(Reuters) – New York’s attorney general on Thursday sued Celsius Networks founder Alex Mashinsky, alleging he planned to defraud hundreds of thousands of investors by tricking them into depositing billions of dollars with his now-bankrupt cryptocurrency lending platform.
Mashinsky was accused of promoting Celsius as a safe alternative to banks, while hiding the mounting losses from risky investments that contributed to its collapse, according to a complaint filed by Attorney General Letitia James in New York state court in Manhattan.
“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.”;
Mashinsky did not immediately respond to requests for comment.
The civil lawsuit accuses Mr. Mashinsky for violating the state’s Martin Act, which gives James broad power to prosecute securities fraud cases and other laws.
It aims to ban Mr. Mashinsky from doing business in New York, and make him pay damages, restitution and disgorgement.
Celsius, based in Hoboken, New Jersey, filed for Chapter 11 protection from creditors on July 13, a month after freezing withdrawals and transfers for its 1.7 million customers due to “extreme” market conditions.
Ms. James said Mr. Mashinsky’s marketing efforts through social media, interviews and cryptocurrency conferences helped Celsius amass $20 billion in digital assets early last year.
But according to the lawsuit, Celsius struggled to pay promised returns on investor deposits, prompting Celsius to move into riskier investments.
The lawsuit said that in the two weeks before the withdrawal halt, Mashinsky was still dismissing criticism that Celsius was overhyped, urging investors to “ignore FUD,” short for “fear, uncertainty and doubt.”