Author|Erica Carnevalli & Margaret Fleming
Editor|GaryMa Wu said blockchain
Original link:
https://www.cnbc.com/2022/07/19/former-employees-say-issues-plagued-crypto-company-celsius-years-before-bankruptcy.html?&qsearchterm=celsius
summary
- Celsius had a series of internal missteps in the years leading up to its recent liquidity problems, according to former employees and internal documents reviewed by CNBC.
- Employees interviewed by CNBC paint a picture of risk-taking, disorder and alleged market manipulation.
- "The biggest problem is the failure of risk management," said one former employee.
Problems with Celsius appear to have been brewing for years before the cryptocurrency lending company filed for bankruptcy.
The latest turmoil has been fueled by a series of internal missteps at the company, according to former employees and internal documents reviewed by CNBC. Multiple employees painted a picture of risk-taking, disorder and alleged market manipulation.
Timothy Cradle, former head of financial crime compliance at Celsius, said in an interview with CNBC: "The biggest problem is the failure of risk management. I think Celsius has a good idea. They provide services that people really need, but they don't manage them well. risk."
A month ago, the Hoboken, New Jersey-based company made headlines for freezing customer accounts due to "extreme market conditions." As of June, it had attracted 1.7 million customers and $11.8 billion in deposits. Celsius customers told CNBC they were attracted by the company’s 17% yield on cryptocurrency deposits.
Behind the scenes, Celsius lent the money to hedge funds and other institutions willing to pay higher yields. Internal documents show that the company will also invest in other high-risk cryptocurrency projects. Celsius will then share those profits with customers. The model collapsed as cryptocurrency prices slumped, leading to multiple firms freezing assets and at least three filing for bankruptcy.
Cradle said he was part of a three-member compliance team between 2019 and 2021. This role requires him to apply international financial law to Celsius's business. But resources are limited, he said.
"The compliance team is so small," Cradle said, "and compliance is a place where money is spent. Basically, we're spending money and not making any money back. They don't want to spend money on compliance."
An internal company document obtained by CNBC backs up that claim. It said that when assessing fraudulent cryptocurrency platforms, "there was not enough compliance staff to deal with the number of users on the Celsius platform, as there were only three full-time staff."
The bank is not your friend
Cradle said he was particularly struck by the conversation about $CEL at the Celsius Christmas party in 2019. Cradle said the execs said they were "inflating the $CEL token"; "aggressively trading and increasing the price of the token";
Celsius, CEO Alex Mashinsky and company lawyers did not respond to multiple requests for comment.
Celsius is by far the largest holder of $CEL. But it’s also a buyer, according to blockchain data firm Arkham. The firm estimates that Celsius has spent $350 million acquiring tokens on exchanges over the past three years, even though it already has billions in its own coffers. Meanwhile, executives are also selling. Accounts linked to Alex Mashinsky appear to have sold or "exchanged" about $40 million, according to Arkham.
Cradle and other employees are also partially paid in $CEL. It's a way to attract and retain talent, said one former HR employee. It also lets them share in the company's financial gains. Similar to the attractiveness of equity in fast-growing startups. The token started surging in early 2020, reaching a high of nearly $8 the following year.
The CEO of Celsius is an outspoken promoter of the coin. He posts weekly YouTube updates, often touting the project's benefits, or "token economics." Mashinsky is also known for his criticism of Wall Street banks. He often wears a black T-shirt in public that reads: "Banks are not your friends."
Another former Celsius employee, who did not want to be named, said that while Mashinsky was enticing ordinary investors to buy cryptocurrencies, he was behind the scenes selling them.
Because of the relatively small volume of transactions, it doesn’t take much capital to move the token’s price, the former employee said. According to the former employee, Mashinsky sold for millions of dollars without any public disclosure.
"Since $CEL has low volume, it's easy to manipulate prices. I'm sure Mashinsky knows this. This is just one example of how he's openly manipulating prices for his own benefit," the former employee said.
The ex-employee's allegations echo a recent lawsuit filed by former investment manager Jason Stone. Stone alleges that Celsius artificially inflated the price of its own tokens and "aggressively used client funds to manipulate the cryptoasset market to its benefit." The suit also alleges that Celsius failed to hedge its risks and engaged in activities that amounted to fraud.
