The Justice Department is investigating a case alleging that two men in Estonia defrauded investors in a Byzantine cryptocurrency mining operation that netted $575 million, authorities said.
Sergei Potapenko and Ivan Turõgin, both 39, were arrested in Tallinn, Estonia, and charged on an 18-count indictment filed in the Western District of Washington, DOJ said in a statement today. According to the indictment, the duo claimed to offer virtual currency mining rights to customers for a fee, but in reality they relied on sham invoices, fabricated documents, and a crypto mining capacity of less than 1% of what they told customers. Potapenko and Turõgin, and others not named in the indictment, spent the money people paid them on real estate in Estonia, luxury cars and lavish gifts, authorities said.
“The size and scope of the alleged scheme is truly astonishing. These defendants leveraged both the allure of cryptocurrency and the mystery surrounding cryptocurrency mining to perpetrate a massive Ponzi scheme,” U.S. Attorney Nick Brown of the Western District of Washington said in a statement. “They lured investors with false statements and then paid off early investors with money from those who invested later. They tried to hide their ill-gotten gains 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 contain these assets and reap the profits from these crimes.” The FBI is also investigating the fraud and is actively searching for victims in the investigation.
Beginning in 2013, authorities said Potapenko and Turõgin relied on a network of shell companies, bank accounts, and providers of virtual asset services and wallets to funnel fraudulently obtained funds from victims who thought they were purchasing mining hardware. According to the U.S. Attorney’s Office, the duo alleged that their virtual cryptocurrency mining process, the process of verifying and adding transactions to a blockchain ledger, had significant power and capacity. The power of currency mining is measured by ‘hashrate’, which indicates the number of calculations the computer can perform per second. Cloud or remote mining allows people to rent so-called hashrate from a mining operation and have a share of the virtual coins mined.
Potapenko and Turõgin started a company called HashCoins in Estonia in December 2013 and marketed the company’s mining equipment for Bitcoin and other digital assets, the indictment said. In reality, HashCoins did not manufacture the equipment, but bought, built and sold parts from other companies. In 2014, HashCoins had a stream of unhappy customers and struggled to meet refund requests and fulfill new orders, authorities said.
In 2015, HashCoins told some customers that their undelivered currency mining equipment would be operated remotely instead of giving real machines to customers for which they paid. Under the new deal, customers would get rights under mining contracts that would pay them a percentage of profits from the overall operation, known as HashFlare, authorities claim.
Supposedly, HashFlare allowed customers to purchase virtual currency mining capacity, which people paid for with credit cards, bank transfers, and virtual currency transfers. Potapenko and Turõgin told customers they could use the HashFlare website to access their accounts, view their balances and withdraw or reinvest money to buy additional hashrate, authorities said. This generated more than $550 million from customers wanting to participate in virtual currency mining. In reality, HashFlare’s mining activity was estimated at less than 1% of the hashrate it sold to customers for Bitcoin mining and less than 3% of the hashrate it sold for mining other coins.
And when people wanted to withdraw their supposed proceeds from the crypto mining operations, they were unable to withdraw them, or were only able to withdraw small amounts, the complaint alleged. Sometimes Potapenko and Turõgin bought virtual money on the open market and paid it out to investors. This made it a Ponzi scheme, the DOJ said.
Then, in 2017, the two founded another company, Polybius, which was ostensibly a digital bank.
Polybius raised $25 million in an initial coin offering from outside investors. Most of the money was transferred to accounts that Potapenko and Turõgin controlled. They never built a digital bank and never paid dividends to investors, authorities claimed.
The two were arrested in Estonia in 2022, but were not extradited until April 2024, after appealing the initial decision. Oskar Gross, head of the Cybercrime Bureau of the Estonian National Criminal Investigation Department, said: “The scale of this investigation is described by the fact that this is one of the largest fraud cases we have ever had in Estonia.”
This story originally appeared on Fortune.com
