Why is Quebec pension fund manager Caisse getting involved and losing crypto?

It was revealed last week that the Caisse de depot et placement du Quebec (CDPQ) could lose tens of millions of dollars in pension funds and other funds it manages on behalf of more than six million Quebecers.

The loss of her $150 million investment in a now bankrupt crypto bank, if it comes to it, would appear to be partly the result of an epic failure of due diligence.

Last October, CDPQ and US investment fund WestCap Investment Partners LLC co-led a $400 million (US) round of financing for four-year-old US crypto bank Celsius Network LLC.

As part of this transaction, the Caisse invested $150 million in Celsius.

But the big interest rate hikes from last spring triggered a panic selling of high-risk investments.

This has led to the current collapse of crypto, electronic money. The crypto has lost around two-thirds of its value in recent months. Celsius is one of many top crypto companies that have hit the wall.

Faced with a bank run by crypto depositors, Celsius froze its clients’ accounts in mid-June.

And last week, Celsius filed for Chapter 11 bankruptcy, declaring a balance sheet deficit of nearly $1.2 billion (US)

It is typical in corporate bankruptcies that all equity in the business is wiped out. But the Caisse says it hopes in the bankruptcy process to recover at least part of its investment.

In October, Caisse’s Chief Technology Officer, Alexandre Synnett, bragged that “Celsius is the world’s leading crypto lender with a strong management team that puts transparency and client protection at the heart of its operations. “.

Today, the Caisse does not answer questions from the press on Celsius.

The Fund said “we will provide further comments at the appropriate time”. And that “a very small part of our overall portfolio is invested in new technologies”.

It’s true. La Caisse’s investment in Celsius represents a portion of la Caisse’s total assets of $419.8 billion at the end of 2021.

But it’s not the money, it’s the principle of the thing.

Does the Fund invest in principle in cryptography, one of the most volatile commodities ever imagined? An asset class described by Bill Gates as a “scam” and by Warren Buffett as “squared rat poison?

How many other crypto investments are there in the Fund’s portfolio? If so, were they done with the same due diligence that Caisse applied in its ill-fated investment in Celsius?

As for the Caisse’s liability, that may have to wait for an attempted Celsius Chapter 11 financial restructuring that could take a year or more.

During the bankruptcy process, liability and governance issues tend to be set aside until claims have been settled.

Again, Laurence Tosi, who ran the WestCap fund, has already resigned from its board.

What would Caisse’s extensive due diligence on Celsius have revealed?

First, Celsius has been accused by several US state regulators of selling its products in violation of state laws. Their investigations into Celsius continue.

Celsius has also had repeated run-ins with Britain’s main securities regulator, the Financial Conduct Authority (FCA).

And in an internal document published by Britain’s Financial Times, Celsius’ own legal compliance team warned senior management in February 2021 – seven months before the Fund’s investment – ​​that “Celsius could be subject to a increased scrutiny from regulators due to lack of controls and lack of governance. ”

Celsius’ response was to move its headquarters from London, UK to Hoboken, NJ in June 2021.

According to Celsius records, company executives withdrew more than $40 million (US) in cash from Celsius by reselling their Celsius crypto tokens to the company.

Presumably, these folks sit quietly as hundreds of thousands of Celsius depositors are denied access to their funds.

Celsius’ business model was to pay exorbitant interest rates of up to 18% to attract depositors. To honor these payments, Celsius was forced to seek high returns for ever riskier investments.

Celsius’ publicly known losses from these bad bets total over $100 million.

This pattern hits Jason Stone, an ex-Celsius partner who is now suing him for funds he claims Celsius cheated on him, as “a Ponzi scheme”.

Stone’s insider account, in a lawsuit filed with the New York Supreme Court earlier this month, details what Stone describes as years of wrongdoing at Celsius.

These are some of the disturbing things about Celsius that Caisse could have learned before investing, many of which are public knowledge.

Among the largest fund managers in the world, the Caisse is not like the others. Nor for that matter the other giant Canadian public pension funds.

They have a higher vocation, that of protecting the retirement funds of millions of Canadians.

It’s up to the Caisse, and other public pension funds invested in crypto, to justify risking their retirees’ money in the “Wild West” of crypto.

Based on the Caisse’s experience with Celsius, this will not be a winning argument.

Dolores W. Simon