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 securities fraud, commodities fraud, wire fraud, market manipulation, and conspiracy to commit securities fraud, wire fraud, and market manipulation. The defendant has moved pursuant to Rule 15 of the Federal Rules of Criminal Procedure and 28 U.S.C. § 1783(a), to preserve the testimony of six witnesses who reside outside the United States. For the following reasons, the motion is granted in part and denied in part.

I.

The Indictment alleges that, from 2018 through June 2022, the defendant 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 the defendant purportedly made to customers to induce them to invest their assets with Celsius, and the second alleged scheme involved manipulative trading in CEL, Celsius's native crypto token.

According to the Indictment, in 2018, the defendant founded Celsius and served as its CEO. Indictment ¶¶ 1, 10. The defendant marketed Celsius as a safe place for customers to deposit their crypto assets and earn interest. Id. ¶ 1. By the fall of 2021, Celsius had become one of the largest cryptocurrency platforms in the world. Id. ¶ 4.

The first alleged scheme involved Celsius's “Earn Program,” through which customers could invest their crypto assets with Celsius and earn returns-weekly “rewards” payments. Id. ¶ 12. The Indictment alleges that the defendant repeatedly made public misrepresentations about core aspects of Celsius's business and financial condition to induce retail investors to invest their assets in the Earn Program. Id. ¶ 2. The defendant allegedly misrepresented, among other things, Celsius's profitability and the risks associated with depositing crypto assets with Celsius. Id. ¶¶ 2, 15-47. For example, the Indictment alleges that the defendant assured Celsius's customers that Celsius was not making “directional bets”-that is, gambling on the future value of cryptocurrencies by taking long or short positions in various crypto assets-but instead was earning yield on Celsius's customers' investments through a market-neutral strategy. Id. ¶ 31. However, the defendant allegedly knew that, contrary to his representations, Celsius was not market-neutral and instead regularly used customer assets to take risky bets on the future value of crypto assets. Id.

The second alleged scheme involved CEL, Celsius's native crypto token, which was launched sometime in 2018. Id. ¶¶ 5, 14. The defendant and Celsius touted CEL as a worthy investment and encouraged Earn Program investors to receive their weekly rewards in CEL. See id. ¶ 14.

The Indictment charges that the defendant, 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. The defendant publicly represented that Celsius would purchase in the market only the amount of CEL necessary to pay investors their weekly CEL rewards. Id. ¶ 53. However, to inflate the price of CEL artificially, in July 2020, Celsius (allegedly at the defendant's direction) began to purchase excess CEL in the market-approximately three times more CEL than Celsius needed to pay rewards. Id. ¶¶ 54-55. The defendant and other Celsius executives also personally purchased CEL to prop up CEL's price. Id. ¶¶ 7, 57-59. As a result, 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. ¶¶ 64, 67.

The Indictment also alleges that the defendant repeatedly made false and misleading statements about Celsius's CEL market activity. Id. ¶¶ 56, 60-63, 65-66. In these statements, the defendant 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. The defendant also allegedly made false and misleading statements regarding his own CEL trading activity. Id. ¶¶ 69-71.

By artificially inflating the price of CEL, the defendant allegedly reaped approximately $42 million from his personal sales of CEL. Id. ¶ 8.

On July 11, 2023, the defendant and Roni Cohen-Pavon, Celsius's Chief Revenue Officer, were charged in the Indictment. See ECF No. 1.

On September 13, 2023, Cohen-Pavon pleaded guilty, pursuant to a cooperation agreement, to four counts of the Indictment. See ECF No. 32.

On January 12, 2024, the defendant filed a motion to dismiss Counts Two and Six of the Indictment and to strike surplusage from the Indictment (the “motion to dismiss”).^[1]

On February 20, 2024, the Court set the trial date in the defendant's case as January 28, 2025. See ECF No. 54.

II.

