Trouble at Celsius seemed to have been brewing for years before the crypto lender filed for bankruptcy.
The cryptocurrency company has faced a number of internal blunders leading to its recent turmoil, according to former employees and internal documents reviewed by CNBC. Several employees painted a picture of risk, disorganization and alleged market manipulation.
“The biggest problem was the failure of risk management,” Timothy Cradle, Celsius’ former director of financial crime compliance, told CNBC. “I think Celsius had a good idea, they provided services that people really needed, but they didn’t manage risk very well.”
A month ago, a Hoboken, New Jersey-based company made headlines after it froze customer accounts, blaming “extreme market conditions.” As of June, the company has attracted 1.7 million customers and $11.8 billion in deposits. Celsius customers told CNBC they were drawn to the 17 percent yield the company offered on crypto deposits.
Behind the scenes, Celsius was lending that money to hedge funds and others willing to pay even higher returns. According to internal documents, he will also invest in other high-risk cryptocurrency projects. Celsius would later share this profit with the buyer. The model collapsed along with the price of cryptocurrencies, causing several companies to freeze assets and at least three to file for bankruptcy.
Cradle said he was part of a three-member compliance team between 2019 and 2021. This role required him to apply international financial laws to Celsius’ business. But resources were limited, he said.
“The compliance team was too small,” Cradle said. “Compliance was the center of the cost — basically we were sucking money and not getting it back. They didn’t want to spend on compliance.”
One of the company’s internal documents obtained by CNBC confirms this claim. When it comes to evaluating fraudulent cryptocurrency platforms, it states that “the Celsius platform lacks compliance officers as there are only 3 people on the Celsius platform.”
“Banks are not your friends”
Cradle said he was particularly disturbed by talk at Celsius’ 2019 Christmas party about a cryptocurrency created and used by Celsius called the “cel” token. The executives said they were “pumping the cel token” and “actively trading the token and increasing its price,” Cradle said.
“They weren’t shy about it. They traded the token entirely to manipulate the price,” Cradle said. “It came up in two very different conversations for two very different reasons.”
Celsius, CEO Alex Mashinsky and company lawyers did not respond to multiple requests for comment.
Celsius was sued Thursday by former investment manager Jason Stone as pressure continues to mount on the firm amid falling cryptocurrency prices. Stone claimed, among other things, that Celsius CEO Alex Mashinsky (above) “was able to get rich considerably”.
Piaras O Midhic | Sportsfile for Web Summit | Getty Images
Celsius was the largest holder of cel tokens. But according to blockchain data company Arkham, he was also a buyer. The firm estimates that Celsius has spent $350 million buying tokens from exchanges over the past three years, despite already having billions in its own treasury. At the same time, top managers were selling. According to Arkham, accounts linked to Alex Mashinsky were sold or “swapped” for approximately $40 million.
Cradle and other employees received a portion of their salary in cel tokens. A former HR official said it was a way to attract and retain talent. It also allowed them to share the financial potential of the company—similar to the attraction of capital in a fast-growing startup. The token began to rise in early 2020 and peaked at nearly $8 the following year. As of July, it was trading below $1.
The Celsius CEO has openly supported the token. He posted weekly updates on YouTube, often touting the benefits or “tokenomics” of the project. Mashinsky is also known to have criticized Wall Street banks. During public appearances, he often wore a black T-shirt with the slogan “Banks are not your friends.”
Another former Celsius employee, who asked not to be named, said that while Mashinsky encouraged ordinary investors to buy cryptocurrency, he was selling it behind the scenes.
According to a former employee, it wouldn’t take long for the price of the token to change because the volume was relatively small. According to a former employee, Mashinsky sold millions behind closed doors without any public information.
“The price of the target is easy to manipulate due to the low trading volume of the target. I’m sure, [Mashinsky] knows it,” the former employee said. “This is just an example of what he will do to publicly manipulate the price in his favor.”
The statements of the former employee echo the recent lawsuit filed by former investment manager Jason Stone. Stone alleges that Celsius artificially inflated the price of its own token and “actively used client funds to manipulate the crypto asset markets for its own interests.” The lawsuit also alleged that Celsius failed to hedge risks and engaged in activities that amounted to fraud.
