SEATTLE - Two Estonians have been arrested and charged for a massive $575 million cryptocurrency scam that reached as far as Western Washington.
According to the U.S. District Court in Seattle, 37-year-olds Sergei Potapenko and Ivan Turõgin both face an 18-count indictment for conspiracy, wire fraud and conspiracy to commit money laundering. Both men were arrested in Tallinn, Estonia on Nov. 20, and are currently pending extradition to the U.S.
U.S. Attorney Nick Brown alleges the two ran a "crypto mining" operation that scammed investors out of more than half a billion dollars between 2015–2019.
"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 Brown. "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."
According to the indictment, Potapenko and Turõgin operated a crypto mining business called HashFlare. Crypto mining is the process of using computers to generate cryptocurrency like Bitcoin.
The two offered contracts where customers would pay a fee to rent a percentage of HashFlare's mining operations, in exchange for the crypto generated by their portion. The HashFlare website also allowed customers to see how much cryptocurrency their mining had generated.
In reality, the court said HashFlare had less than 1% of the computing power they claimed to have.
Instead, their profits came from early investors, and as more investors came into the fold, Potapenko and Turõgin would pay the early investors with the later investors' money. Then, when investors tried to withdraw their earnings, they resisted or, in some cases, pay them off with currency bought on the open market—rather than what they had supposedly mined.
Potapenko and Turõgin in 2017 offered investments in the company Polybius, which reportedly positioned itself as a bank specializing in virtual currency. The two promised to pay investors dividends from Polybius' profits, Brown said.
Polybius never formed a bank or paid any dividends.
According to the indictment, the two laundered some $25 million in investments through shell companies, phony contracts and invoices, using the money to buy real estate and luxury cars.
"New technology has made it easier for bad actors to take advantage of innocent victims—both in the U.S. and abroad—in increasingly complex scams," said Assistant Attorney General Kenneth A. Polite, Jr. "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."
Potapenko and Turõgin both appeared in court in Tallinn. Each of their crimes is punishable by up to 20 years in prison, the court said.
If you or someone you know believes you were scammed by HashFlare, you are encouraged to visit the FBI website.