Celsius Faces Merger Chaos Amid Allegations of Fake Distinction

Key Points:

• Celsius Network, a crypto lender, faces allegations of poor record-keeping in its corporate structure and is seeking to merge its U.K. and U.S. entities.
• The court fight pits Celsius customers against Series B investors, with parallel filings by a committee of Celsius’ creditors alleging fraudulent transfers between the two entities.
• Judge Martin Glenn’s finding that customers only had claims against the Delaware LLC entity increases the chances that Series B preferred equity holders could recoup some of their investment, with the court set to consider Celsius’ argument that the two entities should be “substantively consolidated” in the week of July 24.

Crypto lender Celsius Network is facing allegations that the distinction between its U.K. and U.S. entities was a “sham,” as it seeks to merge the two in court filings.

The company, which filed for bankruptcy protection in July 2022, has been accused of poor record-keeping in its corporate structure. The dispute pits Celsius Network’s customers against Series B investors, with the latter group claiming that the two entities should be treated as one for bankruptcy purposes.

In 2021, Celsius Network set up a Limited Liability Company in Delaware and attempted to transfer assets through a series of financial transactions. However, the migration led to “intercompany chaos,” according to a May 1 filing by Celsius, with internal records “sorely lacking,” making it difficult to disentangle each entity’s affairs. Regular customers were reportedly misled by management and did not understand the implications of the transfer, while more sophisticated Series B investors were aware of deficient record-keeping.

Parallel filings by a committee of Celsius’ creditors describe the reorganization as a “sham” and a “facade,” alleging that the billions of dollars transferred between the two entities were fraudulent. These filings suggest that the New York court, which is attempting to restore funds to creditors, should disregard the transfers.

The allegations echo claims made about bankrupt crypto exchange FTX, which was described by its attorneys as a “digital Potemkin village,” disguising a messy and ill-governed reality.

In a March 9 opinion, Judge Martin Glenn found that customers only had claims against the Delaware LLC entity, increasing the chances that Series B preferred equity holders could recoup some of their investment. Under bankruptcy law, these investors would normally be downgraded.

Glenn will now consider Celsius’ argument that the two entities should be “substantively consolidated” in the week of July 24, merging assets and customer claims. An auction of Celsius’ assets is scheduled to continue on Wednesday, with favored bidder NovaWulf now facing competition from Fahrenheit LLC and the Blockchain Recovery Investment Committee.

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