A grand jury sitting in the Western District of Washington returned an indictment on October 27 and unsealed Monday following the arrests.
Sergei Potapenko, 37, and Ivan Turõgin, 37, are facing charges of inducing hundreds of thousands of victims to purchase contracts in a cryptocurrency mining service called HashFlare and investing in a virtual currency bank called Polybius Bank. Victims paid more than $575 million to the defendants’ companies. The defendants then used shell companies to launder the fraud proceeds and to purchase real estate and luxury cars.
HashFlare did not have the virtual currency mining equipment it claimed to have, according to the indictment. In fact, HashFlare’s equipment performed Bitcoin mining at a rate of less than one percent of the computing power it purported to have, according to the indictment. When investors asked to withdraw their mining proceeds, the defendants were not able to pay with the mined currency as promised. Instead, the defendants either resisted making the payments, or paid off the investors using virtual currency the defendants had purchased on the open market – not currency they had mined. HashFlare closed its operations in 2019.
In May 2017, Potapenko and Turõgin offered investments in a company called Polybius, which they said would form a bank specializing in virtual currency, according to the indictment. The defendants promised to pay investors dividends from Polybius’ profits. The men raised at least $25 million in this scheme and transferred most of the money to other bank accounts and virtual currency wallets they controlled. Polybius never formed a bank or paid any dividends.
“New technology has made it easier for bad actors to take advantage of innocent victims – both both in the U.S. and abroad – in increasingly complex scams,” said Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division. “The department is committed to preventing the public from losing more of their hard-earned money to these scams and will not allow these defendants, or others like them, to keep the fruits of their crimes.”
“The size and scope of the alleged scheme is truly astounding. These defendants capitalized on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme,” said U.S. Attorney Nick Brown of the Western District of Washington. “They lured investors with false representations and then paid early investors off with money from those who invested later. They tried to hide their ill-gotten gain in Estonian properties, luxury cars, and bank accounts and virtual currency wallets around the world. U.S. and Estonian authorities are working to seize and restrain these assets and take the profit out of these crimes.”
“Mr. Potapenko and Mr. Turõgin are charged with defrauding investors out of more than half a billion dollars” said Richard A. Collodi, special agent in charge of the FBI’s Seattle field office. “Ultimately, their elaborate Ponzi scheme fell apart and they conspired to conceal and launder the money which they took from the victims of their scheme.”
The indictment also charges the defendants with conspiring to launder their criminal proceeds by using shell companies and phony contracts and invoices. The indictment alleges the money laundering conspiracy involved at least 75 real properties, six luxury vehicles, cryptocurrency wallets, and thousands of cryptocurrency mining machines.
Both defendants appeared in court in Tallin, and are being held pending extradition to the U.S.
The men are charged with conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering. Each of these crimes is punishable by up to 20 years in prison.