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The unholy intersection of Celsius Network, Paxful, and Tether is making ‘crypto crime’ news—again.
Earlier this month, the Celsius Litigation Administrator launched civil suits targeting former Celsius account holders. The suits are aimed at those who failed to repay funds withdrawn from the corrupt digital asset ‘yield’ platform in the 90-day window before Celsius went belly-up.
Celsius operated a classic Ponzi scheme in which customers invested their digital assets in the company’s Earn program, which promised outsized returns that couldn’t be obtained via traditional means. In reality, CEO Alex Mashinky used customer cash to fuel the company’s purchases of his personal stores of in-house CEL tokens while taking out huge loans and occasionally paying out ‘rewards’ to Celsius customers with funds derived from new investors.
Celsius halted customer withdrawals in June 2022 as the Ponzi scheme began to unravel. The following month, Celsius filed for bankruptcy protection, citing billions in unfunded obligations. Mashinsky, who made sure to feather his own nest before the collapse, was arrested on fraud charges that July. Mashinsky’s trial is scheduled to get underway in September.
The liquidators tasked with untangling the company’s Byzantine balance sheet quickly flagged the high number of high-value withdrawals in the 90-day period preceding the bankruptcy filing. Under U.S. bankruptcy law, any disbursements within that window can be clawed back for creditors’ benefit.
Mohsin Meghiji, the Celsius Litigation Administrator, stated last week that those who withdrew during that period “unfairly benefitted at the expense of other account holders since fulfillment of their withdrawal requests resulted in Celsius being unable to equitably fulfill other withdrawals.”
The suits filed last week target Celsius customers whose ‘withdrawal preference exposure’ exceeds $100,000 and who “failed to settle their preference liability.” Celsius previously offered to settle with these withdrawing customers “at a favorable rate,” resulting in the recovery of “nearly $100 million and the resolution of more than a half billion dollars of preference liabilities through settlement agreements with over 1,500 account holders.”
Meghiji said this offer has now expired, and the company intends “to pursue the recovery under the Bankruptcy Code of the full value of cryptocurrency transferred during the preference period.” An FAQ covering the specifics can be read here.
Social media has been buzzing with numerous former Celsius customers who received legal notices from the litigation team. Obviously, not everyone who withdrew ahead of the bankruptcy filing necessarily had access to insider information that the Celsius criminal empire was teetering on the brink, but proving ignorance could prove difficult.
Paxful of regret
One of the early corporate casualties of the Celsius bankruptcy appeared to be the Paxful digital wallet and peer-to-peer marketplace, which suspended its services in April 2023.
Shortly before that suspension, Paxful founder/CEO Ray Youssef issued a statement apologizing for the fact that customers of Paxful’s own Earn program had been “unable to access” their funds, which had been lent out to Celsius in pursuit of that ever-elusive ‘yield.’ Youssef pledged to make customers whole from “our own pockets.”
Paxful restarted its marketplace operations in May 2023, not long after Youssef and co-founder Artur Schaback engaged in a public slap-fight. Schaback was forced out in February 2022, based on what Schaback later claimed was a disagreement with Youssef over (among other things) “the legitimacy of ever-increasing expenditures to previously undisclosed entities that are depleting the Company’s coffers at an alarming rate.”
Fast forward to July 8, 2024, when Schaback pleaded guilty to conspiracy to fail to maintain an effective anti-money laundering (AML) program at Paxful as required under the U.S. Bank Secrecy Act. The charge carries a maximum penalty of five years in prison when Schaback is sentenced on November 5.
The settlement was reached following a probe by the U.S. Department of Justice (DoJ), Homeland Security Investigations, and the Internal Revenue Service Criminal Investigations unit.
The charges stemmed from Paxful’s operations between July 2015 and June 2019, during which Schaback “made Paxful available as a vehicle for money laundering, sanctions violations and other criminal activity, including fraud, romance scams, extortion schemes and prostitution.”
Paxful customers “negotiated for and traded virtual currency for a variety of other items, including fiat currency, pre-paid cards, and gift cards” without supplying sufficient ‘know your customer’ (KYC) information to the site.
Worse, Schaback “marketed Paxful as a platform that did not require KYC; presented fake AML policies to third parties that he knew were not, in fact, implemented or enforced at Paxful; and failed to file a single suspicious activity report, despite knowing that Paxful users were perpetrating suspicious and criminal activity.”
If it’s Tuesday, it must be another Tether scandal
Among the more interesting revelations to emerge from the Celsius bankruptcy process was the involvement of Tether, the issuer of USDT, the world’s largest stablecoin by market cap. Tether held a 7.73% stake in Celsius, making Tether the company’s third-largest shareholder. What can we say… Tether really knows how to pick ‘em.
Several months after Celsius blew up, Tether made a “strategic investment” in Northern Data Group, a Germany-based firm with its fingers in everything from BTC-based mining operations to cloud storage to artificial intelligence (AI). Tether has since increased its stake in Northern Data to a controlling 51%.
