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Red flags from business past

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Kris Marszalek, CEO of Crypto.com, speaking at a 2018 Bloomberg event in Hong Kong, China.

Paul Yeung | Bloomberg | Getty Images

Kris Marszalek wants everyone to know that his company, Crypto.com, is protected and in good hands. His TV appearances and tweets make that clear.

It’s an comprehensible approach. The crypto markets have been in freefall for much of the yr, with high-profile names spiraling out of business. When FTX failed last month just after founder Sam Bankman-Fried said the crypto exchange’s assets were fantastic, trust across the industry evaporated.

Marszalek, who has operated out of Asia for over a decade, subsequently assured clients that their funds belong to them and are available, in contrast to FTX, which used client money for all styles of dangerous and allegedly fraudulent activities, in line with court filings and legal experts. 

Bankman-Fried has denied knowing about any fraud. Regardless, FTX clients are actually out billions of dollars with bankruptcy proceedings underway.

Crypto.com, one in all the world’s largest cryptocurrency exchanges, may possibly be in fantastic health. After the FTX collapse, the corporate published its unaudited, partial proof of reserves. The discharge revealed that nearly 20% of customer funds were in a meme token called shiba inu, an amount eclipsed only by its bitcoin allocation. That percentage has dropped because the initial release to about 15%, in line with Nansen Analytics. 

Marszalek said in a Nov. 14 livestream on YouTube that the wallet addresses were representative of customer holdings. 

On Friday, Crypto.com published an audited proof of reserves, attesting that customer assets were held on a one-to-one basis, meaning that each one deposits are 100% backed by Crypto.com‘s reserves.  The audit was performed by the Mazars Group, the previous accountant for the Trump Organization.

While no evidence has emerged of wrongdoing at Crypto.com, Marszalek’s business history is replete with red flags. Following the collapse of a previous company in 2009, a judge called Marszalek’s testimony unreliable. His business activities before 2016 — the yr he founded what would turn out to be Crypto.com — involved a multimillion-dollar settlement over claims of defective products, corporate bankruptcy and an e-commerce company that failed shortly after a blowout marketing campaign left sellers unable to access their money.

Court records, public filings and offshore database leaks reveal a businessman who moved from industry to industry, rebooting quickly when a enterprise would fail. He began in manufacturing, producing data storage products for white label sale, then moved into e-commerce, and eventually into crypto.

CNBC reached out to Crypto.com with information on Marszalek’s past and asked for an interview. The corporate declined to make Marszalek available and sent a press release indicating that there was “never a finding of wrongdoing under Kris’s leadership” at his prior ventures. 

After CNBC’s requests, Marszalek published a 16-tweet thread, starting by telling his followers: “More FUD targeting Crypto.com is coming, this time a couple of business failure I had very early in my profession. I even have nothing to cover, and am happy with my battle scars, so here’s the unfiltered story.” FUD is brief for fear, uncertainty and doubt and is a well-liked phrase amongst crypto executives.

Within the tweets, Marszalek described his past personal bankruptcy and the abrupt closure of his e-commerce business as learning experiences, and added that “startups are hard,” and “you’ll fail over and once again.” 

‘Business failure’ — faulty flash drives

Marszalek founded a producing firm called Starline in 2004, in line with his LinkedIn profile. Based in Hong Kong, with a plant in mainland China, Starline built hardware products like solid state drives, hard drives, and USB flash drives. Marzsalek’s LinkedIn page says he grew the business right into a 400-person company with $81 million in sales in three years.

There was way more to the story.

Marszalek owned 50% of the corporate, sharing ownership and control with one other Hong-Kong based individual, who partnered with Marszalek in multiple ventures. 

In 2009, Marzsalek’s company settled with a client over a faulty shipment of flash drives. The $5 million settlement consisted of a $1 million upfront payment and a $4 million credit note to the client, Dexxon. The negotiations over the settlement began in some unspecified time in the future after 2007.

