Two arrested in massive $575m cryptocurrency 'Ponzi scheme'
Yet another cautionary tale of diving into crypto investment opps
Two Estonian men were arrested yesterday for their alleged roles in running a series of cryptocurrency and money laundering scams that bilked $575 million from "hundreds of thousands of victims" while the suspects used their ill-gotten gains to buy real estate and luxury cars.
Sergei Potapenko and Ivan Turõgin, both 37, were arrested in Tallinn, Estonia following a joint investigation by US and Estonian law enforcement. The men have been charged with 18 counts of conspiracy to commit wire fraud, wire fraud, and conspiracy to commit money laundering, and they each face a maximum of 20 years behind bars.
"The size and scope of the alleged scheme is truly astounding," US Attorney Nick Brown said in a statement. "These defendants capitalized on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme."
According to court documents [PDF], the two men attempted to pull off a multi-faceted scheme that began around December 2013 with a fake business called HashCoins.
The Estonia-based biz purported to manufacture and sell Bitcoin and other virtual-currency-mining hardware and equipment to a global customer base, and it required customers to pay for the gear in full when they ordered it.
In reality, HashCoins sometimes resold mining equipment that had been manufactured by others, but it never made its own components and didn't have the capacity to deliver the promised hardware to paying customers.
By May 2015, to appease customers and avoid having to refund their payments, Potapenko and Turõgin pivoted. HashCoins started telling customers that instead of receiving their physical machines, they'd get a percentage of profits from a new mining operation called HashFlare that claimed to use HashCoins mining equipment.
The men also allegedly used this second phony business to entice new customers to purchase virtual currency mining capacity using credit cards, bank wires, and virtual currency transfers, thus paying off some earlier investors while also padding their own pocketbooks. Potapenko, Turõgin and others ultimately received more than $550 million through this part of the scam, which the indictment described as a "Ponzi scheme."
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By April 2017, the two had created another fake company: a virtual currency bank called Polybius Bank that would be funded through an initial coin offering (ICO). They even published a press release claiming the ICO raised more than $6 million, and the duo raked in at least $25 million from third-party investors through the ICO, according to the court documents.
The men then allegedly funneled the victims' money "through a convoluted network of shell companies, bank accounts, virtual asset service providers, and virtual currency wallets," and used phony contracts, invoices and bank paperwork to hide their ill-gotten gains.
"Potapenko and Turõgin, and others, then used the laundered proceeds to fund an extravagant lifestyle at the expense of the victim investors," the indictment said.
The two will be sentenced by a federal district court judge, and the FBI is also investigating the case.