Two 39-year-old Estonian men are the alleged kingpins behind a massive half billion fraud targeting thousands of U.S. investors
The Department of Justice is advancing a case alleging that two men in Estonia cheated investors in a byzantine cryptocurrency mining operation that generated $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 were relying on sham invoices, fabricated documents, and a crypto mining capacity of less than 1% of what they told customers. Potapenko and Turõgin, and others who were unnamed in the indictment, spent the money people paid them on real estate properties in Estonia, luxury cars, and lavish gifts, authorities said.
“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 in a statement. “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.” The FBI is also investigating the fraud and actively seeking victims in the probe.
Starting in 2013, authorities said Potapenko and Turõgin relied on a network of shell companies, bank accounts, and virtual asset service providers and wallets to funnel fraudulently obtained funds from victims who thought they were buying mining hardware. According to the U.S. Attorney, the duo claimed that its virtual cryptocurrency mining process, the process of verifying and adding transactions on a blockchain ledger, had significant power and capacity. Currency mining power is measured by “hashrate,” which indicates the number of calculations the computer can perform per second. In cloud or remote mining, people can rent so-called hashrate from a mining operation and get a portion of the virtual coins mined.
Potapenko and Turõgin started a company called HashCoins in Estonia in December 2013 and marketed the firm’s mining equipment for Bitcoin and other digital assets, the indictment states. In reality, HashCoins didn’t manufacture the equipment but was buying, building, and reselling parts manufactured by other companies. By 2014, HashCoins had a flurry of unhappy customers and it struggled to meet requests for refunds and fill new orders, authorities said.
In 2015, HashCoins told some clients that their undelivered currency mining equipment would be operated remotely instead of giving actual machines to customers that they paid for. 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 allege.
Supposedly, HashFlare allowed customers to buy virtual currency mining capacity that people paid for using credit cards, bank wires, and virtual currency transfers. Potapenko and Turõgin told customers they could access their accounts through the HashFlare website, view their balances, and withdraw or reinvest to buy additional hashrate, authorities said. This generated more than $550 million from customers who wanted in on virtual currency mining. In reality, HashFlare’s mining activity was estimated to be less than 1% of the hashrate it sold to customers for Bitcoin mining and less than 3% of the hashrate sold for mining other coins.
And when people wanted to withdraw their supposed returns on the crypto-mining operations, they were either blocked from withdrawing, or could only take out small amounts, the complaint alleged. Sometimes Potapenko and Turõgin bought virtual currency on the open market and paid it to investors. This made it a Ponzi scheme, the DOJ said.
Then in 2017, the two created another company, Polybius, which was supposedly a digital bank.
Polybius raised $25 million in an initial coin offering from outside investors. The bulk of the funds were transferred to accounts Potapenko and Turõgin controlled. They never built a digital bank and have never paid dividends to investors, authorities alleged.
The two were arrested in 2022 in Estonia but weren’t extradited until April 2024, after they appealed the initial decision. The Estonian National Criminal Police’s Oskar Gross, head of the Cybercrime Bureau said: “The sheer volume of this investigation is described by the fact that this is one of the largest fraud cases we’ve ever had in Estonia.”
