New York’s attorney general has sued Celsius Network founder Alex Mashinsky, claiming he defrauded investors out of billions of dollars in digital currency by concealing the failing health of his now-bankrupt cryptocurrency lending platform.

Mashinsky persisted in promoting Celsius as a safe alternative to banks, paying interest as high as 17 percent on deposits, while concealing hundreds of millions of dollars of losses in risky investments, according to a complaint filed by Attorney General Letitia James on Thursday.

The civil lawsuit seeks to ban Mashinsky from doing business in New York and have him pay damages for violating laws including the state’s Martin Act, which gives James broad power to pursue securities fraud cases.

“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” James said in a statement. “Making false and unsubstantiated promises and misleading investors is illegal.”

Neither Mashinsky nor his attorney immediately responded to requests for comment. Celsius is not a defendant in the lawsuit, filed in a state court in Manhattan.

Crypto lenders gained popularity during the COVID-19 pandemic by promising easy loan access and high interest rates to depositors. They then lent out tokens to institutional investors, hoping to profit from the difference.

But the business model often proved unsustainable in 2022 after a selloff in cryptocurrency markets, including the collapse of the terraUSD and Luna tokens,

The lawsuit against Mashinsky is the latest government effort to address risky crypto practices.

It follows the federal criminal charges brought last month accusing FTX crypto exchange founder Sam Bankman-Fried of widespread fraud, He has pleaded not guilty,

James’s lawsuit “adds to the fear factor likely facing the industry, where money is extremely tight and the capacity to absorb large fines is going to be much more limited,” said Yesha Yadav, associate dean at Vanderbilt Law School in Nashville, Tennessee.

The absence of a comprehensive federal framework to regulate crypto frees James to take an “aggressive” enforcement role, Yadav added.

‘Ignore the FUD’

Celsius filed for Chapter 11 protection from creditors last year on July 13, listing a $1.19bn deficit on its balance sheet. Chapter 11 in the US Bankruptcy Code involves a reorganization of a debtor’s business affairs, debts and assets.

The filing came a month after the Hoboken, New Jersey-based company froze withdrawals and transfers for its 1.7 million customers, citing “extreme” market conditions.

Celsius ended November with $9bn of liabilities, including more than $4.3bn owed to customers, a court filing shows.

James said Mashinsky’s fraud ran from 2018 to June 2022, when deposits were frozen, with more than 26,000 New Yorkers among his victims.

Many victims were ordinary investors, like a father of three who lost his $375,000 life savings, and a disabled veteran who lost the $36,000 he spent nearly a decade saving, she said.

Born in Ukraine and later emigrating to Israel with his family, Mashinsky started multiple businesses before founding Celsius in 2017, becoming its chief executive and public face.

James said his promotional efforts through social media, interviews and cryptocurrency conferences helped the company amass $20bn of digital assets by early last year.

But as it struggled to pay the promised yields on investor deposits, Celsius allegedly moved into riskier investments.

The lawsuit said that in the two weeks before the withdrawal freeze, Mashinsky was still dismissing criticism that Celsius was overextended, urging investors to “ignore the FUD”, short for “fear, uncertainty and doubt”.

In September, the US Bankruptcy Court’s Judge Martin Glenn appointed an examiner to investigate whether Celsius was mismanaged after a federal trustee said an appointment could help “neutralize the inherent distrust” in the company among creditors and customers.

Mashinsky resigned as Celsius’s chief executive in September, saying at the time he was committed to helping return deposits to investors.

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