Scenes from a Celsius bankruptcy report

A court-ordered examiner’s report on bankrupt crypto lender Celsius Network has just dropped and, of its several references to “Ponzi scheme”, this one is probably the pick:

On January 19, 2021, Mr [Dean] Tappen stated in an internal communication that his title at Celsius should be “Ponzi Consultant.”

Tappen was Coin Deployment Specialist at Celsius, reporting to its ebullient founder Alex Mashinsky. He told the examiner that the Ponzi consultant thing was a “poor joke” during a late-night conversation, “and that he had no concerns that Celsius was operating as a Ponzi scheme,” which is a perspective.

Another perspective, set out in detail by the report, is that Celsius was using investor and customer funds to prop up the price of its native token, known as CEL, while Mashinsky and other employees were quietly selling.

Celsius “abandoned its promise of transparency from its start”, writes former federal prosecutor Shoba Pillay, who was appointed as an independent examiner in September by the court overseeing Celsius’s bankruptcy case:

Initially, in 2018 and 2019, when the crypto markets were in decline, Celsius bought CEL, as it advertised it would, to pay rewards. During this time period, the price of CEL remained well below the ICO price of $0.20. But starting in 2020, Celsius decided to substantially expand its purchases of CEL for the purpose of increasing CEL’s price. Instead of buying CEL when it needed to pay rewards, Celsius began timing its purchases so that they would prop up CEL’s price by creating activity in the market. Celsius also began placing “resting” orders to buy CEL, which were triggered if the price of CEL dipped below a set amount. Celsius also began selling CEL in private over-the-counter (OTC) transactions, while making offsetting purchases of CEL in public markets where it believed its purchases would impact the trading price. Internally, Celsius referred to this new strategy as its “OTC Flywheel.”

In regular online appearances, Mashinsky often talked up CEL as a measure of Celsius’s corporate worth rather than just its Disney dollar. The below illustration is how the lender’s “self-sustaining flywheel” was explained in the CEL white paper.

The secret ingredient was other people’s money. Celsius spent at least $558mn buying CEL on the market, the report finds.

From when Celsius began its CEL buying binge in mid-March 2020 to June 2021, the token rose by 14,751 per cent.

Internally, Celsius’s Head of Trading Desk recognized that Celsius was in fact cranking up the flywheel. He wrote to other employees, including Celsius’s then-Chief Financial Officer: “Just to clarify between us three: The last 3-4 months we bought always more CEL than what we pay as interest per week but we did not buy it for the interest payments, that is just what we told the community.” After a round of CEL purchases in September 2020, the same Celsius employees congratulated themselves on “our good work” resulting in “people thinking [the price of CEL] is going to the moon haha.”

😐

Celsius filed for Chapter 11 protection in July having disappeared into a $1.2bn balance sheet hole. The report illustrates how insolvency could’ve been recognised much earlier:

And shows the extent to which CEL was the balance sheet:

Even though CEL tokens were almost entirely useless . . . 

Celsius employees routinely discussed that CEL was “worthless,” stating that its price “should be 0,” and that Celsius should “assume CEL is $0 since we cannot liquidate our current CEL position,” and questioning whether any party (other than Celsius itself) was purchasing CEL.

Note: almost entirely useless.

The increasing price of CEL benefited Celsius’s insiders who held most of the CEL following the ICO and then made millions of dollars selling a substantial portion of their CEL tokens. Between 2018 and the Petition Date, Mr. Mashinsky sold at least 25 million CEL tokens, realizing at least $68.7 million on these sales. S. Daniel Leon, also a founder of Celsius, sold at least 2.6 million CEL tokens for at least $9.74 million.

Celsius “often sought to protect CEL from price drops that it attributed to Mr. Mashinsky’s sales”, using a plunge protection mechanism that would buy back the entire overhang. The ex CFO quoted here is Rod Bolger:

These trades caused Celsius’s former Chief Financial Officer to write “[w]e are talking about becoming a regulated entity and we are doing something possibly illegal and definitely not compliant.” As one employee noted in an internal Slack communication: “if anyone ever found out our position and how much our founders took in USD could be a very very bad look . . . We are using users USDC to pay for employees worthless CEL . . . All because the company is the one inflating the price to get the valuations to be able to sell back to the company.”

