Celsius Network is once again embroiled in controversy, as a former money manager for Celsius filed a lawsuit stating that the company had lost millions of dollars by failing to hedge risk, and had instead used customer funds to manipulate the price of its own token.
Jason Stone, the CEO of KeyFi, filed a lawsuit against Celsius in the State Supreme Court of New York, alleging market manipulation.
According to the complaint filed, Stone noted that Celsius experienced serious exchange rate losses owing to the shifting values of different tokens.
Stone claimed in the filing that Celsius is operating a Ponzi scheme as Celsius does not have assets on hand to “meet its withdrawal obligations.”
Stone, using the pseudonym @0x b1, revealed on Twitter that KeyFi began managing millions of dollars in customer deposits after its assets and people were purchased by Celsius in the middle of 2020.
Soon after, Celsius gave KeyFi access to the addresses’ private keys, and in the months that followed, they sent them huge funds in customer deposits to invest. When Celsius and KeyFi split, the latter was in charge of over $2B in assets.
Using HedgeGuard and DeBank, Celsius’s risk management team kept track of KeyFi’s investment tactics and results.
Celsius assured Stone that their trading teams were sufficiently hedging any potential temporary loss resulting from KeyFi’s activity in liquidity pools as part of this monitoring.
Celsius also said to Stone that risk management and hedging were in place to account for variabilities in tokens prices.
However, KeyFi found that Celsius had lied to them in late February 2021. Both their actions and price swings in crypto assets had not been hedged by them, and the company’s whole portfolio was open to the market.
KeyFi revealed to Celsius that they wished to end their partnership as soon as they became aware of these significant issues with the way the company conducted business in March 2021.
KeyFi promised Celsius that over the coming months, they would work with them to wind down their various positions. The value of the assets under KeyFi’s supervision had increased by nearly $800M by April 2021.
But Celsius experienced temporary loss as a result of the unwinding of the DeFi positions. At first, they accused Stone of being a thief because they thought the transient loss was proof that KeyFi was stealing.
Celsius claimed to hedge that specific risk while entirely ignoring the fact that they have perfect visibility into every trading strategy used by KeyFi.
Stone has been attempting to quietly resolve this conflict with Celsius for more than a year. In accordance with the agreements Celsius made with KeyFi, KeyFi is owed 20% of the money.
The issue, according to Stone, was that while Celsius primarily accepted Bitcoin and Ethereum as deposits, “its strategies were rewarded with other coins.”
This suggested that if Bitcoin and Ethereum appreciated more quickly than the other currencies, even if Celsius was profitable, it might end up with more debt.
Even if clients were due with bitcoin or other tokens, Celsius continued to track their U.S. dollar deposits, the lawsuit claims. According to Stone, the miscalculation left “a $100 million to $200 million hole in the balance sheet” when it was detected.
According to Stone, Celsius gave him permission to purchase NFTs in exchange for an advance on his portion of the trade earnings. He asserts that after quitting the company, its founder Alex Mashinsky transferred some of these to his wife’s wallet.
Celsius has refused to accept the reality or their shortcomings in risk management and accounting, which, in Stone’s opinion, was driven by the sizable hole in its balance sheet. Instead, they have attempted to place the responsibility on him.
Given the widespread rumors regarding the company’s financial stability and his observations of Celsius’ erratic reporting of the facts, Stone filed a lawsuit against Celsius “to settle this issue once and for all.”
Stone is requesting a jury trial and is asking for pre-trial and post-judgment interest as well as an award of damages in an amount to be determined at trial. Celsius only has 20 days to respond to Stone’s lawsuit.
The document adds that if the lender does not appear in court or does not respond to the complaint, judgment will be rendered against them by default.
Also Read: Crypto Lender Celsius Network Reorganizes its Board of Directors
Celsius still hasn’t restarted its operations after suspending its withdrawals and trading activities on the platform. But the company is trying to redeem itself by paying off debts one by one. Just yesterday, Celsius withdrew $440 million of collateral from Maker Protocol after repaying its loan entirely.
