Two 39-year-old Estonian men are the alleged kingpins behind a massive half billion fraud targeting thousands of U.S. investors

Two 39-year-old Estonian men are the alleged kingpins behind a massive half billion fraud targeting thousands of U.S. investors

The Justice Department 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 in an 18-count indictment filed in the Western District of Washington, The DOJ said in a statement today. According to the indictment, the duo claimed to offer virtual currency mining rights to their customers for a fee, but in reality they relied on fake invoices, fabricated documents and mining capacity. cryptocurrency less than 1% of what they had told customers. Potapenko and Turõgin, as well as others unnamed in the indictment, spent money people paid them to buy real estate in Estonia, luxury cars and lavish gifts, the investigators said. authorities.

“The scale and scope of the alleged scheme is truly staggering. These defendants capitalized on both the allure of cryptocurrency and the mystery surrounding cryptocurrency mining to commit a massive Ponzi scheme. U.S. Attorney Nick Brown of the Western District of Washington said in a statement.. “They lured investors with false claims, then paid early investors with money from those who invested later. They attempted to hide their ill-gotten gains in Estonian properties, luxury cars, bank accounts and virtual currency wallets around the world. U.S. and Estonian authorities are working to seize and confiscate these assets and profit from these crimes. ” THE The FBI also investigates fraud and is actively searching for victims. in the probe.

Beginning in 2013, authorities said Potapenko and Turõgin relied on a network of shell companies, bank accounts, virtual asset service providers and wallets to funnel fraudulently obtained funds from victims who thought they were purchasing mining equipment. According to the U.S. Attorney, the duo claimed that their virtual cryptocurrency mining process, the process of verifying and adding transactions to a blockchain ledger, had significant power and capacity. Currency mining power is measured by the “hashrate”, which indicates the number of calculations the computer can perform per second. In cloud or remote mining, people can rent a so-called hashrate from a mining operation and get a portion of the mined virtual coins.

Potapenko and Turõgin launched a company called HashCoins in Estonia in December 2013 and marketed the company’s mining equipment for Bitcoin and other digital assets, the indictment states. In reality, HashCoins did not manufacture the equipment but purchased, built and resold parts made by other companies. By 2014, HashCoins had many unhappy customers and was struggling to respond to 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 customers real machines they had 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 say.

Apparently, HashFlare allowed customers to purchase virtual currency mining capacity which people paid for using credit cards, bank transfers, 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 purchase additional hashrate, authorities said. This has generated over $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 sold to customers for mining Bitcoin and less than 3% of the hashrate sold for mining other coins.

And when people wanted to withdraw their so-called returns from crypto mining operations, they were either blocked from withdrawing them or could only withdraw small amounts, according to the complaint. Sometimes Potapenko and Turõgin purchased virtual currency on the open market and paid it to investors. That made it a Ponzi scheme, the DOJ said.

Then, in 2017, the two men created another company, Polybius, intended to be a digital bank.

Polybius raised $25 million in an initial coin offering from outside investors. Most of the funds were transferred to accounts controlled by Potapenko and Turõgin. They never built a digital bank and never paid dividends to investors, authorities claimed.

Both were arrested in 2022 in Estonia but were not extradited until April 2024, after appealing the initial decision. Oskar Gross, head of the Cybercrime Bureau of the Estonian National Criminal Police, said: “The sheer volume of this investigation is described by the fact that this is one of the largest fraud cases we have never had in Estonia. »

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