Judge orders investigation into whether bankrupt lender Celsius operated as a Ponzi scheme
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(Kitco News) – The bankruptcy judge overseeing the Celsius case has ordered the court-appointed examiner and official committee of Celsius creditors to decide who will lead an advanced investigation into whether the firm operated as a Ponzi scheme.
Customers of the platform have accused the crypto lender of using the assets deposited by new users to pay returns and facilitate withdrawals for existing users, which technically fits the legal definition of a Ponzi scheme.
The judge earlier approved the appointment of an independent investigator to look into the various aspects of Celsius’ operations after receiving a number of calls for more transparency in the firm’s operations, including why some customers were moved to different accounts.
“We don’t know if Celsius was a Ponzi scheme, but there are flags that came up,” said the creditors’ committee’s attorney, Greg Pesce. “Let me make it clear that we are looking into whether it is. We don’t have an answer to that.”
The court-appointed investigator, Shoba Pillay, has indicated that she will expand the scope of the investigation to include Celsius’ marketing practices and statements it made to attract new customers, along with an investigation into how it handled its original CEL token.
The embattled crypto lender filed for Chapter 11 bankruptcy on July 13, citing the decline in the value of cryptocurrencies and poor asset allocation decisions, which left the firm unable to meet its obligations.
After the collapse of Terra/Luna in May, Celsius was caught in the contagion effect that spread across the crypto ecosystem and punished those who did not operate with the best business practices or risk management strategies.
Since filing for bankruptcy, the firm has faced multiple allegations from government authorities and clients that it made misleading statements about its financial health and used assets to new investors to pay returns and fund withdrawals for account holders.
Decentralized finance protocol KeyFi previously sued the platform in July, alleging that the firm is acting like a Ponzi and owes the DeFi protocol millions of dollars.
At the hearing on Tuesday, the federal judge in the case, Martin Gleen, ordered Celsius to include more details about its Oct. 11 request to pay nearly $3 million to 62 employees as part of a key employee retention plan (KERP).
According to Law360, the judge said while making the order: “I was shocked when I saw the redactions. I had never seen anyone try to edit everything.”
The statement was made in reference to a section of the proposal that detailed the participants in the bonus, or at least was supposed to, as all details relating to individuals had been redacted, inducing their salaries and job descriptions.
On October 27, the United States Trustee submitted an objection to KERP due to the lack of identifiable calculations with the proposal to justify the expensive bonus scheme. The trustee claimed that the heavy redactions prevented interested parties from arguing whether some participants could be considered insiders and therefore ineligible for a KERP.
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