United States v. Mashinsky

1

UNITED STATES OF AMERICA, v. ALEXANDER MASHINSKY, Defendant.

No. 23-cr-347 (JGK)

United States District Court, S.D. New York

November 8, 2024

MEMORANDUM OPINION AND ORDER

JOHN G. KOELTL, DISTRICT JUDGE:

The defendant, Alexander Mashinsky, was charged in a sevencount indictment on July 11, 2023 (the “Indictment”). ECF No. 1. The Indictment charges the defendant with the following crimes: (1) securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and 18 U.S.C. § 2 (Count One); (2) commodities fraud in violation of 7 U.S.C. §§ 9(1) and 13(a)(5), 17 C.F.R. § 180.1, and 18 U.S.C. § 2 (Count Two); (3) wire fraud in violation of 18 U.S.C §§ 1343 and 2 (Count Three);(4) conspiracy to commit securities fraud, market manipulation, and wire fraud through manipulating the price of CEL token in violation of 18 U.S.C. §§ 371 and 1343, 15 U.S.C. §§ 78i(a)(2), 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5 (Count Four); (5) engaging in a fraudulent scheme to manipulate the price of CEL token in violation of 15 U.S.C §§ 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5 (Count Five); (6) market manipulation of Celsius's proprietary token-CEL-in violation of 15 U.S.C §§ 78i(a)(2) and 78ff (Count Six); and (7) wire fraud in connection with the manipulation of CEL in violation of 18 U.S.C. §§ 1343 and 2 (Count Seven).

The Indictment alleges that, from 2018 through June 2022 Mashinsky engaged in two interrelated criminal schemes in connection with his operation of Celsius Network LLC and its related entities (collectively, “Celsius”). The first alleged scheme involved false and misleading statements that Mashinsky purportedly made to customers to induce them to invest their assets with Celsius, and the second alleged scheme involved manipulative trading in CEL.

Mashinsky now moves to dismiss Counts Two and Six of the Indictment pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B), and to strike surplusage pursuant to Federal Rule of Criminal Procedure 7(d). See ECF No. 41. For the reasons that follow, the motions are denied.

I.

The following facts are taken from the Indictment and are accepted as true for the purposes of this motion to dismiss. See United States v. Velastegui, 199 F.3d 590, 592 n.2 (2d Cir. 1999).

In 2018, Mashinsky founded Celsius and served as its CEO. Indictment ¶¶ 1, 10. Mashinsky marketed Celsius as a modern-day bank-a safe place for customers to deposit their crypto assets and earn interest. Id. By the fall of 2021, Celsius had become one of the largest cryptocurrency platforms in the world, at one point purportedly holding $25 billion in assets. Id. ¶ 4.

Celsius's main offering was its “Earn Program.” Through the Earn Program, customers could invest their crypto assets with Celsius and earn returns-weekly “rewards” payments-through Celsius's investment of those assets. Id. ¶ 12. Celsius's core marketing pitch to customers was that Celsius would use their crypto assets to generate yield through safe, low-risk investment strategies, but-unlike traditional banks, which kept most of the profits from investing customer deposits for themselves-Celsius would return the majority of profits back to customers. Id.

The Indictment alleges that Mashinsky repeatedly made public misrepresentations about core aspects of Celsius's business and financial condition to induce retail investors to provide their assets to Celsius and participate in the Earn Program. Id. ¶ 2. Mashinsky allegedly misrepresented, among other things, the safety of Celsius's yield-generating activities, Celsius's profitability, and the risks associated with depositing crypto assets with Celsius. Id.; see also Id. ¶¶ 15-47.

Sometime in 2018, Celsius launched CEL, Celsius's native crypto token, to raise money for Celsius's operations. Id. ¶¶ 5, 14. Mashinsky and Celsius promoted CEL as a worthy investment and encouraged Earn Program investors to receive their weekly rewards in CEL. See id. ¶ 14. Mashinsky frequently discussed CEL in public and equated the price of CEL with the strength of Celsius's overall business. Id. ¶ 48.

The Indictment charges that Mashinsky, who was a large holder of CEL and stood to benefit from an increase in its price, worked with others at Celsius to manipulate the price of CEL. Id. ¶¶ 6, 49-50. Initially, despite Celsius's efforts to promote CEL, the price of CEL remained low; by the end of October 2019, CEL was trading at approximately $0.05 per token. See id. ¶ 51. Mashinsky publicly represented that Celsius would purchase in the market only the amount of CEL necessary to pay investors their weekly CEL rewards. Id. ¶ 55. However, to inflate the price of CEL artificially, in July 2020, Celsius (at Mashinsky's direction) began to purchase excess CEL in the market-approximately three times more CEL than Celsius needed to pay rewards. Id. On occasion, Mashinsky and other Celsius executives also personally purchased CEL to prop up CEL's price. Id. ¶¶ 7, 57-59. This scheme worked: the price of CEL rose from approximately $0.40 in late July 2020 to approximately $5.50 by the end of 2020. Id. ¶ 55. Celsius continued these practices through much of 2021 and in early 2022. See id. ¶¶ 60, 64, 67.

