By Jonathan Stempel

NEW YORK (Reuters) -Alex Mashinsky, the founder and former chief of the now-bankrupt cryptocurrency lender Celsius Network, must face a lawsuit by New York Attorney General Letitia James accusing him of civil fraud, a Manhattan state court judge ruled on Friday.

Justice Margaret Chan said the attorney general sufficiently alleged that Mashinsky defrauded investors by touting Celsius as a safe alternative to banks and concealing its risks, including hundreds of millions of dollars of investment losses.

Chan also said James could pursue some claims under the Martin Act, a powerful state securities law, and that the "earned interest accounts" that Celsius offered customers qualified as securities under state law.

The attorney general's lawsuit "supports a reasonable inference that the harm suffered by investors flowed, at least in part, from Mashinsky's alleged misrepresentations made in New York concerning Celsius' overall financial health and investment safety," Chan wrote in a 25-page decision.

Mashinsky has separately pleaded not guilty to criminal fraud charges brought by the U.S. Department of Justice tied to Celsius' demise.

He also faces related civil lawsuits by the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission and U.S. Federal Trade Commission.

Lawyers for Mashinsky in the New York civil case did not immediately respond to requests for comment.

James, in a statement, said the decision "should serve as another reminder to crypto companies that we will use the full extent of the law against those who defraud investors."

Cryptocurrency lenders such as Hoboken, New Jersey-based Celsius grew rapidly as digital asset prices surged higher during the COVID-19 pandemic.

The lenders promised easy loan access and high interest rates to depositors, and lent tokens to institutional investors, hoping to profit from the difference.

Celsius was founded in 2017 and had offered 17% interest on some deposits, but had a $1.19 billion balance sheet deficit when it sought Chapter 11 protection in July 2022, according to regulators and court filings.

The bankruptcy came one month after Celsius froze withdrawals and transfers for its 1.7 million customers, citing what it called "extreme" market conditions.

The case is New York v. Mashinsky, New York State Supreme Court, New York County, No. 450040/2023.

(Reporting by Jonathan Stempel in New York; Editing by Will Dunham and Cynthia Osterman)