Celsius targets Tether, Badger DAO, Compound, and Netanyahu's niece and nephew in lawsuits

Quick Take

  • Celsius filed a lawsuit against Tether on Friday in an attempt to claw back Bitcoin worth $2.4 billion that the company says Tether sold improperly at the bottom of the market as the crypto lender began to collapse. 
  • Tether has vowed to defend itself against the lawsuit, which CEO Paolo Ardoino described as “baseless” and “bullying.” 
  • Tether joins other targets of Celsius lawsuits including Badger DAO, for losses suffered by Celsius related to its 2021 hack, Compound Labs, for losses related to a November 2020 oracle incident, and Bancor DAO, which is owned by Israeli Prime Minister Benjamin Netanyahu’s niece and nephew, among others, for yet more losses. 

Bankrupt crypto lender Celsius has filed a number of lawsuits in recent weeks attempting to claw back billions of dollars in funds for creditors from a variety of crypto companies, including the world's biggest: Tether. Other companies include three which suffered a variety of losses and failures since 2020: Badger DAO, Compound, and Bancor, which is partially owned by a niece and nephew of Israeli Prime Minister Benjamin Netanyahu. 

While the suit against Tether is the latest in a litany of lawsuits intended to recover withdrawals and preferential payments made by Celsius in the crucial 90-day period before its bankruptcy, Celsius's lawsuits against the other DAOs are more general complaints of mismanagement leading to losses. Tether has vigorously denied wrongdoing, calling the suit "Shake Down litigation" in a blog post. 

Celsius v. Tether

The largest among the lawsuits was filed on Friday and targets Tether for 39,542 bitcoin, worth over $2.4 billion at current prices, that Celsius says made up collateral for loans it had taken out from Tether, the world's largest stablecoin issuer. When prices began to slide in early 2022, Tether requested more collateral from Celsius to prop up its loans, which the lender transferred over in the form of bitcoin on several occasions throughout May and June. Celsius also took out an additional $300 million in USDT in loans beginning in April 2022, crucially within 90 days of Celsius' bankruptcy filing that July. 

Without these transfers, the lawsuit argues, "Tether would not have been able to come close to making itself whole on its $812,330,000 USDT loan to Celsius" and "Tether would have had over $350 million less in collateral" had the transfers not been made. 

According to the lawsuit, after Celsius satisfied Tether's request for over 3,000 bitcoin worth of additional collateral on June 12, 2022 (worth about $350 million at the time), the stablecoin issuer requested a second collateral demand. While Celsius was allegedly putting together the funds during a contractually mandated ten-hour waiting period, Tether decided to liquidate Celsius's complete collateral, the 39,542 bitcoin, within just hours. 

Celsius's lawsuit alleges that the lender could have come up with the bitcoin had it been given the full time allotted by the contract. "If Celsius had been given the opportunity to meet the collateral demand—which it had the contractual right to do—it could have been able to avoid the disposition of its Bitcoin at near the bottom of the cryptocurrency market. Instead, that disposition was carried out for the benefit of just one creditor: Tether," the lawsuit states, though the lawsuit also admits, "Amidst the chaos of June 13, 2022, Celsius’s CEO Alex Mashinsky allegedly gave Tether permission to liquidate Celsius’s collateral in an “orderly” manner." 

The lawsuit notes that Tether only received an average price of $20,656.88 per bitcoin, which the lawsuit notes is "considerably below Bitcoin’s low price of $22,808 on Bitfinex, a crypto exchange controlled by Tether’s parent company, around the time when the collateral was allegedly liquidated." 

Tether, in a blog post, vigorously denied wrongdoing, writing, "We look forward to responding in court to this contrived, meritless shakedown that will benefit nobody other than the lawyers, bankers and consultants involved in bringing this case." Tether's CEO, Paolo Ardoino, echoed the sentiment on X, writing, "There are plenty of flaws in the claimant’s filing and we're very confident in the solidity of our contract and our actions."

Celsius v. Bancor

In a lawsuit filed on July 12, Celsius targeted the founders of Bancor DAO, an automated market maker (AMM) powered decentralized exchange protocol on Ethereum which claimed to be impervious to impermanent loss (IL) — a type of loss incurred when someone supplies two unrelated crypto assets to a liquidity pool. Notably, two of the defendants are siblings Galia and Guy Ben-Artzi, founders of Bancor DAO and LocalCoin and a niece and nephew of Israeli Prime Minister Benjamin Netanyahu. 