Internal Documentation Details
Other internal documents revealed that Celsius appeared to be taking some risks with client funds. Lenders such as Celsius and hedge funds are able to earn high returns by investing in DeFi projects. Celsius has its own cryptocurrency and relies on high yields to attract more borrowers. According to internal documents, Celsius invested client funds in several DeFi projects. All were labeled as moderate to high risk.
On Wednesday, Vermont became the sixth state regulator to launch an investigation into Celsius, noting the investment strategy. The state's financial regulator said Celsius "deployed client assets in a variety of risky and illiquid investing, trading and lending activities."
"Celsius' customers did not receive material disclosures regarding their financial condition, investment activities, risk factors, and solvency to depositors and other creditors," Vermont regulators said in a statement.
Cradle also said that many Celsius users may not have a good grasp of the company's terms of use, which contradicts what Celsius has communicated through its marketing.
But the risks of depositing funds with Celsius are "hidden in plain sight," Cradle said. Clause 13 of the company's terms of use states that once customers deposit funds, those funds belong to Celsius.
Cradle also said he saw evidence the firm traded client money without disclosing that it was doing so. Celsius’ CEO made it clear on Twitter that the company does not trade clients’ funds.
Cradle said he wouldn't be keeping his money with Celsius, based on his first-hand experience with the firm's risk appetite.
"I don't think it's appropriate to leave funds on the platform," Cradle said. "I often read the terms of use. Once you deposit assets into Celsius, they belong to Celsius. Celsius can keep them if they need or want."
Internal documents also show evidence of disorder among multiple teams. A document reveals policies written by a team without the knowledge of the team's leader. In one instance, a top risk official wrote that he was "surprised" by a document written by another overseas team.
"He's probably surprised that the document exists, which is what happened with Celsius," Cradle said. "It's the left hand not knowing what the right hand is doing, and it's just another example of mismanagement or mismanagement on the part of Celsius."
lack of transparency
One area where Celsius lacks transparency, Cradle said, is its account numbers. While Celsius reports 1.7 million users, Cradle says that number is inflated.
"Probably closer to 300,000 because the number of fake accounts is huge and there's no willingness on the management team to do anything to really stop people from doing it," he said.
Aside from this alleged discrepancy, Mashinsky's own Twitter posts reveal a discrepancy between what he's communicating to clients and what's going on behind the scenes.
The day before the withdrawal freeze, in response to a tweet questioning the company's financial health, Mashinsky wrote: "You know someone is having trouble withdrawing money from Celsius? Why spread FUD and misinformation?"
Then the next day, June 12, customers were no longer allowed to withdraw funds from their accounts.
Celsius may have had financial troubles well before that, public records show.
Figures from the federal government show Celsius received $281,502 worth of Paycheck Protection Program loans in April 2020. The federal government awarded these loans to businesses negatively impacted by the pandemic.
"It's kind of jaw-dropping to me, and I wonder if we're profitable," Cradle said.
The loan was forgiven by the federal government, meaning Celsius met the requirement that no repayments be required.
background check
The risk-taking is also evident in Celsius's hiring process. Nikki Goodstein, a former senior member of the human resources team, said she was not aware of any background checks at the company when she joined in May 2021.
Executives specifically told the chief human resources officer not to conduct a background check on incoming CFO Yaron Shalem, she told CNBC. In November 2021, Shalem was arrested in Israel and charged with money laundering related to his former company. Shalem did not respond to a request for comment.
CNBC also sought to learn about the circumstances of the case, but it does not appear to be public in the Israeli court system.
Before Celsius, Goodstein, who worked at publicly traded Fortune 500 companies, said she was surprised that people in executive positions didn't face background checks.
"At the time, it was definitely a procedural gap, and everyone was upset that he didn't have a background check, because if we had a process like this, it wouldn't be such an embarrassment for the company, and we were all a little bit Blinded."
Cradle said he does not plan to return to the cryptocurrency industry after his stints at Celsius and another startup. At a time when banks are paying close to zero interest on savings, Celsius has made a good product, he said.
"I think it's a bunch of bad people who didn't plan well, they didn't hire at the right time, they didn't add people at the right time, they didn't scale up as the company grew," he said. .”
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