Adds details from complaint, James quote, background on bankruptcy
NEW YORK, Jan 5 (Reuters) - New York's attorney general on Thursday sued Celsius Network founder Alex Mashinsky, claiming he schemed to defraud hundreds of thousands of investors by inducing them to deposit billions of dollars with his now-bankrupt cryptocurrency lending platform.
Mashinsky was accused of promoting Celsius as a safe alternative to banks, while concealing the mounting losses from risky investments that contributed to its collapse, according to a complaint filed by Attorney General Letitia James in a New York state court in Manhattan.
"Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin," James said in a statement. "Making false and unsubstantiated promises and misleading investors is illegal."
Mashinsky did not immediately respond to requests for comment.
The civil lawsuit accuses Mashinsky of violating the state's Martin Act, which gives James broad power to pursue securities fraud cases, and other laws.
It seeks to ban Mashinsky from doing business in New York, and have him pay damages, restitution and disgorgement.
Celsius, based in Hoboken, New Jersey, filed for Chapter 11 protection from creditors last July 13, one month after freezing withdrawals and transfers for its 1.7 million customers because of "extreme" market conditions.
James said Mashinsky's promotional efforts through social media, interviews and cryptocurrency conferences helped Celsius amass $20 billion of digital assets by early last year.
But according to the lawsuit, Celsius struggled to pay the promised yields on investor deposits, prompting its move into riskier investments.
The lawsuit said that in the two weeks before the withdrawal freeze, Mashinsky was still dismissing criticism that Celsius was overextended, urging investors to "ignore the FUD," short for "fear, uncertainty and doubt."
(Reporting by Jonathan Stempel in New York; Editing by Noeleen Walder, Chizu Nomiyama and Bill Berkrot)
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