The Celsius Saga – Users were Doxed & Scammed

The Celsius Bankruptcy Saga Continues: Latest Updates

The Celsius case had a lot of updates last week. I had the chance to attend the zoom hearing on October 7.

Insider Withdrawals and Clawbacks

Insider Withdrawals. The first words from the judge’s lips referenced the insider withdrawals. Ex-CEO Alex Mashinsky and ex-CSO Daniel Leon pulled their holdings from their custody accounts in May, shortly before the company suspended all customer withdrawals. In Bankruptcy cases, there is a presumption of insolvency where insider withdrawals in the past year, and everyone’s withdrawals in the past 90 days prior to the bankruptcy filing can be clawed back.

@jamsalad tweeted that during those 90 days, there were 348,193 withdrawals belonging to 106,379 names, totaling $4.3B.

  • 491 names withdrew $1mm +
  • 6,742 names withdrew $100,00 +
  • The top name withdrew $56 million.

From April 14 – May 8, it was business as usual, with around $33M withdrawn each day, but then it really started to ramp up,

  • May 9 had 78M,
  • May 10, $111M,
  • May 12, $481M

Celsius insider, Nuke Goldstein, who allegedly withdrew at least $11.8m during the clawback period, took to twitter to explain that the withdrawal numbers are deceptive, because it was actually him transferring from Earn to Custody, or vice versa, and it looks like a withdrawal.

Tiffany Fong received a text message from an anon insider who said Alex didn’t take a single withdrawal from his primary account until May 15, 2022, at which point he began draining it. He has nothing left in Celsius other than a bit of CEL tokens. So much for all his statements that he too is a creditor, he represented that he left his money there. The informer said to Tiffany:

I’m just trying to show how disgusting these people are at the end of the day. I had about $200K stuck on there, that was all of my savings in the past five years – it was meant for a house, my kids education, retirement. Now it’s pissed at the wind in the hands of these monsters.

Doxxed Users. Celsius owes 500,000 creditors nearly $5billion, and published a 14 thousand page report with each of its users names and wallet addresses. Celsius did object to this disclosure, but the bankruptcy court requires this information to determine a fair claim. Several users pleaded with the court not to publish full names. At first the court wanted a full name, email, wallet address, home address. Ultimately, it was agreed to just publish names and wallets.

Turns out a lot of prominent Bitcoiners didn’t follow their own advice.

Independent Examiner Appointed

Independent Examiner. The Judge recently appointed Shoba Pillay as the independent Examiner, who will make a report for the Dept. of Justice. She will prepare an interim report of her findings in the next few weeks. She previously worked as an Assistant US Attorney in the Northern District of Illinois for over 11 years. She took 18 federal criminal trials to verdict, argued nine appeals, and chaired complex investigations and jury trials. She has investigated and prosecuted dozens of cyber and dark web marketplace matters with digital currency components including chain analysis and wallet seizures. She’s experienced at interviewing witnesses, and victims, within the cyber and crypto community and has a strong knowledge of the digital asset industry. She was well spoken in today’s hearing and inspired confidence (at least for me) that she will see some justice prevail.

Custody vs. Earn Accounts: A Crucial Distinction

The ToS distinguishes between the people who were in the Earn program (who were getting that sweet ponzi yield), and those who just used Celsius as a deposit account, but were not getting the yield. The UCC has been arguing that Custody account holders are supposed to get their money back before the Earn holders because the title to their assets was not given to Celsius. The judge, the lawyers, the Trustee, and the Examiner have been hesitant to agree to any withdrawals. They were waiting for the account records that were disclosed last week, and then both the Unsecured Creditors Committee and the Trustee will prepare a report.

Concerns Over Commingling of Funds

Cam Crews spoke up at the hearing, he is representing himself – he did significant research and found the funds that were earmarked for custody or earn were entirely commingled. Funds were deposited into the same wallet, then transferred offline.

Tax Implications and Title Transfer Issues

The deposits going in, even for custody holders, were being used to cover the yield payments to the people in the earn program. He raised a substantial issue around the title. When Celsius updated its ToS in 2021, they didn’t require an affirmative assent – like a click box – from the users, which has become an industry standard. Also, they may have sneakily changed the wording so that the title to the earn assets was in Celsius’s name, but from a tax perspective, that’s not actually how they treated the assets. Cam argued that the title transfer is considered a disposal of assets for US tax laws, but in the tax forms Celsius encouraged users that they could defer their taxes by banking with Celsius. He filed a report with exhibits depicting Celsius’s use of the term, “your coins” long after the deceptive change to the ToS that actually made it their coins. (See Docket 914).

