By Amy Castor and David Gerard
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“Most of you guys weren’t around for Occupy Wall Street. I was. I was there marching. And so I know exactly what those people I marched with wanted: access to decentralized and permissionless perpetual futures with up to 100x leverage. We carry their legacy.”
Alex Mashinsky photographed outside court on Thursday, July 13
The Mashinsky Method: mycrimes.epub
Alex Mashinsky, the former CEO of bankrupt crypto investment company Celsius Network, was arrested at 7 a.m. on Thursday, July 13, in his New York home — one year to the day after Celsius filed for bankruptcy.
US prosecutors charged Mashinsky with seven counts, including securities fraud and manipulating the market for the CEL token. Roni Cohen-Pavon, Celsius’s former chief revenue officer and an Israeli citizen, was also charged — but avoided arrest by remaining abroad. [DOJ press release; Statement of facts, PDF; Indictment, PDF; Non-prosecution agreement, PDF]
At his arraignment in a Manhattan courtroom later on Thursday afternoon, Mashinsky pleaded not guilty to all charges. He was set free on a $40 million bond secured by his Manhattan home and a brokerage account at First Republic. [Doc 5, PDF]
The SEC and the CFTC filed civil suits against Mashinsky and Celsius, and the FTC filed against former Celsius executives Daniel Leon and Nuke Goldstein as well. [SEC press release; SEC complaint, PDF; SEC case docket; CFTC press release, CFTC complaint, PDF; CFTC case docket; FTC press release; FTC case summary; FTC complaint, PDF; FTC monetary judgment, PDF; FTC case docket]
Celsius settled with all three agencies by promising not to do the bad things again. Celsius has also agreed with the FTC to pay back $4.72 billion in customer funds. (This may just become another unsecured claim in the bankruptcy.)
The November 2022 interim report and the January 2023 final report of the bankruptcy examiner, Shoba Pillay, set out Celsius and Mashinsky’s lies, incompetence, and Ponzi schemes in detail. Those reports were the raw material for the indictment and the complaints.
The current filings don’t supply any new information that wasn’t in the examiner’s reports — but if you don’t want to read the several hundred pages of the reports, these documents are a quick précis of the greatest problems.
All four documents present the same basic facts. If the DOJ and the agencies can’t get Mashinsky for crimes of fraud, they’ll get him for commodities law violations, securities law violations, or consumer deception.
Mashinsky is alleged to have repeatedly lied about Celsius Earn and the CEL token, about Celsius’s loans to other companies, about the risks Celsius was taking with its investment strategies (such as DeFi and directional trading), and about the company’s financial health.
Mashinsky’s false statements were much to the consternation of Celsius’ own staff. One executive said to another: “I need your help in making sure he doesn’t continue saying wrong things. This has gotten us into trouble time and time again and it’s not healthy.”
Celsius Earn rewards, which promised yields up to 17% per year, were paid out from incoming customer funds over and above investment earnings — a Ponzi scheme. Earn was “basically using user balances to pay user rewards,” as one executive described it.
Celsius pumped the CEL token to increase the dollar value of its treasury, which was full of CEL tokens. This let Celsius claim sufficient assets in reserve to get loans it wouldn’t have been able to otherwise.
Mashinsky also did well selling his personal CEL. He made $42 million by dumping his pumped CEL holdings on retail investors. Cohen-Pavon made $3.6 million doing the same.
Multiple state securities regulators were literally telling us without prompting last September that they wanted Mashinsky’s backside in jail. So we’re slightly surprised none of the states joined in today — though New York is already suing Mashinsky. But we’re guessing that the three agencies and the DOJ simultaneously filing charges is sufficient overkill.
In one chat forum we’re in, small Celsius creditors were delighted to learn of Mashinsky’s arrest — hoping it would lead to him coughing up more of their money.
Alex had planned to share his genius investment secrets with the world in his magnum opus, The Mashinsky Method — but after Celsius imploded, Wiley pulled the book before it hit the shelves. Boooo! There must exist text for this book somewhere — at least an outline and sample chapters. We so want a copy.
Good, if bizarre, news for XRP
In January 2013, Ripple launched its XRP token. In December 2020, the SEC sued Ripple and its executives Brad Garlinghouse and Christian Larsen, claiming XRP was a security. Ripple, Garlinghouse, and Larsen have been battling this out in court since.
XRP was ostensibly created for cross-border payments. Ripple had many remittance partnerships — every one of which it paid the other companies to engage in. But mostly, XRP was traded in the hopes that number go up.
