Celsius legal saga gets a lot messier

The embattled crypto lender initiates legal action against infrastructure provider Prime Trust, countersues a former employee for alleged theft and laundering millions of dollars worth of crypto.

Frozen man holding a thermometer while it is snowing.

The costs of bankruptcy procedures have already become a burden for the beleaguered crypto firm, and it's getting heavier with each passing day. Meanwhile, its customers and creditors are getting more disgruntled and frustrated as prolonged legal suits dent their hopes of a quick refund.

Celsius, once a crypto highflier with $12 billion AUM, filed for Chapter 11 bankruptcy on July 13, after abruptly halting all transfers and withdrawals in June due to “extreme market conditions.” Since then, the insolvent company received letters from more than 300 angry customers asking for the return of their funds. Some of them were claiming Celsius CEO Alex Mashinsky misled them about the potential risks of investing in the company.

Days before Celsius filed for bankruptcy, its former employee, Jason Stone, accused the company of mismanagement and fraud, claiming that it used customers' funds to manipulate the price of CEL, its native token. Stone, the CEO of Celsius’ subsidiary KeyFi, revealed in a Twitter thread that the parent company had not been hedging KeyFi activities, leaving a $2 billion portfolio with “naked exposure to the market.”

Stone said that it forced him to terminate the KeyFi agreement with Celsius. When his company started unwinding its DeFi positions, Celsius suffered an impermanent loss. According to Stone, Celsius initially accused him of stealing and refused to acknowledge the fact that the loss was caused by their poor risk management.

Read also: Celsius descends into chaos as withdrawals are put on hold

“I have tried for over a year to quietly settle this dispute with Celsius. Pursuant to the contracts Celsius signed with KeyFi, they owe KeyFi a significant sum of money. We have been more than reasonable in attempting to resolve this with them,” Stone wrote, adding that he decided to bring legal action against Celsius.

On August 23, Celsius countersued Stone and KeyFi, claiming that the defendants lost the company tens of millions of dollars through ineptitude. The crypto lender filed a complaint in the US Bankruptcy Court for the Southern District of New York, demanding restitution of millions worth of coins that were allegedly stolen from Celsius’ wallets by Jason Stone and laundered through recently sanctioned Tornado Cash.

Celsius said it lent coins to KeyFi for staking and had to send multiple formal requests to get funds back. So far, the crypto lender managed to recover the majority of its coins from Jason Stone, but mentioned that “a substantial gap remained.”

"As Celsius only later would learn, Stone’s repeated assurances that he could, and would, return all of Celsius’ coins (plus “profits” due to Celsius) were lies designed to conceal the fact that he either had lost or stolen a substantial number of coins," the filing read.

At the same time, the crypto lender initiated legal proceedings against Prime Trust, a company that provided custody for New York- and Washington-based Celsius users. After the two companies terminated their relationship in June 2021, Prime Trust returned Celsius about $119 million worth of crypto assets. The latter now claims that it’s still owed 398 Bitcoin, 196,268 CEL tokens, 3,740 ETH, and 2,261,448 USDC, a total of $17 million.

"Upon the commencement of these bankruptcy proceedings, Prime Trust was obligated under the Bankruptcy Code to deliver all property belonging to Celsius that is in Prime Trust’s possession to Celsius, including these remaining crypto assets, and should be ordered to turn them over now pursuant to section 542 of the Bankruptcy Code," Celsius filing said.

“Celsius sought for many months to persuade Prime Trust to honor its obligations and transfer identified Subject Property to Celsius. At times, it appeared those efforts were close to being rewarded. However, to this day, Prime Trust continues to withhold wrongfully Subject Property that Celsius has directed Prime Trust to release,” the legal team added.

Meanwhile, last week, the government trustee tasked with overseeing Celsius' bankruptcy suggested appointing an examiner to analyze the lender’s business model.

“There is no real understanding among customers, parties in interest, and the public as to the type or actual value of crypto held by the Debtors or where it is held,” the filing said.

So far, it’s unclear whether creditors will support the appointment of an examiner since it’s likely to cause significant delays to the process. But it’s already obvious that with all those court proceedings and legal tit-for-tats we won’t see the end to the Celsius case anytime soon.