State securities regulators seek more transparency in Celsius crypto bankruptcy

Illustration shows Celsius logo and representation of cryptocurrencies
Celsius logo and representation of cryptocurrencies are seen in this illustration taken, July 7, 2022. REUTERS/Dado Ruvic/Illustration
  • U.S. bankruptcy watchdog said an independent review would dispel customer "distrust" and "confusion"
  • At least 40 state securities regulators are investigating Celsius for potential violations

(Reuters) - State securities regulators from Texas, Vermont and Wisconsin on Wednesday pushed for greater transparency in the bankruptcy of cryptocurrency lender Celsius Network LLC, joining the U.S. Department of Justice's call for a court-appointed examiner to ensure that Celsius is providing creditors with accurate information.

The state regulators said they supported the appointment of an examiner in court filings in U.S. bankruptcy court in Manhattan, noting that they were particularly concerned about protecting retail investors who may have deposited college funds or retirement accounts with Celsius based on false promises.

New Jersey-based Celsius did not respond to a request for comment on Wednesday. The company filed for bankruptcy on July 13, following losses related to the collapse of major tokens TerraUSD and Luna in May.

The U.S. Trustee, the DOJ's bankruptcy watchdog, has argued that an examiner could provide an impartial review of Celsius' actions and finances, helping to dispel "widespread confusion" and "distrust" that has surrounded the crypto lender's bankruptcy.

The DOJ alleged that Celsius has not provided clear information about the type and value of the crypto it holds, where its assets are held, and its lending and investment activity.

In their filings, the states said that Celsius misled customers for months before filing for Chapter 11 protection.

For example, Celsius CEO Alex Mashinsky told customers "all funds are safe" in a May 11 tweet, when in fact Celsius had approximately $454 million in losses between May 2 and May 12, according to Vermont's filing. Mashinsky also told customers that regulators had given a "thumbs up" to Celsius' business model at a time when the company faced multiple investigations related to potential securities law violations, according to Vermont.

Texas made similar arguments in its filing, pointing out that Celsius froze customer accounts just five days after publishing a blog post saying it would have no problem honoring withdrawal requests.

At least 40 state securities regulators are investigating Celsius for potential unregistered securities activity, mismanagement, securities fraud, and market manipulation, according to the Texas and Vermont filings.

A group of equity holders opposed the DOJ's request for an examiner as too broad. The DOJ's current request would require the examiner to "investigate and report on nearly everything having to do with the debtors' business," a task that would cost tens of millions of dollars and consume the majority of Celsius' focus "for at least several months," the equity holders said on Wednesday.

Chief U.S. Bankruptcy Judge Martin Glenn is scheduled to consider the DOJ's request for an examiner at a hearing on Sept. 14.

The case is In re Celsius Network LLC, U.S. Bankruptcy Court for the Southern District of New York, No. 22-10964

For Celsius Network: Joshua Sussberg of Kirkland & Ellis

For the DOJ: Shara Claire Cornell of the U.S. Department of Justice

For Vermont: Jennifer Rood of the Vermont Department of Financial Regulation

For Texas: Layla Milligan of the Texas State Securities Board

Read more:

Crypto lender Celsius Network reveals $1.19 bln hole in bankruptcy filing

State securities regulators investigating Celsius accounts freeze

Crypto lender Celsius gets court sign-off to sell bitcoin, but not stocks or debt

Reporting by Dietrich Knauth

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