Court letters reveal financial distress after Celsius, Voyager bankruptcies

Recent court documents filed in the bankruptcy cases of Voyager Digital and Celsius Network reveal the financial ruin customers of both companies could face.

“The money that my wife and I hoped to use for our young daughter’s future education is now locked up,” Niraj, a Voyager client, wrote in a statement to Judge Michael Wiles.

“I’ve been in shock ever since Voyager stopped taking off. It’s like your bank no longer allows you to withdraw from your savings accounts. How would you feel? Wouldn’t you feel betrayed?” he added.

Niraj’s letter is one of more than a hundred filed in court and made public by judges in these cases, which includes revelations from users who lost money or believe they were misled by each company.

On June 12, Celsius told its customers that it would freeze all withdrawals on its platform. Three weeks later fellow crypto lender Voyager did the same thing. In the first two weeks of July, both crypto companies filed for Chapter 11 bankruptcy protection.

The fate of each client of the platforms is in the hands of the courts.

“The thousands of us Voyager customers hope that you will carefully consider our lives and livelihoods in presiding over this case,” wrote Jacoub Hammodeh, a customer who trusted Voyager with his warehouses.

Hammadoeh points out that the company “was publicly listed, indicating responsible management of my assets.” Hammadoeh points out that the platform’s CEO, Stephen Ehrlich, positioned himself as an industry veteran, and “Voyager claimed to have full FDIC protection on its USD balances.”

Stephen Ehrlich, CEO and Co-Founder of Voyager Digital Ltd., speaks during the Piper Sandler Global Exchange and FinTech Conference in New York, U.S., June 8, 2022. REUTERS/Brendan McDermid

Stephen Ehrlich, CEO and Co-Founder of Voyager Digital Ltd., speaks during the Piper Sandler Global Exchange and FinTech Conference in New York, U.S., June 8, 2022. REUTERS/Brendan McDermid

Last week, the Federal Reserve and the FDIC issued a joint letter asking Voyager to cease and desist from making false statements about its FDIC insurance status.

The customer admits he strongly considered withdrawing his crypto in early June, but was “reassured” by a Voyager press release that read: “The company is well capitalized and well positioned to weather this cycle and protect the assets of customers”.

Using half of the proceeds from the sale of a family business, Lisa Dagnoli, a mother of four, put over a million dollars in bitcoin, ether and USDC into the Voyager platform. Now, she is outraged by the company’s proposal to partially repay creditors with equity and tokens for a new company.

“I take responsibility for the investment and the risk, but Voyager’s leaders and Voyager Digital, LLC must take responsibility for paying us back our due, in full,” Dagnoli wrote in a letter filed with the court.

“Business is doing very well”

Like other Celsius Network customers-turned-creditors interviewed by Yahoo Finance, one party is calling for Celsius’ management to be ousted based on its statements up until June 12, when the company suspended customer withdrawals.

Celsius owes $4.7 billion to its customers and faces a $1.2 billion hole between its reported assets and outstanding liabilities, its latest bankruptcy filing showed. Earlier this month, the company paid customers through its bitcoin mining subsidiary.

Robert Cominos, a Celsius customer of about a year who “transferred about $250,000” to its platform, claims in his letter that interviews with the company’s co-founder and CEO, Alex Mashinsky, convinced him to make the move.

“The business is doing very well,” Mashinsky told a reporter on April 13.

“Celsius is a yield magnet, a magnet for people who want to save and earn income,” Mashinsky said he told Yahoo Finance in June 2021. “We just passed 800,000 users and many, many of them are living off this income.”

LISBON, PORTUGAL - 2021/11/04: Alex Mashinsky, founder and CEO of Celsius, addresses the audience during the final day of Web Summit 2021 in Lisbon.  (Photo by Bruno de Carvalho/SOPA Images/LightRocket via Getty Images)

LISBON, PORTUGAL – 2021/11/04: Alex Mashinsky, founder and CEO of Celsius, addresses the audience during the final day of Web Summit 2021 in Lisbon. (Photo by Bruno de Carvalho/SOPA Images/LightRocket via Getty Images)

In another letter to Celsius, an investor who deposited 6 items of his life savings on the platform cites a Celsius Medium post published on June 7 that sought to rebuke its rumored financial woes. In its post, Celsius claimed that “a handful of haters” were spreading misinformation about the company.

