The new 476-page Celsius Network investigation details all the red flags VCs and pension plans missed

It’s the reason why Salesforce employees are less than enthused over their CEO referring to them as “family,” even as he lays off thousands of them in droves.

It’s also one reason why Alex Mashinsky, the startup founder and CEO of the WestCap- and CDPQ-backed, now-defunct crypto lender Celsius Network, has buried himself into a hole so deep, it seems unlikely he’ll ever get out of it.

While en route to Seattle yesterday, my airplane reading of choice was the scathing 476-page report on the crypto lender that was filed last week by former federal prosecutor Shoba Pillay. Pillay is the very thorough independent examiner appointed by the U.S. bankruptcy court in New York to oversee the investigation of Celsius’ Chapter 11 and find out where the hell several billion in capital went and ran off to. 

As a reminder, Celsius, which venture funds and pensions once pegged to be worth $3.5 billion, spiraled into insolvency in the wake of its exposure to the stablecoin Terra, the hedge fund Three Arrows Capital, and later, Sam Bankman-Fried’s now infamous crypto exchange FTX.

Pillay’s expansive investigation offers us the first fully comprehensive look at what exactly happened. And it serves as a warning to investors to take a second look at founders who use words like “transparent” or “safe” or “financial freedom” to lure in new customers—particularly when they may be running an alleged sham of an operation that their own employees would describe as “very ponzi like.” 

Pillay’s extensive investigation spanned 500 gigabytes of data and records, including 231,000 documents, emails, financial and coin reports, Slack messages, and dozens of interviews. All of this laid out details regarding how Celsius allegedly never had a robust risk management policy in place (and didn’t have a written policy until early 2021), had incomplete financial statements with “significant discrepancies” from its account balances, and how its executives were using both customer deposits and capital from their equity fundraising to prop up the value of their proprietary token, CEL, and cash out. One might think that all these things may have come up somewhere along the way as Celsius was fundraising around $741 million in capital. (Celsius Network, its law firm Kirkland & Ellis, and investors CDPQ and WestCap didn’t respond to requests for comment prior to publication.)

Here’s my highlight reel of some, but not all, of the more egregious red flags Pillay found during her investigation. Please note that all the following are allegations against the company and its executives, as determined by the court-appointed examiner:

–Problematic item #1: Celsius announced it had raised $50 million from its initial coin offering when it actually only raised $32 million. CEO Mashinsky represented that any of the 325 million proprietary Celisus tokens, known as CEL, that Celsius didn’t sell to community members were burned. But that didn’t happen, leading one executive to conclude that Celsius was “non-complian[t] with our own whitepaper,” according to the examination report. Employees had apparently discussed whether to disclose how they hadn’t met their ICO goals, but allegedly decided against it so as not to “upset” the community. 

–Problematic item #2: The startup seems to have been highly responsible for CEL’s price movement, as it was basically the only major buyer. Since 2020, Celsius allegedly timed the purchases of its token to create activity in the market and inflate the price. Internal messages between executives in the report underscore how these individuals were allegedly not being forthright with their customers about their own role in inflating the token’s price, which rose 14,751% between March 2020 and June 2022. 

–Problematic item #3: Celsius’s own employees allegedly regularly discussed how they thought the CEL token was worth nothing. Messages and interviews from the investigation revealed that, in 2022, Celsius employees supposedly regularly discussed how their token was “worthless” and that its price “should be 0,” and they questioned whether any other party besides Celsius was actually buying CEL.

–Problematic item #4: When employees laugh about misleading customers. Haha. In September 2020, after Celsius successfully propped up its own token, employees allegedly congratulated one another on “our good work” resulting in “people thinking [the price of CEL] is going to the moon haha.” 

–Problematic item #5: The founders of Celsius cashed out for millions ahead of the company making any sufficient revenue and recognizing investment losses of more than $800 million in 2021. The report states that, between 2018 and the bankruptcy, Mashinsky sold at least 25 million CEL tokens, worth approximately $68.7 million, and that founder S. Daniel Leon, sold at least 2.6 million CEL tokens for at least $9.74 million. “Celsius often increased the size of its resting orders to buy all of the CEL that Mr. Mashinsky and his other companies were selling,” the investigation reads. “These trades caused Celsius’s former Chief Financial Officer to write ‘[w]e are talking about becoming a regulated entity and we are doing something possibly illegal and definitely not compliant.'” 

–Problematic item #6: Celsius allegedly had insufficient risk management policies, and no risk management policies until 2021. That’s despite repeated claims from Mashinsky that risk management was “what Celsius does best.” Mashinsky also made public statements about how Celsius avoided lending to risky institutions or hedge funds, although the report says that Celsius made loans that were either unsecured or not fully secured, placed crypto assets into DeFi and staking protocols, purchased a DeFi company that failed within months, allocated crypto assets to exchanges, and invested approximately $604 million in the form of an intercompany loan to start a BTC mining operation. 

–Problematic item #7: When the company uses its own interpretation for how to calculate net interest margin, making its numbers look better. Because of the yield and rewards it was paying to customers, Celsius’s net interest margin, a key indicator of a financial institution’s health, was generally negative. Celsius calculated its own NIM by comparing the yield on its assets to their cost, rather than using the conventional and more conservative method, which would be to compare the yield on assets to liabilities.

Despite the above, Celsius managed to raise around $741 million in funding, per the report, and garner a $3.5 billion valuation, making it—for a time—among the highest-valued companies in the private markets. 