Some of these excess CEL purchases were aimed at supporting CEL's price in anticipation of negative news about Celsius. See id. ¶¶ 54, 58. For example, in July 2020, Mashinsky instructed others at Celsius to be prepared to purchase large quantities of CEL to support CEL's price if a news article that was expected to be critical of Celsius came out. See id. ¶ 54. The article was ultimately published, and Celsius did in fact conduct this large purchase of CEL, which enabled the price of CEL to stay relatively stable as a result. Id.

The Indictment further alleges that Mashinsky repeatedly made false and misleading statements about the nature and extent of Celsius's CEL market activity. Id. ¶¶ 56, 60-63, 65-66. In these statements, Mashinsky falsely claimed that the price increase in CEL was due to “organic” demand, when in reality the price increase was due to Celsius's own excess market purchases. See id. ¶ 56. Mashinsky also allegedly made false and misleading statements regarding his own CEL trading activity-specifically, by representing on certain occasions that he had not been selling CEL when, in fact, he had. Id. ¶¶ 69-71.

According to the Indictment, by artificially inflating the price of CEL, Mashinsky was able to sell his personal CEL holdings for a substantial profit. Id. ¶ 8. Mashinsky reaped approximately $42 million from his personal sales of CEL. Id.

By mid-2022, Celsius was in dire financial straits. Id. ¶ 9. In May 2022, when the prices of crypto assets, including CEL, dropped, Mashinsky continued to tout publicly the safety of the Celsius platform and to encourage investors to continue to deposit their crypto assets with Celsius, even while he withdrew almost all of his non-CEL personal deposits from the platform. Id. On June 12, 2022, Celsius announced that it was halting all customer withdrawals from its platform, leaving hundreds of thousands of Celsius customers unable to access $4.7 billion worth of crypto assets. Id. In July 2022, Celsius filed for Chapter 11 bankruptcy. Id.

II.

Federal Rule of Criminal Procedure 7(c)(1) provides that an indictment “must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.”^[1]An indictment is sufficient if it contains the elements of the offense charged and fairly informs a defendant of the charges against him. See United States v. Alfonso, 143 F.3d 772, 776 (2d Cir. 1998). Accordingly, “an indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.” United States v. Stavroulakis, 952 F.2d 686, 693 (2d Cir. 1992).

An indictment may be defective if it charges logically inconsistent counts. See, e.g., United States v. Conde, 309 F.Supp.2d 510, 511 (S.D.N.Y. 2003) (describing allegations that the defendant's acceptance of payment was both part of a conspiracy to transfer false identification and theft as “mutually exclusive,” rendering the indictment “inconsistent” and therefore “defective”); United States v. Rajarantnam, No. 13-cr-211, 2014 WL 1554078, at *6 (S.D.N.Y. Apr. 17, 2014) (finding two counts inconsistent where the counts attributed the purchase of the same shares to two different defendants).

Moreover, due process requires that a criminal statute “provide a person of ordinary intelligence fair notice of what is prohibited.” United States v. Williams, 553 U.S. 285, 304 (2008). “Due process is not, however, violated simply because the issue is a matter of first impression.” Ponnapula v. Spitzer, 297 F.3d 172, 183 (2d Cir. 2002). “[I]t is immaterial that there is no litigated fact pattern precisely in point,” so long as the language of the statute provides notice. United States v. Kinzler, 55 F.3d 70, 74 (2d Cir. 1995).

A.

1.

Mashinsky moves to dismiss Count Two, contending that the allegations charged in Count Two are “repugnant” to and “inconsistent” with those charged in Count One. ECF No. 42 at 23. Count One charges that Mashinsky, in violation of the Securities Exchange Act of 1934 (the “Exchange Act”), fraudulently “induce[d] investors to purchase an interest in Celsius's Earn Program and to acquire CEL token.” See Indictment ¶¶ 72-73. Count Two alleges that Mashinsky violated the Commodity Exchange Act (the “CEA”) by fraudulently “induc[ing] investors to sell their Bitcoin[s] to Celsius in exchange for an interest in Celsius's Earn Program.” See id. ¶¶ 74-75. Mashinsky does not dispute that Count One, as alleged, sufficiently charges that the Earn Program was a security....