Celsius Network, the crypto lender that froze assets last month, used customer funds to manipulate the price of its proprietary token and lost hundreds of millions of dollars by failing to hedge risk, a former money manager for the company said in a lawsuit.
A former investment manager at Celsius Network sued the crypto lender on Thursday, saying it used customer deposits to rig the price of its own crypto token and failed to properly hedge risk, causing it to freeze customer assets.
The complaint said Celsius ran a Ponzi scheme to benefit itself through “gross mismanagement of customer deposits,” and defrauded the plaintiff KeyFi Inc, run by the former manager Jason Stone, into providing services worth millions of dollars and refusing to pay for them.
Stone’s accusations follows Celsius’ June 12 decision to freeze withdrawals and transfers for its 1.7 million customers because of “extreme” market conditions.
Celsius promised retail customers outsized returns, sometimes as much as 19% annually. But Stone said Celsius struggled to pay investors because it failed to hedge investments, resulting in “severe” losses as the values of different coins fluctuated.
He also accused Celsius of logging some deposits onto its books on a U.S. dollar basis even if it paid customers with bitcoin or other tokens, causing a $100 million to $200 million hole that it “could not fully explain or resolve.”
According to Thursday’s complaint, Stone, largely working without a written agreement, generated $838 million of profit for Celsius and KeyFi before costs and overhead from August 2020 to March 2021, with KeyFi entitled to 20% of net profit.
Stone says he exited the relationship in March 2021 after it became clear that the hedging issues “could be financially ruinous” for Celsius and damage KeyFi’s reputation, but that Celsius has refused to recognize his resignation.
The case is KeyFi Inc v. Celsius Network Ltd et al, New York State Supreme Court, New York County. Celsius’s customers have been unable to access their funds since June 12. The company said on June 30 that it’s considering restructuring its debts.
Celsius, one of the biggest crypto lenders, has been struggling to raise funds in a fragile digital-assets market hit by tightening interest rates, liquidity and the collapse of the Terra blockchain last month.
The allegations come amid a credit crisis in cryptocurrency markets. Hedge fund Three Arrows Capital was ordered into liquidation last month, broker Voyager Digital Ltd. filed for bankruptcy this week and other firms offering high-yield products including Babel Finance and Vauld have suspended withdrawals.
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