Two Am Law 100 partners scored a victory when their client, who was accused of “secretly” moving millions of dollars in cryptocurrency assets from the FBI while in custody, was released on Tuesday following an unusual ruling by a U.S. District Court in Seattle.
The U.S. initially charged defendants Sergei Potapenko and Ivan Tulogin with engaging in a $575 million cryptocurrency fraud and money laundering scheme. Defense attorneys Mark E. Bini, a partner at Reed Smith in the Miami and New York offices, and Andrei Spector, a partner at Norton Rose Fulbright in the New York office, noted that the case has had challenges so far.
Reed Smith partner Mark E. Bini (Photo provided)“The documents we received in discovery were in Estonian, English and Russian, and the government turned over nearly two terabytes of data,” Bini said. “But we were able to quickly decipher it and immediately raise significant issues with the government's case, which helped us achieve this fantastic and fair outcome.”
Specter said that having led international litigation as a federal prosecutor and working on cryptocurrency-related matters on both sides, he knows “where the Department of Justice's weaknesses lie, despite all the flashy press releases.”
“When you're asking the court to do something that no judge in your district has ever done, and only a handful of judges across the nation have done, and the magistrate judge is already opposed, it's challenging to say the least,” Specter said. “But when you have a fair and unbiased judge and a great client, and you're willing to put in the effort, it can produce unprecedented results.”
The Department of Justice did not respond to a request for comment.
Now, U.S. District Judge Robert Lasnick of the Western District of Washington has ruled that Potapenko and Tulogin must sign $5 million personal bonds, post $750,000 cash bonds and comply with several additional restrictions as conditions of their pretrial release.
According to the indictment, the case dates back to November 2022, when Potapenko and Tulogin, both 39-year-olds from Estonia, were arrested for allegedly entitling hundreds of thousands of victims to purchase contracts that gave them the right to receive a portion of the cryptocurrency mined by the defendants' crypto mining service, Hashflare.
Cryptocurrency mining is the process by which computers generate cryptocurrencies, such as Bitcoin, for profit. The defendants allegedly offered contracts that allowed customers to rent some of HashFlare's mining capacity for a fee. In return, HashFlare agreed to pay the contract holders the cryptocurrency generated by their mining capacity.
Andrei Spector, partner at Norton Rose Fulbright (Photo provided)Between 2015 and 2019, customers around the world signed contracts with HashFlare worth more than $550 million. But the Department of Justice alleged that HashFlare did not own the cryptocurrency mining equipment it claimed, and that the defendants failed to assist investors in withdrawing their mining proceeds.
The DOJ also alleged that in a second scheme, Potapenko and Tulogin offered to leverage their success with Hashflare to invest in a company called Polybius. The defendants claimed to be setting up a bank specializing in cryptocurrencies, but the DOJ alleges that this was a fraud and that the defendants defrauded investors out of more than $575 million.
Meanwhile, following the arrests, the Department of Justice alleged that the defendants moved $95 million worth of cryptocurrency, indicating that they have vast assets that are “still moving about covertly,” and that they lied to pretrial investigators and cannot be trusted.
But as the defendants argued, “it turned out the government was wrong: Neither they nor their associates moved any assets, the banks hosting the cryptocurrency wallets confirmed that, and the Justice Department's “go-to expert” confirmed that, court records show.
The defendants said this was a “devastating blow” to the government, as the entire case was based on assumptions about the defendants' companies' crypto-mining capabilities and related crypto-currency movements. And now, the FBI's main witness to these allegations has been discredited for “material errors.”
“[The fed’s witness] “Defendants submitted sworn statements disclosing that they believed they had caused the movement of $95 million worth of cryptocurrency over the past three weeks,” the defendants wrote in their July filing. “In the end, his claims were false — $95 million.”
