US agency report | Celsius network connected to a Ponzi scheme

By injecting 200 million into the Celsius network, the Caisse de depot et placement du Québec (CDPQ) was betting on a model akin to a Ponzi scam, an American government agency suggests in a scathing report on this still-tormented cryptobank.

Posted at 2:48pm

Julian Arsenal

Julian Arsenal
The press

The document, authored by Vermont’s financial regulator and filed Wednesday in a New York bankruptcy court, also indicates that Celsius Network faced bankruptcy back in 2019. It raises new questions about the due diligence carried out by the Caisse ahead of its investment, in autumn 2021.

In particular, attorney Ethan McLaughlin writes that the company admitted to Vermont investigators that the crypto bank “never generated enough revenue to support the returns paid to investors.”

“This shows a high level of mismanagement and also suggests that returns were likely to have been paid, at least at times, with the fortunes of new depositors,” the report said.

The term “Ponzi scheme” is not used by the lawyer, but his observations correspond exactly to his definition, points out Saidatou Dicko, professor in the ESG UQAM accounting department and specialist in governance.

Revenue wasn’t enough to generate sufficient profits to pay returns, she says. It’s a trap for investors.

Saidatou Dicko, Professor in the Accounting Department of ESG UQAM

A Ponzi scheme consists of using money inflows from new investors to pay fake returns to other investors or to compensate those who want their money back.

Celsius Network, like other crypto banks, has pooled cryptocurrency deposits. It offered depositors loans and interest rates that could sometimes reach 17%. This is much higher than what traditional banks offer.

Asked by The press, Wednesday, the Quebec manager of public and parastatal pension and insurance plans declined to comment on the contents of the report. The document does not specify whether the $200 million from the CDPQ was used to pay returns to Celsius Network depositors.

This isn’t the first time the crypto bank has been associated with a Ponzi scheme. A former shareholder made a corresponding allegation in a lawsuit against the company last July. However, the allegation was not as documented as the Vermont Financial Regulator’s finding.

Several criticisms

The government agency is not kind to Celsius Network, which turned to US bankruptcy law on July 13, a month after 1.7 million depositors’ withdrawals were frozen due to a liquidity crisis.

“Celsius, through its CEO Alex Mashinsky, has made misleading statements to investors about the company’s financial health and its compliance with securities laws. This likely prompted individuals to invest in Celsius. »

The document notes that excluding the value of Celsius Network’s cryptocurrency — the CEL token — its liabilities would have exceeded its assets as of February 28, 2019. According to Chief Financial Officer Chris Ferraro, the crypto bank was on track for bankruptcy by 2020. Vermont claims the company also manipulated the price of its virtual currency.

This is in contrast to the public version of Celsius Network, which attributed its collapse to the cryptocurrency collapse that began earlier in the year.

“Celsius and its management hid their massive losses, wealth gap and deteriorating financial situation from investors,” she said.e McLaughlin.

Since the beginning of the year, Vermont has issued more than one warning to its citizens about the risks associated with the Celsius Network. The US state is asking the bankruptcy court to appoint an auditor with “wide powers” to investigate the company.

Unanswered questions

With his mea culpa during the presentation of CDPQ’s half-year results on August 17, President and Chief Executive Officer Charles Emond defended the reviews conducted with Celsius Network.

The manager had claimed that the services had been engaged by “top notch” companies.


PHOTO MARCO CAMPANOZZI, PRESS ARCHIVE

Charles Emond, President and CEO of the Caisse de depot et Placement du Québec

“On the contrary, there were no shortcuts,” said Mr. Emond. The team exercised caution. The reviews were comprehensive, involving several experts and consultants. »

It’s hard to believe there weren’t any red lights, says Mme Dicko.

“A company that does not generate enough income and profits, but pays returns, I think you should have looked at the finances,” explains the expert. The question is whether the CDPQ consulted all the documents before investing. »

The Vermont report also reveals that 40 states are currently investigating Celsius’s business practices.

Learn more

  • 3 billion
    Value attributed to Celsius Network when CDPQ invested in it.

    Source: Caisse de depot et Placement du Quebec

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