Caisse de depot business partner accused of pyramid fraud

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A Caisse de dôt’s business partner accused of pyramid fraud

Quebecers' woolen stocking had invested $150 million US in Celsius Network, which works in the field of cryptocurrency.

Celsius CEO Alex Mashinsky during broadcast on YouTube, May 22, 2022.

In a lawsuit filed in New York state on Thursday, a former Celsius Network business partner accuses the company of being a “fraudulent Ponzi scheme” and putting his clients' funds at risk with his risky practices.

The claimant, Jason Stone, is the CEO of KeyFi, an investment firm operating in the crypto world. In the lawsuit, he claims that his company managed, between August 2020 and March 2021, the equivalent of billions of dollars on behalf of Celsius. To accomplish this, KeyFi integrated the operations of Celsius and formed a subsidiary named Celsius KeyFi.

Celsius acts as a sort of bank in the crypto world. Its clients can deposit cryptoassets there and get a return on their deposits. They can also borrow cryptoassets or cash by placing cryptoassets with Celsius as collateral.

Even if such large amounts were involved, Mr. Stone alleges that no formal agreement had been reached between Celsius and KeyFi, the two companies having instead agreed on a handshake.

In the lawsuit, Mr. Stone claims he quickly saw disorganization, mismanagement and fraud at Celsius and deemed the company's business practices so corrupt that he quit. in March 2021. He is suing the company since he considers that Celsius did not pay him the profits owed to him.

He alleges that he discovered that Celsius had not put implemented basic security controls to protect the billions of dollars in funds entrusted to it by its clients.

Mr. Stone adds that he believes Celsius' practices have harmed the hundreds of thousands of people who use [the platform] and led to the company's current situation.

Recall that following a collapse in the crypto market, Celsius announced on June 12 that it had suspended withdrawals on its platform. Since then, the company has been silent and its customers no longer have access to the cryptoassets they have entrusted to it.

Jason Stone says Celsius' business model is to use deposits from its new clients to pay returns to its custodians. He alleges that Celsius began offering returns of more than 10% on deposits in February 2021, hoping to attract new customers to weather a liquidity crunch.

As a result, while Celsius continued to portray itself as a transparent and well-capitalized company, it had in truth become a fraudulent Ponzi scheme, the lawsuit reads.

A Ponzi scheme involves finding new investors and using their funds to compensate investors who have come on board earlier. This type of pyramid scheme is considered fraudulent.

Jason Stone also alleges that Celsius used customer deposits to manipulate the value of CEL, a cryptocurrency created by Celsius. The company encourages its customers to use CEL by offering more attractive interest rates if they accept that Celsius pays them their profits in CEL.

According to the estimate of Mr. Stone, Celsius and his managers have little experience in crypto-asset trading and investing, despite the colossal sums entrusted to him by his clients. Shortly before pausing withdrawals, Celsius said it was managing some US$12 billion in cryptoassets for its clients.

Stone says Celsius' lack of experience left the company with between US$100m and US$200m of a hole in its balance sheet when he left in March 2021.

In October 2021, the Caisse de dépôt et placement du Québec (CDPQ) announced that it had participated in a financing round of US$400 million at Celsius, in partnership with a firm private investment.

The Caisse has never publicly disclosed the amount it has invested in it, but a Radio-Canada investigation revealed at the end of May that this amount was amounted to US$150 million.

Joined by Radio-Canada, CDPQ would not comment on the lawsuit against Celsius, but a spokesperson assured that the Caisse continues to monitor the situation closely.

A Celsius representative did not respond to our questions.

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