On September 14, 2024, the defendant filed a motion to preserve the testimony of six witnesses residing outside the United States. See ECF No. 68. The defendant seeks permission to take the depositions of five witnesses who are outside the subpoena power of the Court, and to subpoena for trial one United States citizen who currently resides in Israel. The six witnesses are: Cohen-Pavon, Daniel Leon, Johannes Treutler, Ron Sabo, Yaron Shalem, and Yarden Noy. The Government opposes the motion. See ECF No. 72.

A.

Cohen-Pavon is an Israeli citizen who resides in Israel. The Indictment alleges that Cohen-Pavon and the defendant were co-conspirators in the alleged market manipulation scheme involving CEL. The defendant argues that Cohen-Pavon is a material witness on both the market manipulation and fraud charges. As to the market manipulation charges, the defendant claims that Cohen-Pavon provided legal advice to Celsius regarding its CEL market activity from 2019 and 2022, and that, in 2021, Cohen-Pavon and several other Celsius employees disregarded explicit instructions from the defendant to sell CEL and instead chose to buy CEL. As to the fraud charges, the defendant asserts that the defendant sought advice from Cohen-Pavon regarding his public statements about Celsius, and that in some cases Cohen-Pavon deliberately decided not to correct or advise the defendant about the alleged inaccuracy of the defendant's statements. Cohen-Pavon is a cooperating witness and is expected to testify at the trial in January.

B.

Leon was Celsius's co-founder and former President, Chief Operating Officer, and Chief Strategy Officer. Leon is a United States and Israeli citizen who resides in Israel. The defendant claims that Leon, like Cohen-Pavon, was part of the group of Celsius employees who disregarded the defendant's instructions to sell-rather than buy-CEL throughout 2021. The defendant also asserts that Leon had contemporaneous knowledge of unauthorized directional trading and substantial losses in these positions, which were not disclosed to the defendant, and that Leon drafted a blog post, issued by Celsius in June 2022, that stated that “Celsius has the reserves . . . to meet obligations, as dictated by our comprehensive liquidity risk management framework,” even though in reality Celsius's business was in trouble. Indictment ¶ 47. The defendant also points to Leon's WhatsApp conversations with Cohen-Pavon, which the defendant claims suggest that Cohen-Pavon deliberately decided not to correct perceived inaccuracies in the defendant's public statements regarding Celsius.

On August 1, 2024, defense counsel emailed counsel for Leon, seeking an interview in preparation for trial. Westfal Decl. ¶ 10a, ECF No. 69. On August 12, 2024, Leon's counsel responded that Leon was not available for an interview, that Leon was unwilling to return to the United States to testify at the trial, and that Leon was unwilling to sit for a pre-trial deposition in Israel. Id. ¶ 10c.

C.

Treutler, a German citizen who resides in Germany, was Celsius's former Senior Token Analyst and head of Celsius's Yield Desk. With respect to the market manipulation charges, the defendant alleges that Treutler was responsible for Celsius's weekly CEL purchases from 2019 through 2021, and that, from May 2021 through January 2022, Treutler bought hundreds of millions of dollars' worth of CEL on the FTX cryptocurrency exchange through a secret Celsius subaccount at the instruction of, or with the knowledge of, Cohen-Pavon, Leon, Sabo, and Shalem. However, Treutler allegedly provided inaccurate reporting on his CEL purchases in order to conceal these purchases from the defendant and the rest of the company. With respect to the fraud charges, Treutler is quoted in the Indictment's allegations regarding the directional trading positions that Celsius purportedly took at the direction of the defendant. See Indictment ¶ 32. The defendant also alleges that Treutler himself conducted directional trading in 2021 at the direction of, or with the knowledge of, Cohen-Pavon, Leon, Sabo, and Shalem, and that this trading activity was not disclosed to the defendant until 2022.

On June 10, 2024, defense counsel emailed counsel for Treutler to request an interview in preparation for trial, but Treutler's counsel declined. Westfal Decl. ¶ 11a. On August 5, 2024, defense counsel asked...