CNBC was unable to locate Marszalek’s business partner.

Court documents don’t show whether Starline made good on either the $1 million “lump sum settlement fee” or the $4 million credit note. Starline was forced out of business proceedings by the tip of 2009, court records from 2013 show.

Over the course of 2008 and 2009, Marszalek and his partner were transferred nearly $3 million in payments from Starline, in line with the documents.

Over $1 million was paid out to Marszalek personally in what the court said were “impugned payments.” His partner took home nearly $1.9 million in similar payments.

“It seems that there was a concerted effort to strip the money from Starline,” Judge Anthony Chan later wrote in a court filing. 

Some $300,000 was paid by Starline to a British Virgin Islands holding company called Tekram, the document says. That cash went through Marszalek, and Tekram eventually returned it to Starline.

By 2009, Starline had collapsed. Marszalek’s representatives told CNBC in a press release that Starline went under because customers did not pay back credit lines that the corporate had prolonged them through the financial crisis of 2007 and 2008. Starline borrowed that cash from Standard Chartered Bank of Hong Kong (SCB).

“The bank then turned to Starline and the co-founders to repay the lines of credit and filed for liquidation of the corporate,” the statement said.

Starline owed $2.2 million to SCB. 

Marszalek said on Twitter that he had personally guaranteed the loans from the bank to Starline. Because of this, when the bank forced Starline into liquidation, Marszalek and his partner were forced out of business as well.

The court found that the $300,000 transfer to Tekram was “in reality a payment” to Marszalek.

Marszalek said the cash within the Tekram transfer was repayment of a debt Starline owed to Tekram. The judge described that claim as “inherently incredible.”

“There isn’t a reason why the repayment needed to be channelled through him or why the cash was later returned to the debtor,” the judge said. 

Riding the Groupon wave

Bankruptcy didn’t sever the ties between Marszalek and his partner or keep them out of business for long. At the identical time Starline was shutting down, the pair arrange an offshore holding company called Middle Kingdom Capital. 

Middle Kingdom was established within the Cayman Islands, a notorious hub for tax shelters. The connection between Middle Kingdom and Marszalek and his partner, who each held half of the firm, was exposed within the 2017 Paradise Papers leak. The Paradise Papers, together with the Panama Papers, contained documents about an online of offshore holdings in tax havens. They were published by the International Consortium of Investigative Journalists.

Middle Kingdom was the owner of Buy Together, which in turn owned BeeCrazy, an e-commerce enterprise that Marszalek had began pursuing. Much like Groupon, retailers could use BeeCrazy to sell their products at steep discounts. BeeCrazy would process payments, take a commission on goods sold, and distribute funds to the retailers.

Read more about tech and crypto from CNBC Pro

Sellers and buyers flocked to the positioning, drawn in by considerable discounts on every little thing from spa passes to USB power banks. Buy Together drew attention from an Australian conglomerate called iBuy, which was on the verge of an IPO and pursued an acquisition of BeeCrazy as a part of a plan to construct out an Asian e-commerce empire.

Court filings and Australian disclosures show that to seal the deal, Marszalek and his partner had to stay employed by iBuy for 3 years and clear their individual bankruptcies in Hong Kong court. The partner’s uncle got here forward in front of the court to assist his nephew and Marszalek clear their names and debts, filings show.

While the judge called the uncle’s involvement “suspicious,” he allowed him to repay the debt. Because of this, each Marszalek and his partner’s bankruptcies were annulled. A number of months later, in October 2013, BeeCrazy was purchased by iBuy for $21 million in money and stock, in line with S&P Capital IQ. 

A month and a half after buying BeeCrazy, iBuy went public. Marszalek was required to stay until 2016. 

The corporate struggled after its IPO as competition picked up from larger players like Alibaba. Marszalek was eventually promoted to CEO of iBuy in August 2014, in line with filings with Australian regulators. 

Alibaba headquarters in Hangzhou, China.

