US Prosecutors Contest ‘Uncommonly Soft’ Sentence in HashFlare Mining Scam

Federal prosecutors are seeking to overturn what one legal analyst referred to as an “unusually lenient” conclusion in a major cryptocurrency fraud case.

On Tuesday, the government filed an appeal with the Ninth Circuit Court of Appeals regarding the “time served” sentences given to Sergei Potapenko and Ivan Turõgin, Estonian nationals who pleaded guilty to conspiracy related to a $577 million cryptocurrency Ponzi scheme.

The appeal contests both the decisions made at the sentencing hearing and the written “Order on Sentencing” issued by Judge Robert S. Lasnik on Tuesday.

The appeal focuses on Lasnik’s choice to impose only three years of supervised release and fines of $25,000 each for Potapenko and Turõgin, dismissing prosecutors’ request for 10-year prison sentences in what was termed “the largest fraud ever prosecuted” in the Western District of Washington.

According to Ishita Sharma, a blockchain and cryptocurrency attorney and managing partner at Fathom Legal, the likelihood of upholding the sentence is high, as “the Ninth Circuit typically defers to a district judge’s discretion unless the sentence is clearly unreasonable.”

Sharma further explained that the Ninth Circuit will assess whether the judge properly evaluated the U.S. Sentencing Guidelines, the consistency of the ruling with national standards for large fraud cases, and if leniency compromises general deterrence in financial crimes.

Legal partner Navodaya Singh Rajpurohit from Coinque Consulting echoed this sentiment, stating to Decrypt that although the sentence may seem “unusually lenient,” Judge Lasnik clearly explained his rationale concerning “time already served, immigration risks, and concerns about restitution.”

Rajpurohit noted that Lasnik’s reasoning is sound and highlights the possible issues related to the treatment of foreign defendants that influenced the sentencing decision.

While “prosecutors can argue the sentence downplays the severity of the fraud, history indicates that the Ninth Circuit seldom overturns sentences that are supported by a clear, well-reasoned order,” he said.

The HashFlare defendants admitted guilt in February for defrauding 440,000 individuals globally via deceptive cryptocurrency mining contracts from 2015 to 2019.

They presented clients with “fake online dashboards” showcasing bogus returns while lacking the promised mining infrastructure, instead utilizing investor funds for luxury expenditures and purchasing Bitcoin through exchanges to settle early withdrawals.

Judge Lasnik referred to this case as “one of the most challenging sentencings the Court has faced in his 27 years on the federal bench.”

He indicated that all involved parties agreed that any prison term for the defendants should be served in Estonia via a treaty transfer, but there is a “significant risk in assuming that the Department of Justice’s Office of International Affairs will approve the defendants’ treaty transfer instead of rejecting it.”

Lasnik cautioned that without treaty transfers, the defendants could “experience a much longer and harsher prison term” compared to American white-collar criminals receiving similar sentences, followed by “indefinite detention” by Immigration and Customs Enforcement before deportation.

However, Sharma emphasized that the “leniency” of the sentence amidst such a substantial fraud raises vital questions regarding consistency and deterrence.

The defendants forfeited around $400 million in assets intended for victim restitution.