Damian Williams, the US Lawyer for the Southern District of New York, and Tyler Hatcher, the Particular Agent in Cost of the Inside Income Service, Legal Investigation, Los Angeles Area Workplace (“IRS-CI”), introduced at this time that JAMES ZHONG pled responsible to committing wire fraud in September 2012 when he unlawfully obtained over 50,000 Bitcoin from the Silk Street darkish net web market. ZHONG pled responsible on Friday, November 4, 2022, earlier than United States District Decide Paul G. Gardephe.
On November 9, 2021, pursuant to a judicially licensed premises search warrant of ZHONG’s Gainesville, Georgia, home, legislation enforcement seized roughly 50,676.17851897 Bitcoin, then valued at over $3.36 billion. This seizure was then the most important cryptocurrency seizure within the historical past of the U.S. Division of Justice and at this time stays the Division’s second largest monetary seizure ever. The Authorities is in search of to forfeit, collectively: roughly 51,680.32473733 Bitcoin; ZHONG’s 80% curiosity in RE&D Investments, LLC, a Memphis-based firm with substantial actual property holdings; $661,900 in money seized from ZHONG’s residence; and numerous metals additionally seized from ZHONG’s residence.
U.S. Lawyer Damian Williams stated: “James Zhong dedicated wire fraud over a decade in the past when he stole roughly 50,000 Bitcoin from Silk Street. For nearly ten years, the whereabouts of this huge chunk of lacking Bitcoin had ballooned into an over $3.3 billion thriller. Due to state-of-the-art cryptocurrency tracing and good old style police work, legislation enforcement positioned and recovered this spectacular cache of crime proceeds. This case exhibits that we received’t cease following the cash, regardless of how expertly hidden, even to a circuit board within the backside of a popcorn tin.”
IRS-CI Particular Agent in Cost Tyler Hatcher stated: “Mr. Zhong executed a complicated scheme designed to steal bitcoin from the infamous Silk Street Market. As soon as he was profitable in his heist, he tried to cover his spoils via a sequence of advanced transactions which he hoped can be enhanced as he hid behind the thriller of the ‘darknet.’ IRS-CI Particular Brokers are one of the best on the planet at following the cash via our on-line world or wherever our monetary investigations lead us. We are going to proceed to work with our companions on the US Lawyer’s Workplace to trace down these criminals and convey them to justice.”
In keeping with the allegations contained in filings in Manhattan federal courtroom and statements made throughout courtroom proceedings:
ZHONG’s Scheme to Defraud
Silk Street was an internet “darknet” black market. In operation from roughly 2011 till 2013, Silk Street was utilized by quite a few drug sellers and different illegal distributors to distribute huge portions of unlawful medicine and different illicit items and companies to many consumers and to launder all funds passing via it. In 2015, following a groundbreaking prosecution by this Workplace, Silk Street’s founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in jail.
In September 2012, ZHONG executed a scheme to defraud Silk Street of its cash and property by (a) making a string of roughly 9 Silk Street accounts (the “Fraud Accounts”) in a way designed to hide his identification; (b) triggering over 140 transactions in fast succession in an effort to trick Silk Street’s withdrawal-processing system into releasing roughly 50,000 Bitcoin from its Bitcoin-based fee system into ZHONG’s accounts; and (c) transferring this Bitcoin into quite a lot of separate addresses additionally below ZHONG’s management, all in a way designed to forestall detection, conceal his identification and possession, and obfuscate the Bitcoin’s supply.
Whereas executing the September 2012 fraud, ZHONG didn’t listing any merchandise or service on the market on Silk Street, nor did he purchase any merchandise or service on Silk Street. ZHONG registered the accounts by offering the naked minimal of knowledge required by Silk Street to create the account; the Fraud Accounts have been merely a conduit for ZHONG to defraud Silk Street of Bitcoin.
ZHONG funded the Fraud Accounts with an preliminary deposit of between 200 and a couple of,000 Bitcoin. After the preliminary deposit, ZHONG then rapidly executed a sequence of withdrawals. By way of his scheme to defraud, ZHONG was capable of withdraw many instances extra Bitcoin out of Silk Street than he had deposited within the first occasion. For example, on September 19, 2012, ZHONG deposited 500 Bitcoin right into a Silk Street pockets. Lower than 5 seconds after making the preliminary deposit, ZHONG executed 5 withdrawals of 500 Bitcoin in fast succession — i.e., throughout the similar second — leading to a internet achieve of two,000 Bitcoin. As one other instance, a unique Fraud Account made a single deposit and over 50 Bitcoin withdrawals earlier than the account ceased its exercise. ZHONG moved this Bitcoin out of Silk Street and, in a matter of days, consolidated them into two high-value quantities.
