The filing was initially made public by John Reed Stark. He runs John Reed Stark Consulting, which helps firms in the fintech space with SEC and FINRA compliance.
Goines is the plaintiff representing all members of the United States that purchased Celsius Earn Rewards, CEL tokens, and Celsius loans between Feb 2018 and the present.
He likened the crypto lender’s operation to a Ponzi scheme, where new investors have to come on board to pay yield to old investors continuously.
The firm filed for Chapter 11 bankruptcy in New York earlier this week after freezing customer funds in early June. The bankruptcy filing, the company said, would allow it some breathing room to stabilize its operations.
Had it not frozen withdrawals last month, the company said it would have undergone a “bank run” scenario where early withdrawers would have had their transactions honored, while the outcome for smaller withdrawers would have been less certain.
Celsius made money by lending to institutional borrowers at higher interest rates than it offered for deposits, touting high-yield investment products as low-risk but high-yield. It began dabbling in high-risk investments in 2020 after the appetite for institutional loans dipped, investing funds in decentralized finance (DeFi) products without considering the accompanying risks.
The filing alleges that Celsius and its executives continually made misleading statements regarding how certain products were managed and that the company failed to register their yield or interest-bearing products with the Securities and Exchange Commission.
The lawsuit defines securities according to Section 2(a)(1) of the Securities Act, 15 U.S.C. §77b(a)(1), and alleges that Celsius violated Sections 5(a), 5(c), and 12(a) of the Securities Act, 15 U.S.C. §§77e(a), 77e(c), and 771(a). Section 5(a) involves the interstate sale of unregistered securities, while Section 5(c) compels sellers to register a security. Section 12(a) provides a legal basis for buyers of unregistered securities to sue sellers.
Other allegations assert that Alexander Mashinsky and other Celsius executives enriched themselves from inflated CEL token prices at customers’ expense. The plaintiff demands restitution derived from the difference between the purchase and sale of Celsius products.
Stark was critical of Celsius in a LinkedIn post following the release of the lawsuit documents. He pointed out that the only recourse facing victims of Celsius is the money from the outcomes of the bankruptcy, since Celsius was not registered with the SEC and provided no Federal Deposit Insurance to its customers in the event of default.
Last week, a former Celsius employee, Jason Stone, sued the company for manipulating the cryptocurrency markets and unsound accounting practices.
The plaintiff demands a trial by jury, which Stark believes Celsius will lose. Whether enough money remains to compensate victims after the litigation is unknown.