Details in internal documents
Other internal documents shed light on some of the risks Celsius takes on client funds. Lenders such as Celsius and hedge funds have been able to achieve high returns by investing in “decentralized finance” or DeFi projects. Celsius has its own cryptocurrency and is looking to high returns to attract more borrowers. According to internal documents, Celsius has invested client funds in several DeFi projects. All were rated as medium or high risk.
On Wednesday, Vermont became the sixth state regulator to launch an investigation into Celsius and point to the investment strategy. The state’s Department of Financial Regulation said that Celsius “used client assets for a variety of risky and illiquid investments, trading and lending.”
“Celsius clients were not receiving critical information about their financial condition, investment activity, risk factors, and ability to repay their obligations to depositors and other creditors,” the Vermont regulator said in a statement.
Cradle also said he had seen evidence that the company was trading client funds without disclosing it. The Celsius CEO explicitly stated on Twitter that the company did not trade client funds.
Cradle said that based on his personal experience with the company’s risk appetite, he would not keep his money in Celsius.
Internal documents also show disorganization in several teams. One document shows policies written by a team without the knowledge of its head. In one case, a senior risk manager writes that he was “surprised” by a document written by another team abroad.
“He was probably surprised that the document even existed – that’s how things were at Celsius temperature. It’s the left hand that doesn’t know what the right hand is doing,” Cradle said. “This is just another example of mismanagement or some sort of sloppy management on the part of Celsius.”
One area where Cradle said Celsius lacked transparency was the number of accounts. While Celsius reported 1.7 million users, Cradle stated that the number was inflated.
“Probably around 300,000 because the number of fake accounts was so high and the management team wasn’t prepared to do anything to really stop people from doing it,” he said.
In addition to this alleged inconsistency, Mashinsky’s own Twitter messages show a contrast between the messages he relayed to clients and what went on behind the scenes.
the day before suspension of withdrawals, in response to a tweet questioning the financial condition of the company, Mashinsky wrote: “Do you know at least one person who has problems withdrawing funds from Celsius? Why spread FUD and misinformation,” referring to fear, uncertainty and doubt. The next day, June 12, customers were no longer allowed to withdraw funds from their accounts.
Public records indicate that Celsius may have been in financial trouble long before this.
Federal government data shows Celsius received a $281,502 Paycheck Protection Program loan in April 2020. The federal government provided these loans to businesses affected by the Covid pandemic.
“It surprised me a bit and I was curious if we were making a profit,” Cradle said.
The loan has been forgiven by the federal government, meaning that Celsius has complied with the requirements it needs to avoid repayment.
Risk taking also showed up in the recruitment process for Celsius employees. Nikki Goodstein, a former senior human resources officer, said she was not aware of any background checks at the company when she joined the company in May 2021.
She told CNBC that executives specifically told the HR director not to do a background check on Yaron Shalem, the new chief financial officer. November 2021 Shalem was arrested in Israel and charged with money laundering in connection with his previous company. Shalem did not respond to requests for comment.
CNBC also made an attempt to find out the status of the case, but it does not appear to be in the public domain in the Israeli judiciary. The chief human resources officer, who Goodstein said was ordered not to conduct background checks, did not respond to a CNBC request for comment.
Goodstein, who worked at public Fortune 500 companies before Celsius, said she was “surprised” that someone in a management position didn’t face background checks.
“It was definitely a gap in the process at the time,” she said. “Everyone was [upset] that his background wasn’t checked because then it wouldn’t cause such embarrassment in the company if it was the process we had – we all thought what the hell just happened?”
Cradle said he has no plans to return to the cryptocurrency industry after Celsius and work at another startup. Celsius intended to create a good product at a time when banks were paying near-zero interest on savings, he said.
“I think they were good people with bad planning—they didn’t hire at the right time, they didn’t hire at the right time, they didn’t scale with the growth of the company,” he said. “It was just a bunch of mistakes that ended very tragically.”
– Erica Carnevalli and Margaret Fleming contributed to this article.
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