“Celsius has the reserves (and more than enough ETH) to meet obligations as dictated by our comprehensive liquidity risk management framework,” the company said.

Five days later, Celsius said it would stop all customer withdrawals on the platform. A month later, the company announced that it had filed for bankruptcy.

Not everything, but not nothing either

Those personal stories “will also give judges a sense that for many of these clients the impact of these bankruptcies is far-reaching and deeply affecting their lives,” bankruptcy judge Daniel Saval told Yahoo Finance.

However, in Saval’s view, whether and how these customers will be completed is a difficult path for customers right now.

“I think it’s going to be a challenge,” Saval said. “The way these exchanges work is that they usually pool the contents of customer accounts together. This means they do not maintain separate accounts. As a result, in these circumstances, the likely outcome is that the property will be deemed to belong to the bankruptcy estates, as opposed to belonging to the clients themselves.’

In bankruptcy proceedings, secured creditors usually get the first payment in any money. Unsecured creditors are usually next on the list. However, before any claimant receives what they are owed, bankrupt companies must pay operating costs and legal fees through the bankruptcy process.

“There is no blueprint in the bankruptcy code that decides what happens in these circumstances for clients. This is all new,” Saval said.

“If [the customers] are considered unsecured creditors, then in theory, they could be lumped in with all other types of creditors. In theory they could all be grouped together,” Saval explained.

Although both crypto lenders have proposed some form of repayment plan, a distribution plan is far from decided in either case, according to Adam Levitin, a professor at Georgetown Law School and principal at financial advisory, Gordian Group.

Whether distributions are paid in crypto-assets or fiat currencies depends first on whether the companies liquidate their remaining crypto-assets and, second, on the distribution plan agreed to by the organized committee of creditors of each case by majority vote.

“I can say with almost absolute certainty that clients are not going to get anything and they are not going to be paid in full,” Levitin told Yahoo Finance. He added that because either process could “go on for years,” customers expecting a payout should consider other factors, such as crypto market volatility and inflation.

Earlier this month, Voyager responded to a joint proposal by FTX and Alameda Research that submitted an offer to purchase customer accounts. The offer argued that it reduced risk for customers holding unsecured claims with Voyager in exchange for FTX potentially acquiring those creditors as new customers.

The FTX logo displayed on a phone screen and a representation of the cryptocurrency are seen in this illustrative photo taken in Krakow, Poland on February 16, 2022. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

(Photographic illustration by Jakub Porzycki/NurPhoto via Getty Images)

In its response, Voyager claimed the offer made “several false and misleading claims” about its business. “It is a low-ball offering dressed up as a white knight rescue,” the legal filing said.

Such a transaction could reduce the risk for customers holding unsecured claims during a complex bankruptcy process. But as Levitin pointed out, that won’t change if customers see full compensation for their claims.

‘Curated BS’

Letters from Celsius and Voyager customers show users asking for their assets back, although they reflect a clear uncertainty about whether they will ever see that money again.

“Now I’m sorry I believed it (so) their marketing strategy and possibly losing my family savings,” Voyager client Digant Goyal wrote in his letter to Judge Wiles.

Goyal’s sentiment was echoed by Daniel James Howley, who told the court, “the majority of my lifetime assets, accumulated through some ups and downs as an entrepreneur, are locked away in Voyager without knowing if, when or how much of it I will win. access again.”

“My savings to buy a house, build and support a family and invest in my future are all locked away in this account,” he added.

Chapman Shallcross, a retired firefighter, held $244,000 in ETH and ADA in another cryptocurrency lender, BlockFi before transferring assets to Celsius Network “based entirely on overwhelmingly positive feedback,” he wrote in his letter. “And now I find out that all this information I had gathered was edited BS”

For Amanda Gan, a Celsius customer, the company’s bankruptcy and the uncertainty surrounding her $167,000 in crypto assets has led to “significant distress,” according to her letter.

“Losing this amount of our savings will have irreparable consequences for our family,” he retreated.

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