Ripple sold a lot of XRP to institutional investors — hedge funds and venture capitalists — and the money went right back into Ripple’s business. Ripple also sold XRP by programmatic sales onto exchanges and paid its employees in XRP.
After three and a half years of legal wrangling, both parties asked the court to just rule on the merits.
On Thursday, Judge Analisa Torres ruled that XRP was an unregistered offering of securities when Ripple sold it to the sophisticated investors — but that it was not a securities offering when Ripple anonymously dumped it directly on exchanges with no disclosure. [Ruling, PDF]
The definition of “security” includes a broad range of investments. An “investment contract” is a security, and to determine if something is an investment contract, you apply the Howey test: whether it’s “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
Ripple argued that XRP is not a security under the Howey test because it doesn’t have an actual contract attached to it — they maintained that this was one of the “essential ingredients.”
Judge Torres disagreed with that claim. She said that an investment contract does not, in fact, require an actual contract. However, she also ruled that in the absence of a contract, XRP did not qualify as an investment contract when Ripple programmatically sold it on exchanges.
The judge’s reasoning was that Ripple’s institutional investors received information on the investment. But retail buyers who bought in Ripple’s programmatic sales of XRP did not. So how could Ripple have represented XRP to these buyers as a security? They must not have been buying it in the hope of making money from Ripple’s efforts in particular.
XRP fans threw their hats in the air at the ruling. The price of XRP went up 75% on the news. Coinbase, Kraken, Crypto.com and Bitstamp are re-listing XRP in the US. [Fortune]
This is despite the judge not ruling at all on secondary market sales of XRP — when a non-Ripple XRP holder sells the XRP to someone else, such as on an exchange.
Matt Levine from Bloomberg thinks the ruling is nuts. He makes an analogy with stock in Meta. When you buy Meta stock on an exchange, you are not buying it from Meta, and Meta does not get the money. But it’s still a security!
Levine notes that the judge’s ruling means that institutional investors have protection — but retail investors do not. This is completely backwards from the intent of the Securities Act and a century of precedent. [Bloomberg]
Ann Lipton, a law professor at Tulane University, says “the holding makes no sense.” Lipton goes through everything that’s weird about the decision and notes that it contradicts other tests of whether assets are securities. [Typepad]
Preston Byrne thinks the finding will be reversed on appeal — but in the meantime, this is good for the crypto business. Byrne hopes Congress will come up with special rules for tokens. [Preston Byrne]
This is a summary judgment from a district court judge. It isn’t a firm precedent for very many other courts — but other judges may choose to take it as indicative.
The SEC is going to appeal this for sure. Even Ripple may appeal the bit that went against them.
A trial will still be happening on Brad Garlinghouse and Chris Larsen’s XRP sales and promotions.
We’re all trying to find the guys who did this
After making repeated public accusations on Twitter, Gemini has finally sued Digital Currency Group, and its CEO Barry Silbert personally, for fraud over their failure to return money to customers of the Gemini Earn program. [Daily Beast; complaint, PDF]
Gemini offered a yield product to retail customers called Gemini Earn. This was functionally a feeder fund for Genesis, a subsidiary of DCG. Genesis put a lot of its money into Three Arrows Capital.
The story gets even more complicated. In January, the SEC sued both companies together over Gemini Earn, for issuing unregistered securities to retail customers.
In its lawsuit, Gemini claims that Silbert knew that Genesis was utterly insolvent, but kept taking depositors’ money anyway, including funds from Gemini Earn. The suit points to the $1.1 billion IOU DCG issued Genesis to fill the gaping void left by 3AC in 2022.
Data Finnovation says that Genesis seems from the complaint to have sent doctored spreadsheets to Gemini: “That document looks to be a fraud on its face before we even dig in to context or accounting.” He notes that Genesis may also have admitted insolvency in July 2022. [Medium]
We wrote previously how Gemini should have just shut down Gemini Earn immediately after 3AC imploded. The Winklevoss twins knew that that was where Genesis was putting their customers’ money. But they turned a blind eye and suffered greater losses as a result.
Even Binance hates Binance
Yet more layoffs at Binance as it continues to take on water. The company let go of more than 1,000 more employees in recent weeks. Customer service was heavily affected. We’re guessing that’s because there are far fewer customers. [WSJ]
The Australian Securities and Investments Commission (ASIC) has raided several Binance Australia locations. This action was reportedly part of an investigation into the local operation’s now-defunct local derivatives business. [Bloomberg]
The wash trading bots have abandoned Binance.US — Tether has been slipping to $0.70 per USDT. Volume on the exchange is also through the floor. You’d think Binance didn’t care any more. [Twitter, archive]
Coinbase, the battle continues
The SEC sued Coinbase in June. Coinbase responded with 177 pages of handwaving and chaff. Now the SEC has responded to some of Coinbase’s arguments, particularly where Coinbase claims the SEC does not have jurisdiction. [Doc 26, PDF]
Coinbase also claims that the Howey test doesn’t apply to tokens, using much the same arguments that Ripple did for XRP — we suspect lawyers for both firms were coordinating.
