Celsius investors owed $ 4.7 billion to ask the judge to recover life savings

Celsius Network, once a titan of the cryptocurrency lending world, is in bankruptcy proceedings and is facing claims that it was running a Ponzi scheme by paying early depositors with money received from new users. Some of the 1.7 million customers trapped by the alleged fraud are now directly begging the Southern District of New York to help them get their money back.

Christian Ostheimer, a 37-year-old living in Connecticut, wrote in a letter included in court evidence that he trusted Celsius for his retirement savings and lost more than $ 30,000, which led to “insurmountable tax complications. “.

“It is in your hands, honorable judge, to make this a different case. grandma and grandpa – all those many little unsecured creditors – so that they are not as usual at the end of the chain where they lose everything, ”Ostheimer wrote.

The question of who gets repaid first – if that day ever comes – hangs heavily on bankruptcy proceedings.

At its peak in October 2021, CEO Alex Mashinsky said the cryptocurrency lender had $ 25 billion in assets under management. Now Celsius has dropped to $ 167 million “in cash,” which he says will provide “ample cash” to support operations during the restructuring process. Celsius owes its users about $ 4.7 billion, according to its bankruptcy filing.

That filing also shows that Celsius has more than 100,000 creditors, some of whom have lent money to the platform with no collateral to back up the deal. The list of its top 50 unsecured creditors includes Sam Bankman-Fried’s trading company Alameda Research, as well as an investment firm based in the Cayman Islands. Those creditors are likely the first in line to get their money back, leaving smaller retail investors to hold the sack.

Unlike the traditional banking system, which typically insures customer deposits, there are no formal consumer protections in place to safeguard user funds when things go wrong.

Celsius specifies in its terms and conditions that any digital asset transferred to the platform constitutes a loan from the user to Celsius. As there were no collateral provided by Celsius, client funds were essentially just unsecured loans to the platform.

Also in the fine print of Celsius’ terms and conditions is a warning that in the event of bankruptcy, “any eligible digital asset used in the earning service or as collateral under the loan service may not be recoverable” and that customers “may not have any legal remedies or rights in relation to Celsius’ obligations.” The disclosure reads as an attempt at total immunity from legal wrongdoing if things go wrong.

On July 19, Celsius released a document detailing the next steps for customers. In it, the platform said its Chapter 11 bankruptcy plan “will provide customers with the option, at customers’ choice, to recover money at a discount or stay ‘long’ in cryptocurrencies,” but it is unclear whether customers they will never see their money again.

The whole process lays bare how much of the cryptocurrency regulation in the United States happens through the application.

The Securities and Exchange Commission has effectively become one of the leading industry regulators in the country, even by eliminating Ponzi and pyramid schemes, and it appears that some precedents will be set in US bankruptcy courts in the coming months as lawmakers deliberate on formal legislation on Capitol Hill.

Investor requests

In the hundreds of letters officially filed with the court, retail investors are demanding to be put on the front lines to get their money back.

Flori Ohm, a single mother of two college-bound daughters, said her family was “severely affected by both financial and mental health” from the bankruptcy, which left her funds stranded on the platform. Ohm, who also supports her parents, said she can’t sleep or focus on work.

“I am fighting hard [to make a] live, “he wrote.

Jeanne Y Savelle, who described herself as a “retired little old lady” living on a fixed income, said she turned to Celsius looking for a way to top up her monthly social security check to stretch her dollar. in a record level of inflation.

“I bought my small amount of cryptocurrency just hoping to earn enough to help me hold on for a few years, a kind of safety net,” Savelle said. “Yes, I know, buyer beware, but I agree that there has been too much deception.”

Others have lost everything.

California resident Stephen Bralver said he has less than $ 1,000 left in his Wells Fargo checking account, now his only source of funds to provide for his family since Celsius suspended all withdrawals.

“There is absolutely no way I can continue to provide without access to my assets in Celsius,” he wrote to Judge Martin Glenn, who is overseeing the Celsius bankruptcy proceedings in New York.

“This is an EMERGENCY situation, simply to keep a roof over my family and food on their table,” Bralver wrote.

Sean Moran of Dublin wrote that he lost his family farm in Ireland and his family is homeless.

“I can’t believe they lied to us during the weekly AMA [ask-me-anything events] about not trusting the banks while all the time we are wolves in sheep’s clothing, false promises and misleading information, “Moran wrote.” I’m mentally unstable. The family is upset by my decisions to trust Celsius and promise them a better future. ”

Beyond the financial devastation described in each of these letters, a recurring theme centers on a sense of betrayal over the breach of trust between Celsius CEO Alex Mashinsky and his clients.

Three weeks after Celsius stopped all withdrawals due to “extreme market conditions” – and a few days before the cryptocurrency lender finally filed for bankruptcy protection – the platform was still advertising in bold on its website for returns. annuals of nearly 19%, who paid off the week.

“Transfer your cryptocurrency to Celsius and you could earn up to 18.63% APY in minutes,” the website read on July 3.

Ralphael DiCicco, who revealed a holding of approximately $ 15,557 in cryptocurrencies on Celsius, said he was misled by the marketing.

“I believed in all the commercials, social media and advertisements showing that Celsius was a high yield, low risk savings account. We made sure our funds were safer on Celsius than in a bank,” DiCicco wrote. .

“This money is pretty much my life savings … I hope you can find it in the best interest of all parties involved to repay smaller investors first … before any restructuring occurs,” DiCicco continued.

Travis Rodgers of Phoenix said he was informed in numerous phone calls to Celsius Network, just two days before it blocked depositor accounts, that there was no danger to clients’ assets and zero likelihood of bankruptcy. Rodgers said he recorded a lot of those calls. He said his holdings in Celsius amount to $ 40,000 on 11 cryptocurrencies.

The weekly ask me anything events hosted by Mashinsky on YouTube have been mentioned in multiple letters, including one sent by Stephen Richardson, who described the many ways he said Mashinsky tricked the public into luring new customers into the plan.

Richardson said he has watched every single Friday AMA since he signed up.

“Alex would talk about how Celsius is safer than banks because they allegedly don’t re-mortgage and use fractional reserve loans like banks do,” Richardson wrote. “I currently have six digits of cryptocurrencies locked in my Celsius account that cannot be withdrawn, despite Alex’s claims a few hours before the close of withdrawals that no one has a problem withdrawing from Celsius and that anything they feel against is simply ‘fud ‘ [fear, uncertainty and doubt]. ”

Some said they even thought about suicide if they can’t get their funds back.

Australian Katie Davis asked the judge to return the $ 138,000 she and her husband stuck on the Celsius platform.

“The thought of losing that amount of money is horrible,” wrote Davis.

“If I don’t get it back, I will end my life as the loss will have a significant impact on my family and me,” he wrote.

Mashinsky did not immediately respond to CNBC’s request for comment.

If you or someone you know is in crisis, call the National Suicide Prevention Lifeline at 800-273-8255.

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