Federal prosecutors in Washington state have charged two Estonian citizens with running a series of crypto scams that allegedly defrauded hundreds of thousands of investors around the world of a combined $575 million.
According to the indictment released Monday, Sergei Potapenko and Ivan Turogin – both 37-year-old residents of Tallinn, Estonia – were partners in a series of interconnected fraudulent schemes using cryptocurrency. The two defendants allegedly used a variety of shell companies to launder the proceeds of their schemes, and spent investor funds on luxury cars and real estate in Estonia.
Their first company, HashCoins, which launched in December 2013, purported to be a manufacturer of crypto mining equipment, and took orders (and payment in full) from customers who wanted to purchase miners. However, according to the indictment, HashCoins never manufactured anything – instead, it re-sold mining equipment purchased on the open market and found reasons to delay the shipment of the majority of its sales.
In May 2015, facing a growing number of angry customers, Potapenko and Turogin allegedly started a second company, HashFlare. According to prosecutors, they told their clientele that orders for mining equipment would be converted to “remote mining services” and – instead of the physical equipment they were promised – those sending funds would receive a share of the service’s profits.
Prosecutors, though, say Potapenko and Turogin ran HashFlare more like a Ponzi scheme than a mining operation, and accused them of actually mining less than 1% of all the mining hashrate sold to customers.
HashFlare’s customers were allegedly shown statements with fraudulent crypto balances. When customers tried to cash out, prosecutors say Potapenko and Turogin attempted to give them the run-around, coming up with reasons why they could not pay out and making them jump through legal hoops, such as fulfilling know-your-customer (KYC) requirements before they could be paid.
While HashFlare continued to operate, Potapenko and Turogin allegedly started another venture, Polybius Bank, which was marketed as a crypto bank based in Estonia. According to the indictment, the pair advertised an initial coin offering (ICO) for the project in June 2017, which raised $25 million from investors around the world. The project fizzled shortly thereafter.
In 2018, HashFlare announced that it was shutting down, citing rising energy costs and claiming that bitcoin mining was no longer profitable even as prosecutors say Potapenko and Turogin continued mining for themselves, using miners that they’d purchased with stolen customer funds.
By the time HashFlare officially shuttered in August 2019, prosecutors say it had raised a total of $550 million.
Potapenko and Turogin are both charged with one count each of conspiracy to commit wire fraud, 16 counts each of wire fraud, one count each of conspiracy to commit money laundering.
Both Potapenko and Turogin were arrested in Tallinn on Nov. 20. A jury trial has been demanded in the Western District of Washington.
UPDATE (21:21 UTC): Modifies headline to reflect that Potapenko and Turogin are Estonian citizens, and adds that they were arrested in Tallinn.