Last Updated on May 3, 2023 by Bitfinsider
In a legal battle that pits its clients against Series B investors, the bankrupt cryptocurrency company is the most recent to be accused of having inadequate record-keeping in its organizational structure.
The company established a Limited Liability Company in Delaware in 2021 and attempted to transfer assets through a series of financial transactions after its Celsius Network Limited subsidiary had received a warning from the Financial Conduct Authority of the United Kingdom to stop operating there.
The relocation “resulted in intercompany chaos,” Celsius claimed in a filing on May 1. The company added that internal documents are “sorely lacking,” making it difficult or impossible to separate the operations of each entity.
The lawsuit also argued that the two organizations should be considered as one for bankruptcy reasons because less skilled Series B investors were aware of the poor record keeping while more regular customers, who were mislead by management, were unaware of the ramifications of this move.
The reorganization was a “sham” and a “facade,” according to parallel filings by a committee of Celsius’ creditors, and the billions of dollars transferred between the two entities were fraudulent, suggesting the New York court should disregard them in its effort to return money to creditors.
That is similar to statements made about FTX, whose lawyers referred to the defunct cryptocurrency exchange as a “digital Potemkin village” whose slick front-end concealed a chaotic and poorly regulated reality.
Judge Martin Glenn determined on March 9 that customers only had claims against the Delaware LLC business. This judgment raises the possibility that holders of Series B preferred shares, whose investment would ordinarily be downgraded under bankruptcy law, will be able to recover some of their investment.
Glenn will now examine Celsius’ allegation that the two organizations should be “substantively consolidated,” combining assets and client claims, during the week of July 24.
In July 2022, Celsius sought bankruptcy protection. The assets of Celsius will continue to be auctioned off on Wednesday, with Fahrenheit LLC and the Blockchain Recovery Investment Committee now competing against the preferred bidder NovaWulf.
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