Damning report on Celsius Network | The work of the CDPQ raises new questions

Accounting worthy of a local convenience store, mentions of a Ponzi scam and questionable practices: a damning report from the American justice system adds a layer to the weakness of the checks carried out by the Caisse de dépôt et placement du Québec (CDPQ) before betting 200 million on Celsius Network – a sum that evaporated in less than a year.

The report by former federal prosecutor Shoba Pillay – appointed by New York judge Martin Glenn, who is overseeing the bankruptcy proceedings of the controversial cryptobank – was made public on Tuesday. The document of approximately 700 pages draws up several disturbing observations on the practices of the ex-partner of the woolen stockings of Quebecers.

“Behind the scenes, Celsius was conducting its business in a radically different way than how it presented itself to its customers, in all areas,” says the auditor.

“Ponzi Consultant”

Since the Celsius debacle, its business model has more than once been compared to a Ponzi scheme. This is what employees of the company also seemed to think from 2021 – before the arrival of the CDPQ in the portrait.

“On January 19, 2021, Mr. [Dean] Tappen said, in an internal communication, that his title at Celsius should instead be ‘Ponzi consultant’,” the report reveals.

In interrogation, Dean Tappen, “specialist in currency development”, tried to minimize the scope of his statement by saying that it was a “bad joke” made during “a late night conversation”. A Ponzi scheme involves using money inflows from new investors to pay false returns to other investors or reimburse those who want their money back.

With due respect to Mr. Tappen, the investigation of Mrs.^me Pillay reveals that Celsius had been dipping into client deposits and using investors’ money almost from day one.

This practice notably allowed Celsius to artificially support the price of its own virtual currency – called CEL – while its former CEO and founder Alex Mashinsky and other employees sold it. The businessman was able to pocket nearly 70 million US thanks to this scheme.

Cheap accounting

It was presented as a “world-class” platform by the Caisse in October 2021 with a valuation of more than 3 billion US. However, Celsius performed its bookkeeping with QuickBooks, an accounting software that is primarily aimed at small and medium-sized enterprises (SMEs).

M^me Pillay was able to interview at least 25 employees and ex-employees of the cryptobank, including Mr. Mashinsky, during his investigation.

Despite all the resources at her disposal, the complexity of the company’s accounting system “hampered” the auditor’s work, the report says. Financial information was distributed across 15 different entities. It was therefore difficult to have a good portrait of the financial situation of the cryptobank founded in 2017.

“Celsius began manually preparing consolidated financial statements in the second quarter” of 2021, Ms.^me Pillay.

” A mess ”

How could the CDPQ carry out a due diligence according to the rules of the art if a court-appointed auditor with extended powers had difficulty obtaining what she was asking for? This is the question posed by Saidatou Dicko, professor of governance in the accounting department of ESG UQAM and expert in governance.

M^me Dicko was “stunned” by the content of M’s report^me Pillay.

“How was the CDPQ able to invest in this company? she asks. We threw the money out the window. We were talking about a world-class company, but it was run like the corner store. If la Caisse thought it was investing in a world-class company, did it carry out world-class verifications? »

Verifier Wanted

M^me Pillay believes Celsius was essentially insolvent since its founding. Even during a “bull market” year, the company recorded a pre-tax loss of US$811 million in 2021, she points out. The situation deteriorated greatly the following year, where the plunge in cryptocurrencies caused a liquidity crisis.

However, “Celsius never implemented a robust risk management policy before filing for bankruptcy,” writes the auditor.

In terms of compliance, a person had been hired to perform an audit – to comb through the financial statements – but the senior management of the cryptobank delayed the establishment of formal practices in the matter.

On analysis

When questioned, the CDPQ said that it had read the report, without going any further.

Last August, the president and CEO, Charles Emond, publicly acknowledged the institution’s error. She refuses to say more, citing the legalization of the situation at Celsius. She still hasn’t explained how her due diligence prompted her to lay down millions in a company that collapsed less than a year later.

At the time of this writing, Judge Glenn had not commented on the contents of the document. It was not immediately known what impact it will have on bankruptcy proceedings. In parallel with this process, the ex-boss of Celsius is the subject of a civil lawsuit.