After orchestrating a cryptocurrency Ponzi scheme that generated more than $577 million in sales and targeted hundreds of thousands of people around the world, two men from Estonia were sentenced Tuesday in the U.S. District Court for the Western District of Washington, according to the U.S. attorney’s office.
U.S. District Judge Robert S. Lasnik ordered Sergei Potapenko and Ivan Turogin, both Estonian nationals, each pay a $25,000 fine and complete 360 hours of community service over three years, according to court documents. They were sentenced to 16 months in prison, which they’ve already served.
It is the largest fraud ever prosecuted in the history of this District,” according to a court memorandum filed last week.
The sentencing follows Potapenko and Turogin pleading guilty to wire fraud conspiracy in February, an offense that carries a maximum prison sentence of 20 years, according to court documents.
As part of the sentence, more than $450 million worth of cryptocurrency, funds, equipment and other assets were forfeited. They will be used to help compensate the scheme’s victims, and more details will be announced later, according to the news release.
Potapenko and Turogin — who were told by the Department of Homeland Security to self-deport in April but had the order deferred by a year — will serve their terms of supervised release in Estonia, according to the news release.
The two men — childhood friends born five days apart in the same hospital — created a cryptocurrency mining service called HashFlare that started contracting with customers in 2015, according to the defendants’ joint sentencing submission. It promised customers profits from the mining activity, which involves using special computers to check and record transactions on a blockchain network and getting newly generated cryptocurrency in return, according to an attorney’s office news release.
But HashFlare relied on fake online dashboards that lied about mining activity and returns. By 2018, the company needed 80,000 cryptocurrency miners to satisfy the mining capacity it sold, according to court documents. Yet it had only bought around 164 machines, and most of them didn’t work properly.
It turned out that Potapenko and Turogin used investor funds to buy real estate and luxury vehicles, as well as to fund investment and personal cryptocurrency accounts, according to the news release. Out of more than 440,000 customer accounts, 60,000 were in the United States and the total fraud loss was $300 million, U.S. attorney’s office spokesperson Emily Langlie wrote.
Prosecutors had argued for a 10-year prison sentence.
During their guilty plea, Potapenko and Turogin forfeited $500 million for a remission fund and provided the government with a database that would help facilitate compensation for customers, according to Mark Bini, one of Potapenko’s attorneys.
He noted that Potapenko and Turogin paid customers the correct rate of return for crypto mining, and wrote “it’s not clear there was any financial loss caused by the case.”
That, as well as other arguments and expert opinions from the defense about losses from the fraud, were contested by prosecutors in a supplemental sentencing memorandum filed Monday.
“HashFlare was, plain and simple, a Ponzi scheme, according to the document.
Andrey Spektor, one of Turogin’s attorneys, sent a written statement on behalf of his client.
“We are grateful for Judge Lasnik’s careful consideration of our arguments, and for agreeing with us that a time-served sentence was appropriate,” he wrote.
Anyone who believes they were affected by the scheme should visit fbi.gov/hashflare.