Celsius Accused of Market Manipulation by Ex-employee

key takeaways

Jason Stone, CEO of KeyFi, is accusing Celsius of misappropriating user funds to cover its shortfalls in its lending business
Stone also alleges Celsius failed to pay him and repeatedly lied to him about the lender’s risk management strategies for cryptoassets

Embattled crypto lender Celsius is staring down accusations of fraud by a former employee over its alleged manipulation of crypto markets and a failure to implement basic account controls last year.

Jason Stone, CEO of staking software and strategies firm KeyFi, filed a lawsuit in the Supreme Court of the State of New York on Wednesday accusing Celsius of market manipulation.

Stone is also accusing Celsius of refusing to honor its contractual obligations to pay him “the millions of dollars it is owed pursuant to a profit-sharing agreement,” the filing reads.

It’s the latest development for the beleaguered lender, which halted account withdrawals last month citing “extreme market conditions.” Celsius has resisted calls from its lawyers to file for Chapter 11 bankruptcy and has instead implemented a “HODL” mode feature for users to demonstrate their support by opting not to withdraw their funds for an extended period of time.

KeyFi, whose assets and team were acquired by Celsius in mid-2020, set about managing hundreds of millions of dollars of customer deposits, Stone said in a statement on Twitter under his pseudonymous handle 0x_b1.

Celsius’ risk management team monitored KeyFi’s investment strategies and performance through portfolio management platform HedgeGuard and decentralized finance dashboard DeBank.

“[Celsius] assured me that as part of this monitoring, their trading teams were adequately hedging any potential impermanent loss from our activities in liquidity pools,” Stone said in his statement. “They also assured me they had risk management and hedging in place to account for fluctuations in token prices.”

Impermanent loss occurs when a liquidity provider’s locked up deposited assets in a liquidity pool shift in spot value when compared to the time they deposited them.

Celsius executives repeatedly assured Stone the lender had entered necessary hedging transactions to ensure that price fluctuations in certain cryptos would not materially and negatively impact the company or its ability to repay depositors, the filing reads.

Though according to the allegations laid out in the lawsuit and in Stone’s statement, Celsius was lying. Stone and his team relied on Celsius’ representations of facts when deploying certain trading strategies.

“Celsius failed to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies,” the filing reads.

As alleged evidence of mismanagement and fraud grew, Stone concluded he could no longer work with Celsius and moved to terminate his business relationship with the lender.

By the time Celsius and KeyFi parted ways in March of last year, the firm was managing close to $2 billion worth of assets on behalf of the lender, Stone said.

“The unfortunate events that have publicly unfolded in recent weeks show that Plaintiff was right — Celsius grossly mismanaged its customer funds, failed to perform basic internal auditing to account for its obligations and manipulated crypto-assets to the benefit of itself and its principals,” the filing reads.

Stone, who is demanding a trial by jury, is seeking an award of damages in an amount to be determined at trial and recuperation of money owed as well as pre- and post-judgment interest. Celsius has 20 days to answer the complaint. Failure to appear before the court or to provide an answer to the complaint will lead to judgment being taken against the lender by default, the filing states.

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