Legal Troubles Escalate For Celsius As Court Broadens Scope Of Investigation

Zinger Key Points
  • A committee of Celsius creditors and a court-appointed examiner will decide who heads the probe.
  • The investigation's expanded purview will now cover the firm's marketing strategies.

A New York bankruptcy judge expanded the scope of the investigation in the Celsius Network CEL/USD bankruptcy case, as the company’s clients demanded an inquiry into the activities of the cryptocurrency lender.

Judge Martin Glenn of the U.S. Bankruptcy Court directed the court-appointed examiner and the official committee of Celsius creditors to agree on who will be in charge of an investigation into the company's handling of client funds during a meeting on Tuesday, according to The Wall Street Journal.

The report quoted Greg Pesce, counsel for the creditors' committee, as saying, "we don't know if Celsius was a Ponzi scheme, there are flags that came up. Let me make it clear we’re looking into whether it is. We don’t have an answer to that."

The U.S. Trustee accused Celsius of managing the bankruptcy case with "significant transparency issues" and "gross mismanagement," leading to the appointment of the examiner, Shoba Pillay, in September.

In July this year, Celsius filed for bankruptcy, halting withdrawals and disclosing that it owed customers and creditors $5.5 billion.

Pillay was first charged with investigating Celsius' cryptocurrency assets and Bitcoin BTC/USD mining operation, recent changes to its account offerings, and the company's compliance with tax and bankruptcy processes.

The investigation's expanded purview will now cover the firm's marketing strategies, claims it made when bringing on new clients, and management of CEL.

In her court filings, Pillay stressed that she would focus on gathering information that could support an inquiry into potential allegations that Celsius was operating a Ponzi scheme rather than offering her own legal opinion.

Also read: Celsius Lost $350M Due to High-Risk Trading Strategies: Report

Celsius’s legal woes

Back in July, KeyFi CEO Jason Stone filed a lawsuit against the cryptocurrency lender for allegedly breaching its contract and utilizing client cash to manipulate the cryptocurrency markets.

According to the lawsuit, the revelation that Celsius was unable to fulfill its withdrawal commitments "shows that Defendants were, in fact, operating a Ponzi scheme."

Vermont goes hammer and tongs against Celsius

Meanwhile, Vermont state officials had requested additional powers to look into the Celsius bankruptcy in September, claiming the company has been insolvent since 2019.

Ethan McLaughlin, an associate general counsel for Vermont, claims that Celsius inflated the value of its CEL token to the disadvantage of retail investors and that the cryptocurrency lender acknowledged it never generated enough income to cover the investors' payouts.

Vermont state officials at the time stated, "This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors."

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