A spot of regulatory clarity
The White House has released its 2023 National Cybersecurity Strategy Implementation Plan. The plan includes action to “carry out disruption operations against the ransomware ecosystem” and to push other countries to adopt the FATF recommendations on cryptocurrency. [White House, PDF]
In the UK, the FCA has told crypto firms to get in line with the rules on crypto promotions by October 8. [FCA]
Singapore has banned crypto lending and staking for retail investors — and customer assets will need to be moved into a trust to prevent FTX-style commingling. [MAS]
Gisele Bündchen: Crypto? What’s a crypto?
The New York Times has run an extended puff piece on how very hard it was for Tom Brady and his ex-wife, model Gisele Bündchen, to have been so unlucky as to promote the stupendously fraudulent crypto exchange FTX and invest in the company. [NYT]
Brady and Bündchen’s partnership with FTX began in June 2021. Brady was paid $30 million and Bündchen $18 million, both in FTX equity. Bündchen assumed the title of “head of environmental and social initiatives” for FTX. [WWD, 2022]
Bündchen pumped FTX hard in Vogue in April 2022. The article touted her as a “quick study” on the subject of cryptocurrency. “There’s always that period of disruption, but then the new technologies that seemed so foreign become a part of your life … There is a real potential for good, a chance to foster positive change and create a level playing field,” Bündchen said. “Our current system hasn’t worked out great for everyone.” [Vogue, 2022]
Speaking to Vanity Fair in April 2023, a year later, Bündchen suddenly knew nothing about crypto. “I was blindsided. I’m no different than everyone else that trusted the hype.” She blames her advisors.
“It’s just … terrible,” she said. “I’m so sorry for all of us that this happened, and I just pray that justice gets made.” [Vanity Fair, 2023]
Bündchen is named in the ongoing class action against the celebrities who promoted FTX. We wish her a very pleasant justice-getting-made.
Reggie Fowler: The artful dodger strikes again
In the Reggie Fowler case, prosecutors are claiming every asset they can from Fowler to make up the $740 million forfeiture amount, which at this point seems to be a purely aspirational number. The US “has not been able to locate, obtain or collect any assets traceable to the proceeds of the Defendant’s offenses, despite the exercise of due diligence in investigating the assets of the Defendant.” [Doc 146, PDF; Doc 149, PDF; Doc 149.1, PDF; Doc 150, PDF]
Fowler’s diabetes is playing up. He was supposed to surrender to custody on July 30 to begin his 75-month sentence, but the judge extended that to August 18, due to his health issues.
Prosecutors are now asking the judge to recall Fowler’s bail immediately, because he can’t stop doing financial crimes. Reggie asked a tenant to pay July rent on a Texas property he sold in June. [Doc 147; Doc 151, PDF]
More good news
Now that the crypto bubble has popped, there’s no work. Crypto job listings have dropped by up to 80% in big cities, and crypto startups are near-dead. Both job listings and startup launches have closely tracked bitcoin’s price and trading activity. Venture capitalists have pivoted to AI. [Brookings]
Circle is laying people off to “maintain a strong balance sheet.” The issuance of USDC has fallen by nearly 50% in the last year. [CoinDesk]
In the Three Arrows Capital (3AC) bankruptcy, liquidators Teneo want to claw back $1.2 billion from DCG and BlockFi. These transactions occurred between the collapse of Terra-Luna in May 2022 and 3AC being liquidated in June 2022. [CoinDesk]
Terraform Labs co-founder Daniel Shin and seven other former Terraform employees had their first hearing in South Korea on their role in the Terra-Luna collapse. Shin wasn’t present at the hearing and his lawyers are asking for more time to prepare. [The Block]
The US arrested Shakeeb Ahmed for allegedly stealing $9 million from a decentralized exchange. The exchange wasn’t named, but it seems to have been Crema Finance, a DEX on Solana. [CoinDesk; Justice Department press release; indictment, PDF]
Singapore’s Temasek sovereign wealth fund is not into crypto any more. LOL, we bet it isn’t. Temasek lost $275 million investing in FTX. [CNBC]
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