Last week, Bloomberg reported that Northern Data was mulling a U.S.-based initial public offering of its Taiga Cloud and Ardent Data Centers divisions in the first half of 2025. Reflecting the current AI hype-cycle, the units could reportedly list at a value ranging from $10-16 billion. Peak Mining, which has six operations across Europe and North America, could be listed separately at a later date.
Northern Data cautioned that there was no guarantee that any of its units would go ahead with an IPO, a caveat that seems all the more advisable given the potentially criminal allegations contained in a civil suit filed late last month by two former execs.
Joshua Porter and Gulsen Kama, respectively, the former CEO/president and CFO of Northern Data US, claim that they were illegally fired after raising legitimate concerns with their superiors at the global head office about Northern Data’s sketchier activities.
According to Porter, Northern Data was “falsely misrepresenting the strength of its financial condition to investors, regulators and business partners (they were borderline insolvent) and equally problematic, Northern Data was knowingly committing tax evasion to the tune of potentially tens of millions of dollars.”
Some of the illegality stemmed from Northern Data’s alleged desire to shield revenue generated by its U.S. operations from U.S. taxation. Deloitte reportedly refused to provide Northern Data with an opinion letter approving this activity.
Porter claims the tax-avoidance strategy “came directly from” Northern Data AG’s founder/CEO Aroosh Thillainathan, who chose this strategy “for his own personal financial self-interest.” Porter was sacked in March 2023 after suggesting to another higher-up that they take these concerns to the board of directors.
A second opinion
Ex-CFO Kama echoed Porter’s claims, saying Northern Data was “falsely misrepresenting their financial position to potential auditors, tax advisors and investors” while the CEO and COO of the company’s global operations were committing “accounting and securities fraud.”
Kama claims Northern Data was being “untruthful” regarding the company’s liquidity in conversation with its auditors at KPMG, while also “misrepresenting their financial position (including possible insolvency) to their current and future investors.”
Thillainathan allegedly ordered Kama to start looking for other auditors because KPMG were being “difficult and unreasonable.” Thillainathan allegedly said he preferred an auditor “that would perform the audit with no questions asked” and allegedly threatened Kama if she didn’t do as he ordered.
Refusing to play ball, Kama was terminated in June 2023, one day before Northern Data’s extraordinary shareholders meeting, at which additional equity capital that diluted the existing shareholders was authorized (by only 20% of shareholders).
While the timelines of the alleged illegality appear to predate Tether’s involvement in Northern Data, the latter’s alleged disregard for proper third-party auditing might have been what attracted Tether in the first place. Despite seven years of promises to conduct an independent audit of its fiat reserves, Tether continues to issue only weak ‘attestations’ detailing its financial status on a single day each quarter.
Northern Data issued a statement saying it was “no coincidence” that its “disgruntled” former execs had filed their suit just as the company was prepping its IPO. Northern Data called their allegations “clearly financially motivated and completely baseless.”
Speaking of clearly financially motivated and completely baseless…
Tether has long been accused of being the detergent that keeps the ‘crypto’ wash trading machine going, simulating interest in tokens like BTC whenever it appears retail traders are catching on that none of BTC’s value is actually valuable. Studies point to suspect trades on exchanges such as Bitfinex—owned by iFinex, a sister company to Tether—as a key piece of this inflationary deception.
Recently, significant quantities of BTC flooded into the market via the German government and the Mt Gox liquidators, resulting in serious downward pressure on BTC’s fiat price. But every time the plunge seems irreversible, this dead cat bounces high enough to quell any momentary panic.
Bitfinex analysts told The Block that “derivatives market data suggests that a potential local bottom has been reached” for BTC, and that “traders expect bitcoin prices to stay in a range and stabilize.” You hear that, folks? Nothing to fear here, move along.
A slightly different take was offered by the X/Twitter personality RhoRider, who noted that “the day Germany started dumping, Bitfinex fired up its “$BTCUSDLongs” TWAP [time-weighted average price] bot on max to absorb the selloff.”
RhoRider claimed that the “Bitfinex/Tether criminal organization (‘iFinex’) has a bot that constantly long ‘buys’ $BTC w/unlimited leverage…it soaks up ~1 full $BTC every three minutes during big selloffs w/fake $”
RhoRider wasn’t finished, claiming that “the amount [Bitfinex is] scam pumping daily is just slightly under the avg total daily trading volume of $BTC/USD on” the U.S.-based Kraken exchange. “~$50M daily for weeks at a time. Billions in fake inorganic buying to pad the market.”
Asked when this manipulative scenario might ‘pop,’ RhoRider said, “It never pops unless the Tether guys got taken down by authorities … if that happens then it’s all over.”
We pause here to note that the guilty plea of Paxful’s co-founder announced this week was based on activities that occurred between 2015 and 2019. The arm of the law may be long but it’s also a little slow on the draw, so just because that icy hand hasn’t yet tapped you on the shoulder, doesn’t mean it’s never coming.
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