The lawsuit alleges Bancor's mechanism was flawed from the start. "Impermanent loss protection was, according to Defendants, to be paid for by fees generated by the Protocol. At all times, however, the fees that the Protocol earned were insufficient to cover the cost of IL protection for all LPs [liquidity providers] – indeed, they covered only a fraction of the unrealized IL in the system," the lawsuit states. "Therefore, if enough LPs withdrew their assets at the same time, there would be insufficient funds to provide IL protection for all of the withdrawals, and the Protocol would suffer a “death spiral,” similar to a run on a bank." 

Bancor was, in fact, eventually forced to use emergency DAO powers to pause its impermanent loss protection, an eventuality that Celsius's suit contends its founders must have been aware of given economic reports they had commissioned from consulting firm Topaze Blue that showed Bancor's fees were not enough to cover all impermanent loss. Bancor was unable to be immediately reached for comment by The Block. 

Celsius's lawsuit alleges that the process by which the impermanent loss protection was passed in an emergency measure was improper and so, as the protocol struggled, Celsius sought to withdraw funds. "From June 23 through 27, 2022, Celsius withdrew 14,878 ETH from the Protocol. Because Defendants had improperly suspended IL protection and token rebalancing, Celsius received only 8,338 ETH. Celsius therefore lost 6,540 ETH, which had a market value at the time of approximately $7.8 million." The value is about $17 million at current prices. 

Celsius v. Badger and Compound

Two additional lawsuits filed in July target Badger DAO and Compound Labs for losses Celsius incurred following a hack of Badger DAO and an oracle-related liquidation incident on Compound. 

The lawsuit against Badger DAO targets the protocol's founder, Christopher Spadafora, for touting the security of the protocol and Cloudflare, a service provider, for lacking reasonable safeguards, leading to a $120 million exploit in December 2021

Unlike many other DeFi hacks that target a protocol's smart contracts directly, Badger DAO's attacker was able to compromise the front-end website using fraudulent Cloudflare credentials, injecting malicious code that gave the attacker access to connected wallets. Once a sufficient number of whales fell into the trap — including Celsius — the attacker ran away with the funds, which included more than $50 million in bitcoin from Celsius, according to the lawsuit

The lawsuit claims Cloudflare showed gross negligence and Spadafora breached his fiduciary duty by not securing the frontend website, and seeks damages in an amount to be determine at trial. Cloudflare and Spadafora were unable to be immediately reached by The Block. 

In a final notable lawsuit, Celsius has targeted Compound Labs, the company behind Compound Finance, in connection with a massive spike in liquidations caused by an increase in the price of the stablecoin DAI to $1.30 on Coinbase Pro, which was allegedly used as the sole source of information for Compound's oracle at the time. 

"As a direct result of the DAI price spike, Compound initiated a series of eight liquidation transactions...in a Celsius wallet, resulting in a total of 2,509,770.21 cETH being taken from the wallet and distributed to various liquidator wallets. That 2,509,770.21 cETH would have been redeemable for a total of 50,268.9529 ETH, all of which Celsius was forced to have to repurchase on the open market following the liquidation event," the lawsuit states

Celsius alleges that had Compound used multiple oracles for the price feed, as it claims it does in the protocol's whitepaper, the liquidation event would have been avoided. "But for the failures by Compound Labs in the design, operation, and maintenance of Compound, Celsius would not have been harmed," the lawsuit states. 

Whether the courts will find merit in any of Celsius's lawsuits remains to be seen. The company recently settled with KeyFi founder Jason Stone, agreeing to liquidate hundreds of different tokens and NFTs in connection with the settlement.


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About Author

Zack Abrams is a writer and editor based in Brooklyn, New York. Before coming to The Block, he was the Head Writer at Coinage, a Web3 media outlet covering the biggest stories in Web3. The story he co-reported on Do Kwon won a 2022 Best in Business Journalism award from SABEW. Other projects included a deep dive into SBF's defense based on exclusive documents and unveiling the identity of the hacker behind one of 2023's biggest crypto hacks — so far. He can be reached via X @zackdabrams or email, [email protected].