now Celsius has gone down to $167 million “cash on hand”, which it says will provide “sufficient liquidity” to support operations during the restructuring process. Celsius owes its users approximately $4.7 billion, according to his bankruptcy filing.

This filing also shows that Celsius has more than 100,000 creditors, some of whom lent money to the platform without any collateral to back up the arrangement. Its list of top 50 unsecured creditors includes Sam Bankman-Fried’s trading company, Alameda Research, as well as a Cayman Islands-based investment firm. These creditors are likely to get their money first, leaving smaller retail investors to pick up the slack.

Unlike the traditional banking system, which typically insures customer deposits, there is no formal consumer protection in place to protect user funds when things go wrong.

Celsius specifies in its terms and conditions that any digital asset transferred to the platform constitutes a loan from the user to Celsius. Because there was no collateral Celsius put in place, customer funds were essentially just unsecured loans to the platform.

Also in the fine print of Celsius’s terms and conditions is a warning that in the event of bankruptcy, “any eligible digital asset used in the Earn Service or as collateral under the Borrow Service may not be recoverable” and that customers “may not have any legal remedy or right in connection with Celsius’ obligations.” The disclosure reads like an attempt at blanket immunity from wrongdoing, should things ever go wrong.

July 19, Celsius has published a document detailing the next steps for the customers. In it, they say their Chapter 11 bankruptcy plan “will provide customers with the option, at the customer’s option, to get money back with a discount or go ‘crypto long,’ but it’s not. clear if customers will ever see their money again.

The whole process reveals just how much regulation of crypto in the United States goes through enforcement.

The Securities and Exchange Commission has effectively become one of the top industry regulators in the country, including eliminating Ponzi and pyramid schemes, and it looks like a precedent will be set in US bankruptcy court in the coming months as lawmakers deliberate on formal legislation on Capitol Hill.

Investor calls

In hundreds of letters officially submitted to court, retail investors are begging to be put on the front line to get their money back.

Flori Ohm, a single mother of two college-going daughters, says her family has been “severely impacted both financially and mentally” by the bankruptcy that left her funds stranded on the platform. Ohm, who is also supportive of her parents, says she can’t sleep or concentrate on work.

“I fight hard [to make a] live,” she wrote.

Jeanne Y Savelle, who describes herself as a “little old retired woman” living on a fixed income, says she turned to Celsius looking for a way to top up her monthly Social Security check to stretch her dollar amid record levels of inflation.

“I bought my small amount of crypto hoping to earn enough to get me through a few years, kind of a safety net,” Savelle said. “Yes, I know, buyer beware, but I agree there was way too much deception.”

Others have lost everything.

California resident Stephen Bralver says he has less than $1,000 left in his Wells Fargo checking account – now his only source of funds to support his family since Celsius suspended all withdrawals.

“There is absolutely no way I can continue to supply without having access to my assets at Celsius,” he writes to Judge Martin Glennwho is overseeing Celsius’ bankruptcy proceedings in New York.

“This is an EMERGENCY, simply to keep a roof over my family and food on their table,” Bralver’s letter continues.

Sean Moran from Dublin writes that he lost the family farm in Ireland and his family is homeless.

“I can’t believe they lied to us on the weekly AMA about not trusting the banks when all along we’re wolves in sheep’s clothing, false promises and misleading information .” He continues: “I am mentally unstable. My family is devastated by my decision to trust Celsius and promise them a better future.”

Beyond the financial devastation depicted in each of these letters, a recurring theme revolves around a sense of betrayal over the breach of trust between Celsius CEO Alex Mashinsky and his clients.

Three weeks after Celsius halted all withdrawals due to “extreme market conditions” – and days before the crypto lender finally filed for bankruptcy – the platform was still advertising in bulk bold print on its website, annual returns of nearly 19%, which paid out weekly.

“Transfer your crypto to Celsius and you could earn up to 18.63% APY in minutes,” the website read on July 3.

Ralphael DiCicco, who disclosed holdings of around $15,557 in crypto assets on Celsius, said he was duped by marketing.

“I believed in all the ads, social media and publicity that showed Celsius was a high return, low risk savings account. We were assured that our funds are safer at Celsius than at a bank,” writes DiCicco.

“That money is pretty much my savings…I hope you find it in the interest of all parties involved to pay back small investors first…before any restructuring,” DiCicco continued.

Travis Rodgers from Phoenix say that he was told in numerous phone calls to Celsius Network just two days before depositors’ accounts were locked that there was no danger to clients’ assets and no likelihood of bankruptcy. Rodgers says he recorded several of those calls. He claims his Celsius holdings total $40,000 across eleven cryptocurrencies, including Cardano’s ADA token.

The weekly “ask me anything” events hosted by Mashinsky on YouTube are mentioned in several letters, including one sent by Stephen Richardson, which details the many ways he thinks Mashinsky tricked the public in order to lure new customers into the program.

Richardson says he’s watched every Friday AMA since signing up.

“Alex would talk about how Celsius is safer than banks because they’re not supposed to remortgage and use fractional-reserve loans like banks do,” Richardson writes. “I currently have six digits of crypto locked into my Celsius account that cannot be withdrawn, despite claims from Alex just hours before the close of withdrawals that no one has any problem withdrawing from Celsius and that anything you hear otherwise is just ‘fud’.”

Some have even contemplated suicide if they cannot recover their funds.

Katie Davis is appealing to Judge Glenn over the $138,000 she and her husband blocked on the Celsius platform.

“The idea of ​​losing that amount of money is horrible,” Davis writes.

“If I don’t get this back, I will end my life because the loss will have a significant impact on my family and me,” she shares.

Mashinsky did not immediately respond to CNBC’s request for comment.

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