Bloomberg | Bloomberg | Getty Images

Marszalek renamed iBuy as Ensogo in an effort to retool the corporate. Ensogo continued to suffer, running up a loss in 2015 equal to over $50 million.

By the next yr, Ensogo had already reportedly laid off half its staff. In June 2016, Ensogo closed down operations. The identical day, Marszalek resigned.

After the sudden shuttering of Ensogo, sellers on the positioning told the South China Morning Press that they never received proceeds from items they’d already delivered as a part of a final blowout sale. 

“[Many] sellers had already sold their goods but had yet to receive any money from the platform at the moment, their money thus vanished altogether with the net shopping platform,” in line with translated testimony from a representative for a bunch of sellers before Hong Kong’s Legislative Council.

One seller told Hong Kong’s The Standard that she lost greater than $25,000 in the method. 

“It seems to us that they desired to make huge business from us one last time before they closed down,” the vendor told the publication.

Marszalek’s representative acknowledged to CNBC that “the shutdown angered many shoppers and consumers” and said that was “one in all the explanations Kris was against the choice.” 

Welcome to crypto

Marszalek hurried on to his next thing. The identical month he resigned from Ensogo, Foris Limited was incorporated, marking Marszalek’s entry into the crypto market.

Foris’ first foray into crypto was with Monaco, an early exchange. 

With a leadership team composed entirely of former Ensogo employees, Monaco told prospective investors they might expect three million customers and $169 million in revenue inside five years. 

Monaco rebranded as Crypto.com in 2018.

The outside of Crypto.com Arena on January 26, 2022 in Los Angeles, California.

Wealthy Fury | Getty Images

By 2021, the corporate had smashed its own goals, crossing the 10 million user mark. Revenue for the yr topped $1.2 billion, in line with the Financial Times. That is when crypto was soaring, with bitcoin climbing from about $7,300 originally of 2020 to a peak of over $68,000 in November of 2021.  

The corporate inked a cope with LeBron James for a Super Bowl ad, aired a previous industrial with Matt Damon and spent a reported $700 million to place its name on the world that is home to the Los Angeles Lakers. It is also a sponsor of the World Cup in Qatar.

The market’s plunge in 2022 has been disastrous for all the most important players and goes well beyond the FTX collapse and the various hedge funds and lenders which have liquidated. Coinbase’s stock price is down 84%, and the corporate laid off 18% of its staff. Kraken recently cut 30% of its workforce. 

Crypto.com has laid off tons of of employees in recent months, in line with multiple reports. Questions percolated concerning the company in November after revelations that the prior month Crypto.com had sent greater than 80% of its ether holdings, or about $400 million value of the cryptocurrency, to Gate.io, one other crypto exchange. The corporate only admitted the error after the transaction was exposed because of public blockchain data. Crypto.com said the funds were recovered.

Marszalek went on CNBC on Nov. 15, following the FTX failure, to attempt to reassure customers and the general public that the corporate has loads of money, that it doesn’t use leverage and that withdrawal demands had normalized after spiking.

Still, the market cap for Cronos, Crypto.com’s native token, has shrunk from over $3 billion on Nov. 8 to a bit over $1.6 billion today, reflecting a lack of confidence amongst a key group of investors. Through the crypto mania right now last yr, Cronos was value over $22 billion.

Cronos has stabilized of late, hovering around six cents for the last three weeks. Bitcoin prices have been flat for about 4 weeks. 

Marszalek’s narrative is that he’s learned from past mistakes and that “early failures made me who I’m today,” he wrote in his tweet thread. 

He’s asking customers to imagine him.

“I’m happy with my scar tissue and the best way I persevered within the face of adversity,” he tweeted. “Failure taught me humility, learn how to not overextend, and learn how to plan for the worst.”

Correction: Crypto.com’s Super Bowl ad featured LeBron James, not Matt Damon. The industrial with Damon got here out in late 2021.

Clarification: This story has been updated to more accurately reflect where in Asia Marszalek has operated.

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