New York Attorney General Letitia James sued former Celsius Network CEO Alex Mashinsky on Thursday, alleging that Mashinsky defrauded hundreds of thousands of investors at his now-bankrupt crypto exchange.

Mashinsky publicly assured his customers that investing with Celsius was both safer and more lucrative than leaving their investments in a traditional bank. At one point, deposits at the crypto exchange were valued at $20 billion, according to the complaint. But Mashinsky's statements were false, James alleges, and became part of the former Celsius CEO's efforts to hide deep losses on risky crypto-lending investments.

"As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin," James said in a statement.

The attorney general's office is seeking to fine Mashinsky and levy monetary damages, and bar him from leading a company or working in the securities industry in New York.

The action is civil, not criminal, and is brought under the Martin Act, New York state's wide-ranging securities law. The Martin Act does give prosecutors sweeping search and subpoena powers to investigate potential wrongdoing.

Celsius offered sky-high yields that lured investors in and swelled the exchange's coffers. Celsius, like similarly bankrupt Voyager Digital, was able to pay out yields as high as 17% by lending customer assets to crypto hedge funds, including now-collapsed Three Arrows Capital and Sam Bankman-Fried's Alameda Research.

The Terra/Luna crash in 2022 forced 3AC into bankruptcy and deepened an ongoing "crypto winter." Celsius was exposed to the fall of Terra and Luna both through loans to 3AC and through $935 million of direct investment in "highly speculative" Terra bets, all funded by investor funds, the complaint claims.

Mashinsky claimed that Celsius had "very small losses" and that the exchange had "basically reduced or eliminated any exposure" to borrowers with investments in Terra or Luna.

Those statements were false, James' complaint alleges, and were part of a wider campaign to prevent user outflows that could have precipitated a run on the bank similar to what happened at FTX, another bankrupted exchange.

But Mashinsky made "materially false and misleading" statements designed to hide the actual extent of Celsius' exposure, claiming that the crypto exchange had "billions in liquidity" just days before Celsius filed for bankruptcy on Jul. 13, 2022, the complaint alleges.

Celsius investors were left bereft and so despondent that some considered suicide, CNBC previously reported.

"Mashinsky never disclosed that Celsius had close to a billion-dollar deficit," the complaint alleges. Celsius entered bankruptcy proceedings with only $1.75 billion in crypto assets, a far cry from the $4.7 billion it owed users.

Mashinsky resigned from his position as CEO in September 2022. At the time, he apologized for the "increasing distraction" that his leadership had caused.

"Alex Mashinsky is no longer employed by Celsius and is not involved in the management of the company," a spokesperson for Celsius told CNBC.

Mashinsky did not immediately respond to requests for comment.