Celsius Network founder Alex Mashinsky has been hit with a civil lawsuit from the New York attorney-general, which accuses the former head of the bankrupt crypto lender of defrauding hundreds of thousands of investors and flouting the state’s securities laws.

The 57-year-old, who established Celsius in 2017 and was running the business when it dramatically collapsed in July, had promoted the company “as a safe alternative to banks while concealing that [it] was actually engaged in risky investment strategies”, the lawsuit said.

Celsius’s bankruptcy was a watershed moment in the unprecedented market crash that hit the digital assets sector in the summer. Other once-prominent groups including Three Arrows Capital also collapsed after a sharp downturn in the value of popular tokens such as bitcoin.

In a complaint filed on Thursday, the attorney-general’s office claimed Mashinsky acted as a “modern-day Robin Hood”, promising customers returns of up to 17 per cent via its Earn programme — which paid interest on cryptocurrency deposits — and urged users to stay invested even as the hole in the platform’s balance sheet grew larger.

They said Mashinsky had also failed to register as a salesperson for Celsius and as a securities and commodities dealer under New York law.

“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” New York attorney-general Letitia James said in a statement. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”

Celsius froze customer withdrawals in June, and filed for bankruptcy the following month, revealing a more than $1bn deficit. In October, the Financial Times reported that Mashinsky withdrew $10mn from Celsius just weeks before customer accounts were frozen, amid growing turmoil.

The attorney-general’s office said a disabled veteran was among the New Yorkers to have lost money with Celsius, having invested a decade’s worth of savings totalling $36,000, while another disabled citizen making just $8 per hour lost his entire investment on the platform.

Should the suit succeed, Mashinsky could be barred from doing business in New York state and be forced to repay investors.

Benjamin Allee, Mashinsky’s attorney, said his client “denies these allegations” and “looks forward to vigorously defending himself in court”.

Mashinsky, who resigned as Celsius chief executive in September, previously said he was “very sorry about the difficult financial circumstances members of our community are facing”.

The attorney-general’s suit comes after a ruling issued in a New York bankruptcy court on Wednesday found Celsius’s “unambiguous” terms of service made it clear that crypto assets deposited in the company’s Earn accounts were its property, ruling against some account holders who argued that they owned their deposits.

In July, Celsius had approximately 600,000 accounts in its Earn programme. These accounts held crypto with a market value worth more than $4bn as of July 10. Celsius reported liabilities exceeding $5bn in a bankruptcy filing.

Separately on Thursday, US federal prosecutors in Brooklyn unveiled fraud charges against Aurelien Michel, a 24-year-old French national, over an alleged scheme involving digital collectibles known as non-fungible tokens.

Michel sold “Mutant Ape Planet” NFTs in exchange for $2.9mn in cryptocurrency, but exited the project before making good on promises to investors in what prosecutors in the eastern district of New York described as a “rug pull scheme”.

Michel, who resides in the United Arab Emirates, was arrested at John F Kennedy International Airport in New York late on Wednesday.

“Purchasers of Mutant Ape Planet NFTs thought they were investing in a trendy new collectible, but they were deceived and received none of the promised benefits,” Ivan Arvelo, special agent in charge of homeland security investigations in New York, said in a statement.

The actions taken on Thursday by US state and federal authorities highlight how governments are tightening their oversight of the cryptocurrency sector following last year’s collapse of FTX and several other prominent groups. While digital tokens remain broadly unregulated, global watchdogs are seeking to chase down alleged wrongdoing by players in the sector.

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