Two Estonian men have been arrested in the capital city of Tallinn for their alleged role in an “enormous” Ponzi scheme which defrauded cryptocurrency investors out of hundreds of millions of dollars.
Sergei Potapenko and Ivan Turõgin, both 37, allegedly defrauded hundreds of thousands of investors in two schemes running from 2015 to 2019.
The most serious was their solicitation of investment in HashFlare, which they claimed would enable clients to rent a percentage of the firm’s cryptocurrency mining operations in exchange for the virtual currency it produced.
Over the four-year period, customers are said to have invested over $550m in the firm. However, while the HashFlare website showed they were making big profits, in reality the firm’s equipment allegedly performed Bitcoin mining at a rate of less than 1% of the computing power it purported to have.
When investors asked to withdraw funds, the duo either refused or paid them using virtual currency they purchased on the open market, according to the Department of Justice (DoJ).
A second alleged fraudulent investment scheme was launched by the two in 2017. This time it was a bank specializing in virtual currency, which they claimed would generate dividends for investors from its profits.
Potapenko and Turõgin are said to have raised $25m for this fictitious bank, dubbed Polybius, but it never actually existed.
In both schemes, the duo are said to have laundered funds by using “shell companies and phony contracts and invoices” to buy at least 75 properties, six luxury vehicles, cryptocurrency wallets and thousands of cryptocurrency mining machines.
Potapenko and Turõgin are charged with conspiracy to commit wire fraud, 16 counts of wire fraud and one count of conspiracy to commit money laundering. Each faces a maximum of 20 years behind bars if found guilty.
“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 US attorney Nick 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 gains in Estonian properties, luxury cars and bank accounts and virtual currency wallets around the world. US and Estonian authorities are working to seize and restrain these assets and take the profit out of these crimes.”