But Celsius still wasn’t earning enough yield on pledged assets to fund its CEL buybacks, so began using customer-deposited bitcoin and ether. It wasn’t keeping track adequately of which coins it was short, the report alleges, so the crypto crash of early 2021 left it needing to buy $300mn in the market.

As for the P word in its purest definition, the report finds that “between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests.”

Otherwise, it’s one step removed:

Celsius recognized that it should not use customer assets to purchase the coins necessary to cover liabilities to other customers. But 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. Celsius also used the proceeds of these borrowings to continue to purchase CEL. In April 2022, Celsius’s Coin Deployment Specialist described Celsius’s practice of “using customer stable coins” and “growing short in customer coins” to buy CEL as “very ponzi like.” A few weeks later when Celsius made another push to prop up the price of CEL, Celsius’s former Vice President of Treasury asked where the cash was coming from to make the CEL purchases and Celsius’s Coin Deployment Specialist replied, “users like always.” This same employee explained that at the time he made this statement, Celsius had “negative equity” and therefore necessarily was using customer funds when it made these purchases.

“On a stand-alone basis [Celsius] has been insolvent since inception,” the report finds.

It also alleges that Celsius tried to cover its tracks. Chief risk officer Rodney Sunada-Wong “raised the prospect” of editing Mashinsky’s YouTube broadcasts to remove inaccuracies. Mashinsky rejected this idea, saying anything that interfered with his message “would create ‘FUD’”. Internal documents “suggest that Celsius employees hoped viewers would not notice the discrepancies that had been edited from the videos”.

A few other things of note among the report’s 476 pages include:

• Celsius accounts were done on QuickBooks, “an accounting software package that is geared mainly toward small and medium-sized businesses”, and were split between 15 entities. “Celsius began manually preparing consolidated financial statements in the second quarter of 2021.”

• “Although Celsius hired an individual for [an] audit role in August 2021, Celsius’s executive team delayed his proposals to implement a formal internal audit process”.

• Also in 2021 Celsius management delivered two internal reports, a Waterfall report and a Freeze report. Both gave only a “directional” view of assets and liabilities, presenting “an inaccurate and overly optimistic view of Celsius’s financial performance”.

• “One Celsius internal document memorialized the view that Celsius continued to rely on ‘Absolutely pathetic systems of record – We do not do a good job of knowing anything about how our assets are actually performing. Our systems of record are horrible, and cause the team to operate in a manner . . . [that] can cause us to take on excessive risk.’”

• Mashinsky rejected calls from the company Treasury to lower reward rates so they didn’t exceed yields. He also rejected a call to stop customers collateralising loans with CEL. “When Celsius’s new Chief Financial Officer pressed these issues, Mr. Mashinsky told him to ‘tell your team to stay in their lane’ and that he did not need help with marketing, as he would ‘bring in a few billion just like I brought in the first 20B.’”

• He then hiked reward rates.

The most succinct tl;dr can be found on page 331:

Celsius’s problems did not start in 2022. Rather, serious problems dated back to at least 2020, after Celsius started using customer assets to fund operational expenses and rewards. To fund operations, Celsius posted customer deposits as collateral to take out loans in stablecoin. And to fund CEL buybacks for rewards, Celsius exchanged BTC and ETH for CEL on the secondary market. But prior to the creation of the Freeze Report, Celsius did not adequately track or reconcile customer assets and liabilities on a coin-bycoin basis. Celsius was therefore caught off guard when, in early 2021, it recognized a shortfall in BTC and ETH (which it had been using to fund those CEL buybacks). Because the shortfall was in volatile, rapidly-appreciating crypto assets, it created directional risk. In other words, even if the number of BTC and ETH coins needed to bridge the gap did not change, the liability measured in dollars could grow exponentially, into the hundreds of millions of dollars..

Mashinsky agreed to the examiner’s review after reaching a deal that scaled back proposed investigations by the DOJ’s bankruptcy monitor and state securities regulators. He has repeatedly denied all allegations of fraud.

Further reading:
FT.com/Celsius Network