Estonian Duo Plead Guilty to $577m Crypto Ponzi Scheme

Two Estonian nationals are facing up to 20 years behind bars after pleading guilty to running a huge cryptocurrency fraud scheme that netted hundreds of millions of dollars.

Sergei Potapenko and Ivan Turõgin, both 40, made $577m in sales from crypto mining venture HashFlare between 2015 and 2019.

However, the company they founded simply was not capable of mining for crypto on the scale that the duo claimed to investors. Instead, they falsified mining data on customer-facing dashboards and used stolen funds to purchase real estate and luxury vehicles, according to the Department of Justice (DoJ).

When investors asked to withdraw funds, the two allegedly either refused or paid them using virtual currency they purchased on the open market.

In a classic Ponzi scheme, early investors are usually paid with funds from more recent investors, perpetuating the fraud until the number wishing to withdraw their ‘profits’ or investment becomes unsustainable.

Read more on Ponzi schemes: Three Charged in $722m Crypto Ponzi Scheme

In a plea deal, which presumably will result in shorter jail terms, Potapenko and Turõgin have apparently agreed to forfeit assets worth more than $400m. 

They were originally arrested in the Estonian capital of Tallinn back in 2022 and extradited to the US.

At the time, Infosecurity reported of a second alleged fraudulent investment scheme that the duo had launched in 2017. It was advertised as a bank specializing in virtual currency, which they claimed would generate dividends for investors from its profits.

Potapenko and Turõgin were said to have raised $25m for this fictitious bank, dubbed Polybius, but it never actually existed.

In both schemes, the duo are alleged 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.

Cryptocurrency is ideal for use in a Ponzi scheme, given the current hype around investing, the relative lack of regulatory scrutiny and the virtual nature of supposed assets.