I am selecting my words carefully when I say that Pillay’s findings are nothing short of disturbing. While the extent of damage at Celsius may be smaller than that of the now-infamous FTX scandal, I find the nature of the losses at Celsius to be more gut-wrenching. After all, Celsius allegedly convinced a bunch of non-crypto-savvy, ordinary people that Celsius had bank accounts—bank accounts that would give them at least a 5% annual interest, and help them save up for things like having a child—though the company’s own terms of service said the company would take ownership of any deposited funds. 

You have to wonder how investors missed all of it. Or maybe you don’t. In 2020 and 2021, money was being thrown around so quickly that due diligence went by the wayside in many deals. Celsius is hardly an isolated instance from that perspective.

After all, apart from reputational damage, there’s not a whole lot of downside for investors when a startup blows up like Celsius. You can write down the investment and move on. Maybe even offer an apology. If you’ve adequately diversified a portfolio, it’s just a blip on the monitor—a rounding error. 

But when it’s all just a rounding error, you tend to forget about the customers who are left holding the bag. You tend to forget about that couple in Australia who wanted to have a child or that senior citizen who just lost everything. For them, “blip” isn’t the right word to use here. 

These are the losses that likely won’t find their way onto a fund or pension plan’s investment returns. But they are also the losses that stain the name of venture capital and wreak havoc on the lives of everyday people. And that matters, too.

Carlyle names its new chief executive… After months of anticipation, private equity firm Carlyle Group has finally chosen a new top executive, naming former Goldman Sachs executive Harvey Schwartz as CEO, effective Feb. 15. Schwartz is replacing Kewsong Lee, who stepped down suddenly last summer. 

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- ShiftMed, a McLean, Va.-based W-2 health care workforce management marketplace, raised $200 million in funding co-led by Panoramic Ventures led the round and was joined by Blue Heron Capital and Audacious Capital. 

- Magic.dev, a San Francisco-based A.I.-assisted software development product company, raised $23 million in Series A funding. Alphabet’s independent growth fund, CapitalG, led the round and was joined by Nat Friedman, Elad Gil, and Amplify Partners.

- Car IQ, a San Francisco-based vehicle payments platform, raised an additional $15 million in Series B funding. Forte Ventures led the round and was joined by State Farm Ventures, TELUS Ventures, Avanta Ventures, Visa, Bridgestone, Navistar, and Circle K. 

- Mattiq, a Chicago-based electrochemical solutions provider, raised $15 million in seed funding led by Material Impact.

- Samooha, a San Francisco-based data collaboration application company, raised $12.5 million in Series A funding co-led by led by Altimeter Capital, Snowflake Ventures, and other angels. 

- Elementus, a New York-based blockchain data analytics company, raised $10 million in Series A-2 funding led by ParaFi Capital.

- Simple HealthKit, a Freemont, Calif.-based diagnostic delivery health care platform, raised $8 million in Series A funding. Initialized Capital led the round and was joined by Kleiner Perkins, Kapor Capital, and Quest Venture Partners. 

- Wisor AI, a Tel Aviv-based freight booking software company, raised $8 million in seed funding led by Team8. 

- Cenoa, a Singapore-based digital wallet to buy USD, raised $7 million in seed funding. Quiet Capital led the round and was joined by Human Capital, Ulu Ventures, Acrew Capital, and Collective Spark. 

- Disclo, an Atlanta-based job accommodations platform, raised $5 million in seed funding led by General Catalyst.

- HowNow, a London-based employee training and onboarding platform, raised $5 million in Series A funding from Mercia Asset Management and Pearson.

- Moonhub, a San Francisco-based A.I.-based hiring platform, raised $4.4 million in funding. Khosla Ventures and GV co-led the round and were joined by AIX Ventures, Day One Ventures, and other angels. 

- Vertical Insure, a Minneapolis-based insurance provider, raised an additional $2 million in seed funding. Greenlight led the round and was joined by Groove Capital and others.

- Inkle, a Bangalore, India-based digital CPA, raised $1.5 million in pre-seed funding. Picus Capital, Saison Capital, and Force Ventures invested in the round. 

- Olokun Minerals, a Los Angeles-based brine mineral mining company, raised $1.1 million in pre-seed funding. Propeller led the round and was joined by Textbook VC. 

PRIVATE EQUITY

- Andra Tech Group, an Equistone Partners Europe portfolio company, acquired DKH Metaalbewerking, an Uden, Netherlands-based metallic parts and components manufacturer. Financial terms were not disclosed. 

- Ara Partners acquired a majority stake in Wattstor, a Brno, Czech Republic- and London-based automated carbon reduction and electricity technology provider for small and medium-sized businesses. Financial terms were not disclosed.  

- Sandy Alexander, a Snow Peak Capital portfolio company, acquired Abbott Communications Group, a Maitland, Fla.-based printing, mailing, and print management solutions provider. Financial terms were not disclosed.

IPOS 

- Cava, a Mediterranean restaurant chain, confidentially filed for an initial public offering. 

FUNDS + FUNDS OF FUNDS

- Greenbriar Equity Group, a Greenwich, Conn.-based private equity firm, raised $3.475 billion for a fund focused on investing in supply chain, business services, and advanced manufacturing sub-sectors. 

PEOPLE

- KarpReilly, a Greenwich, Conn.-based growth equity firm, named Billy Logan and Hank Spring as managing partners and promoted Will Mooney to partner.