Relevant Document:NYAG Opposition
In a brief filed yesterday, Tuesday, June 6, New York Attorney General Letitia James defends her state court
securities fraud suit against former Celsius CEO Alex Mashinsky. According to the AG, Mashinsky engaged in a “scheme to persuade investors to abandon traditional banking in favor of Celsius” by misrepresenting that the
bankrupt crypto platform’s
Earn program accounts would be safe as bank accounts and “generate high yield at low risk.”
James’ brief focuses on Mashinsky’s key argument for dismissal of the securities fraud claims: that the Earn program accounts are not “securities” under the three-part federal
Howey standard. James responds that under New York law, an instrument qualifies as a security if it satisfies either the
Howey standard
or New York’s 1936
Waldstein standard. Under
Waldstein, the AG argues, the Earn accounts qualify as securities because they are “used for the purpose of financing and promoting enterprises” and “designed for investment.”
James specifically maintains that there is no need for investors’ fortunes to be tied to those of other investors, as Mashinsky argues. Such “horizontal commonality” is an outdated requirement rejected by New York courts applying the
Howey standard and the U.S. Supreme Court, the AG says.
James argues the Earn accounts qualify as securities under the modern
Howey standard applied in New York because, contrary to Mashinsky’s assertions, account holders in fact invested “in a common enterprise” and were “led to expect profits solely from the efforts of the promoter or a third party.” Rates paid to Earn account holders, James asserts, were supposedly “calculated by weekly demand for each coin combined” and thus sufficiently tied to Celsius’ “success in generating profits” to satisfy the common enterprise requirement.
Mashinsky also promised to return up to 80% of profits to depositors and described the accounts as “sleep-to-earn,” James notes, suggesting a connection between account holder recoveries and the success of Mashinsky’s investment efforts. “Celsius pooled funds from passive investors and used its expertise to generate returns” for Earn account holders, James concludes, and that is sufficient for the accounts to qualify as securities.
The fact that Earn account rates were fixed alone does not obviate their qualification as securities, James continues. According to the AG, New York courts and the U.S. Supreme Court “have rejected Mashinsky’s reading, instead holding that ‘contractual entitlement to a return … does not mean that the return is not also expected to come … from the efforts of others.’” The complaint “clearly alleges that investors expected to share in Celsius’s profits” and that “any profits they received would come solely from the efforts of Celsius,” James concludes.