The court-appointed examiner, Shoba Pillay presented his final report on certain aspects of the operations of bankrupt crypto firm Celsius on January 31. The document was commissioned on September 29 and has 470 pages, not counting the 31 appendices.
Pillay is a former federal prosecutor and partner at the Jenner & Block law firm. It examined how clients’ cryptocurrencies were stored in Celsius, the accuracy of the company’s public statements, whether new deposits were used to pay existing clients, the state of the company’s mining business, and compliance with tax obligations.
“Celsius promoted itself as an altruistic organization”, wrote Pillay. Nevertheless, “Behind the scenes, Celsius conducted business in a completely different way than it presented to its clients in all key aspects.”
The deception started immediately, Pillay discovered, when the initial Celsius coin offering in March 2018 failed to raise the expected $50 million, rising to $32 million. The Celsius community was not informed of the shortfall. Nor did founder Alex Mashinsky follow through on his promise to buy the unsold tokens.
Additionally, Pillay documented how the company and Mashinsky personally exercised control over the price of the native token; CEL. That effort was not entirely successful, partly due to accounting deficiencies. As a result:
“Celsius did not earn enough return from its crypto asset deployments to fully fund its CEL buybacks. As a result, it began using client-deposited Bitcoin (BTC) and Ether (ETH) to fund its CEL purchases.”
In early 2021, as Bitcoin (BTC) and Ether (ETH) prices rose and customers withdrew more of the CEL cryptocurrency, Celsius “justified its use of customer deposits to fill this hole in its balance sheet on the grounds that it was not selling customer deposits, but rather placing them as collateral to borrow the necessary coins.”
1/ The Celsius bankruptcy examiner report is out.
My opinion is that @Mashinsky and other executives will go to jail for a long time.
Celsius propped $CELL token while Mashinsky dumped on retail.
Evidence shows willful deception to keep the ‘flywheel’ going
highlights
— Ram Ahluwalia, crypto CFA (@ramahluwalia) January 31, 2023
Pillay noted that coin deployment specialist Celsius described the actions as “very Ponzi” in internal communications. In addition, the company’s reward (interest) rates were not tied to the return generated by client assets, rather they were set to outbid competitors. There was no policy to determine rewards until July 2021.
Between 2018 and June 30, 2022, the company paid $1.36 billion more in rewards than revenue generated from customer assets.
In May 2022, as the price of the LUNA (LUNA) stablecoin plummeted, the company could no longer support the price of CEL. On June 13, he suspended withdrawals, but continued to pay rewards. At the time, the company was taking questionable steps. Pillay wrote:
“Between June 9-12, Celsius directly used new customer deposits to fund customer withdrawal requests.”
Celsius filed for bankruptcy on July 13.
The examiner found that Celsius’ mining business, created as a subsidiary in October 2020, was “generally up to date” on its invoices, with few exceptions. He summarized the outstanding debt:
“Celsius Mining’s unpaid bills related to utilities totaled $13,982,152. However, Celsius Mining’s mining hosts have prepaid balances totaling $46,809,756 that may be available to offset Celsius Mining’s obligations.”
In October, Celsius defaulted on its debt to mining contractor Core Scientific.
The fiscal outlook was less encouraging. Pillay found “significant deficiencies in compliance with tax obligations.” This might not be surprising, as Celsius had no tax professionals on its staff until June 2021. Even then, no systems had been put in place to pay use taxes and value-added taxes on time.
Pillay described widespread confusion about how taxes applicable to Celsius Mining were calculated or collected. As a result, Celsius Mining may have to face tax bills of more than USD 20 million in the US states of Texas, Pennsylvania and Georgia, where it has mining operations. That amount can be reduced by exemptions applied retrospectively.
Celsius Network, a UK based organisation, is facing potential VAT liabilities. He has reserved USD 3.7 million for his payment.
Celsius’ fiscal problems were solely due to a lack of systems, communications and sophistication, Pillay said:
“The Examiner did not discover any facts to suggest that Celsius or any of its business entities were willfully or knowingly in breach of their tax obligations.”
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