US Trustee seeks appointment of examiner in Celsius Chapter 11 case
William K. Harrington, United States Trustee for Region 2, is seeking appointment of an examiner in the Celsius Chapter 11 case.
The relevant motion was filed on August 18, 2022 in the New York Southern Bankruptcy Court.
The Trustee notes that the market for cryptocurrency is relatively new, purposefully opaque, and, at best, loosely regulated. It also lacks transparency, which has resulted in widespread confusion among Celsius’ customers and other parties in interest, requiring the immediate appointment of an examiner under section 1104(c)(1).
This lack of visibility did not start with the bankruptcy filing; it has been ongoing and is evidenced by the sudden changes in types of customer accounts and extensive customer confusion about the status of individual assets. There is no real understanding among customers, parties in interest, and the public as to the type or actual value of crypto held by Celsius or where it is held.
The Trustee argues that an independent examiner is necessary here to investigate and report in a clear and understandable way on the Celsius’ business model, operations, investments, lending transactions, and the nature of the customer accounts to ensure public confidence in the integrity of the bankruptcy system and to neutralize the inherent distrust creditors and parties in interest have in the Debtors.
There are also numerous questions in this case as to the Debtors’ management and their role in creating the Debtors’ current illiquidity (i.e., the prepetition failure of the Debtors and their affiliates to adequately collateralize their loans on an institutional level and the Debtors’ repayment of hundreds of millions of dollars in loans during the ninety days prepetition) that require investigation by an impartial third party.
Moreover, the allegations found in the prepetition complaints and regulatory actions against Celsius are severe, including allegations of offering of unregistered securities, the failure to obtain proper licenses, and the failure to hedge against market volatility. If these allegations are true, they could expose further irregularities. An examiner would be able to look into these and other issues to determine if there are any claims or causes of actions that the Unsecured Creditors Committee (the “Committee”) can pursue.
The Trustee says:
“Celsius’ professionals acknowledge many of these facts and circumstances and have provided information requested by the United States Trustee. Irrespective of such cooperation, however, the divergent interests of the various estates, the extreme financial irregularities that have taken place, and the extensive mistrust of the Debtors’ customers, all make the appointment of an independent and disinterested examiner in the best interests of creditors, equity security holders, and the bankruptcy estates”.
Also, while it is helpful that the Committee has been formed and has already begun the difficult work of advancing the collective interest of the Debtors’ creditors, the Committee, as a party in interest, is not neutral and not tasked with providing a public report of its findings for the benefit of all parties in interest and the public. Given the unique nature of these cases, a public report which provides transparency as to the Debtors’ business model and operations, their investments, their lending transactions, and the nature of customer accounts is essential.
Based on the limited facts provided, the Debtors’ capital structure includes unsecured debt in excess of the $5 million threshold of Bankruptcy Code section 1104(c)(2). Thus, the appointment of an examiner is not only necessary and in the best interest of creditors and parties in interest, but it is also mandatory.
Accordingly, an examiner should be appointed to provide the Court, the United States Trustee, creditors, and other parties in interest with transparency and clarity as to the business structure, practices, and liquidity of the above-captioned Debtors.
For these reasons, the United States Trustee urges the Court to direct the United States Trustee to appoint an Examiner, pursuant to section 1104(d) of the Bankruptcy Code.
On a regular basis, customers of Celsius file grievance letters on the Court docket. These allegations include (i) that the Debtors ran a Ponzi scheme where the yield was coming from new investors and not from the charged interests on loans; (ii) that employees withdrew their own funds in advance of the account freezing, thereby causing additional market volatility; and (iii) that current management made regular public announcements to customers assuring them of the safety of their crypto assets through regular AMAs (Ask Me Anything) when management was aware of the danger surrounding investments.