Two Estonians Charged with Running Crypto Ponzi Schemes Totaling $575M

  • Sergei Potapenko and Ivan Turõgin were arrested for operating crypto Ponzi schemes through a bogus crypto mining operation and a crypto bank that never existed.
  • According to the Department of Justice, the two men used shell companies to launder the proceeds of their fraudulent schemes and buy luxury cars and real estate in Estonia.

Two Estonian individuals have been charged by federal prosecutors in Washington state with operating a string of cryptocurrency Ponzi schemes that allegedly defrauded hundreds of thousands of investors worldwide out of a total of $575 million.

The indictment, which was made public on Monday, claims that Sergei Potapenko and Ivan Turogin, both 37, were partners in a network of related bitcoin Ponzi schemes. The two defendants are accused of laundering the earnings of their scams through a number of shell companies while spending investor money on expensive automobiles and real estate in Estonia.

One case of conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering are the charges against Potapenko and Turogin, respectively. 

Both Potapenko and Turogin were arrested in Tallinn on Nov. 20. A jury trial has been demanded in the Western District of Washington. Potapenko and Turõgin each face a maximum of 20 years in jail for conspiracy to launder money using shell corporations, wire fraud, and conspiracy to commit wire fraud.

First HashCoins, then HashFlare

Their initial business, HashCoins, which debuted in December 2013, claimed to be a producer of cryptocurrency mining hardware and accepted orders (along with full payment from consumers) for miners. However, the indictment claims that HashCoins never produced anything; rather, it resold mining equipment that was bought on the open market and looked for excuses to delay the shipment of the majority of its sales.

A second business, HashFlare, is said to have been founded by Potapenko and Turogin in May 2015 in response to an increasing number of angry customers. Prosecutors claim that they informed their clients that orders for mining equipment would be converted to “remote mining services” and that, rather than the physical equipment they had been promised, individuals contributing money would instead receive a portion of the service’s profits.

However, according to the prosecution, Potapenko and Turogin operated HashFlare more like a Ponzi scam than a mining business, with less than 1% of the hashrate offered to consumers really coming from mining.

Customers of HashFlare allegedly saw statements with fraudulent crypto balances. Customers who attempted to cash out, according to the prosecution, were given the runaround by Potapenko and Turogin, who allegedly had them jump through legal hoops including meeting know-your-customer (KYC) standards before they could be paid.

Potapenko and Turogin allegedly launched Polybius Bank, which was advertised as a cryptocurrency bank with headquarters in Estonia, while HashFlare continued to run. 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.

Despite the fact that prosecutors believe Potapenko and Turogin continued to mine for bitcoin for themselves using miners they’d bought with stolen client cash, HashFlare declared in 2018 that it was closing down due to growing energy prices and the fact that it was no longer profitable to do so. 

Prosecutors claim that by the time HashFlare was formally shut down in August 2019, it had raised $550 million in total.