In re Celsius Network LLC
United States Bankruptcy Court, Southern District of New York · Bankr. S.D.N.Y. · New York bar guidance
Verified May 6, 2026
- Citation
- In re Celsius Network LLC, 655 B.R. 301 (Bankr. S.D.N.Y. 2023) (Glenn, C.J.)
- Decided
- November 9, 2023
Summary
Pro se creditor Otis Davis proffered Hussein Faraj as a valuation expert in the Chapter 11 confirmation proceedings to challenge the $0.25 valuation of the CEL Token. Faraj's 172-page valuation report was generated in roughly 72 hours by artificial intelligence at his instruction, where, by Faraj's own admission, a comprehensive human-authored report would have taken over 1,000 hours. Chief Judge Martin Glenn found the report contained almost no citations to underlying facts or data, that Faraj had not reviewed any source material his team or the AI relied on, that there were no standards controlling the operation of the AI that generated the report, and that the report contained numerous errors including duplicated paragraphs and incorrect trade dates. The court also found that Faraj's self-developed "fair value" methodology was not peer-tested or accepted in cryptocurrency valuation.
- AI tool:
- Unspecified generative AI
What sanction did the court impose?
The court granted the debtors' and committee's motion to exclude the Faraj Report under Federal Rule of Evidence 702 (made applicable by Federal Rule of Bankruptcy Procedure 9017) as unreliable and not the product of reliable principles and methods. Faraj's live oral testimony was admitted subject to the weight the court deemed appropriate, given that this was a bench trial. No monetary sanction or referral was imposed, but the AI-generated report was struck from the evidentiary record and the CEL Settlement valuing the token at $0.25 was approved.
Why does In re Celsius Network LLC matter for law firms using AI?
In re Celsius Network is one of the earliest reported decisions excluding an expert report because the work product was generated by AI rather than by the expert. The sanctioned actor was not an attorney but a proffered valuation expert, and the failure mode was not fabricated case citations but an unverified, unsupervised AI-authored analysis submitted under the expert’s name. For a managing partner overseeing complex litigation or bankruptcy work, the case is an early warning that Daubert and Rule 702 reliability inquiries will reach behind the cover page of any expert report, and that an expert who cannot account for what the AI did, what sources it consulted, or whether its outputs were reviewed will see the report struck regardless of the witness’s underlying qualifications.
Sources
Primary sources
Further reading
Source PDF is a Westlaw printout mirrored from the Damien Charlotin hallucination database. We are working to add the underlying court docket (PACER, CourtListener, or court website) as a second source.