He shared this video on his twitter which makes it seem like Daniel Leon considered the yield was actually in lieu of a marketing budget.

Bellwether Trial and Restructuring Plans

Celsius is asking for a Bellweather Trial. This will be a sample trial that gives everyone involved a sense of what the future holds. It indicates trends in litigation and can help plaintiffs and defendants determine how best to proceed. It usually includes a smaller subset of a large group of plaintiffs. The verdict issued in a bellwether trial is not binding. The Committee for the unsecured creditors supports the bellweather trial and would like to see the bellweathers litigate the case. Seems like an expensive charade to me.

Some notable bellweather trials include one against roundup, where the bellwether jury awarded $289 million – which led Monstanto to settle the case without taking the bigger one to court. Similarly, Bayer got a $80 million loss in a bellweather, so settled the larger case for 6.9 billion, with 45,000 plaintiffs.

Simon Dixon’s Restructuring Proposal

Simon Dixon has partnered with Salt Lending to create a restructuring plan that would comply with regulators and try to make the community whole. There seems to be a consensus that the creditors do not want their assets sold off by auction. The plans need to be agreed upon by all major vested parties and the judge, so the regulatory compliance matters are extremely important to creating a viable plan.

Leaked Call and Regulatory Concerns

Celsius had an internal call hosted by Nuke Goldstein, that got leaked. Nuke was discussing a preposterous idea of where they were talking about wrapping the firm’s debt into tokens. For a company that’s already being investigated by several state securities offices, this plan is absolutely braindead as the debt securities would need to be registered with the SEC similar to an IPO before they could be distributed to retail investors, and they could only be listed on a national securities exchange, none of which currently sell crypto tokens. For this reason, the Court is planning to move forward with an auction later this month.

Simon Dixon responded with a tweet thread outlining the vast regulatory challenges with that ridiculous plan, and stating he could only get behind it if Celsius’s lawyers can publish a legal opinion that the IOU token is not a security.

State Regulators’ Involvement

There are a number of state regulators at the table, including Vermont, Texas, Wisconsin, and now Washington has joined. Reuters reported there are over 40 states with open investigations.

Asset Sales and Challenges

Sale of Stablecoins. Celsius is attempting to sell at least $23MM worth of stablecoins are scheduled to go up for auction on Nov 1, 2022. There will be a bidding process similar to what just happened with Voyager, but for the other assets, it’s still open for Simon Dixon, or anyone else to put forward a viable plan. Several states and the examiner have entered motions stating that this is premature and there needs to be more time and disclosure to understand who has the best claims to the proceeds. Should be denied until the Examiner report is filed. Just not ready to release assets.

Key Dates and Next Steps

  • Initial Bid deadline for retail platform assets – November 1, 2022
  • Final Bid deadline for retail platform assets – November 15, 2022
  • Auction (if necessary) for retail platform assets – Nov 18, 2022
  • Sale hearing for retail platform assets – Nov 28, 2022

Filing Your Claim

If you were invested with Celsius, you are expected to review the 14 thousand page disclosure of all customers, and check if they have the correct balance on file for you. If so, you don’t need to file anything, but if there is a discrepancy, you need to notify the court. The date and procedures for this “bar date” has not yet been approved or disclosed, but it will be emailed to the email address of each customer when it’s ready.

Celsius’s Ongoing Litigation

Not only has Celsius sued former money manager Jason Stone, its former bank, Prime Trust, and last week it’s also sued its mining provider, Core Scientific, for allegedly violating the terms of their agreement and the bankruptcy rules. Celsius currently owes Core Scientific $5.4 million, so Core Scientific stopped services, yet Celsius is demanding they be placed in civil contempt. Core Scientific has stopped shipping any further machines and has passed on the electricity charges that their agreement forbade. Core Scientific has also allegedly failed to deploy mining devices on schedule.

Alex’s wife. Krissy Mashinsky wished Alex a Happy Birthday yesterday, I can’t imagine they have much to celebrate this year. Might be his last free one.

She’s also mocking the creditors by selling this shirt that says “unbankrupt yourself” on her website.

I sincerely hope people get something back from this case.

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