Practically 5 years after ZHONG’s fraud, in August 2017, solely by advantage of ZHONG’s possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Street, ZHONG obtained an identical quantity of a associated cryptocurrency — 50,000 Bitcoin Money (“BCH Crime Proceeds”) — on high of the 50,000 Bitcoin. In August 2017, in a tough fork coin cut up, Bitcoin cut up into two cryptocurrencies, conventional Bitcoin and Bitcoin Money (“BCH”). When this cut up occurred, any Bitcoin tackle that had a Bitcoin steadiness (as ZHONG’s addresses did) now had the very same steadiness on each the Bitcoin blockchain and on the Bitcoin Money blockchain. As of August 2017, ZHONG thus possessed 50,000 BCH along with the 50,000 Bitcoin that ZHONG unlawfully obtained from Silk Street. ZHONG thereafter exchanged via an abroad cryptocurrency alternate the entire BCH Crime Proceeds for added Bitcoin, amounting to roughly 3,500 Bitcoin of extra crime proceeds. Collectively, by the final quarter of 2017, ZHONG thus possessed roughly 53,500 Bitcoin of complete crime proceeds (the “Crime Proceeds”).
The Authorities’s Seizure of Forfeitable Property
On November 9, 2021, pursuant to a judicially licensed premises search warrant (the “Search”), IRS-CI brokers recovered roughly 50,491.06251844 Bitcoin of the Crime Proceeds from ZHONG’s Gainesville, Georgia, home. Particularly, legislation enforcement positioned 50,491.06251844 Bitcoin of the roughly 53,500 Bitcoin Crime Proceeds (a) in an underground flooring protected; and (b) on a single-board laptop that was submerged below blankets in a popcorn tin saved in a rest room closet. As well as, legislation enforcement recovered $661,900 in money, 25 Casascius cash (bodily bitcoin) with an approximate worth of 174 Bitcoin, 11.1160005300044 extra Bitcoin, and 4 one-ounce silver-colored bars, three one-ounce gold-colored bars, 4 10-ounce silver-colored bars, and one gold-colored coin.
Starting in or round March 2022, ZHONG started voluntarily surrendering to the Authorities extra Bitcoin that ZHONG had entry to and had not dissipated. In complete, ZHONG voluntarily surrendered 1,004.14621836 extra Bitcoin.
Forfeiture Actions
In reference to ZHONG’s responsible plea, on November 4, 2022, Decide Gardephe entered a Consent Preliminary Order of Forfeiture as to Particular Property and Substitute Belongings/Cash Judgment forfeiting ZHONG’s curiosity within the following property:
- ZHONG’s 80% curiosity in RE&D Investments, LLC, a Memphis-based firm with substantial actual property holdings;
- $661,900 in United States foreign money seized from ZHONG’s residence on November 9, 2021;
- Metallic gadgets, consisting of 4 one-ounce silver-colored bars, three one-ounce gold-colored bars, 4 10-ounce silver-colored bars, and one gold-colored coin, all seized from ZHONG’s residence on November 9, 2021;
- 11.1160005300044 Bitcoin seized from ZHONG’s residence on November 9, 2021;
- 25 Casascius cash (bodily Bitcoin) with an approximate worth of 174 Bitcoin, collectively, seized from ZHONG’s residence on November 9, 2021;
- 23.7112850 Bitcoin supplied by ZHONG on April 27, 2022;
- 115.02532155 Bitcoin supplied by ZHONG on April 28, 2022; and
- 4.57427222 Bitcoin supplied by ZHONG on June 8, 2022.
As we speak, in United States v. Ross Ulbricht, S1 14 Cr. 68 (LGS), the Authorities filed a movement for entry of an Amended Preliminary Order of Forfeiture, in search of to forfeit roughly 51,351.89785803 Bitcoin traceable to Silk Street, valued at roughly $3,388,817,011.90 on the time of seizure, as follows:
- 50,491.06251844 Bitcoin seized from ZHONG’s residence on November 9, 2021;
- 825.38833159 Bitcoin supplied by ZHONG on March 25, 2022; and
- 35.4470080 Bitcoin supplied by ZHONG on Might 25, 2022.
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ZHONG, 32, of Gainesville, Georgia, and Athens, Georgia, pled responsible to 1 depend of wire fraud, which carries a most sentence of 20 years in jail.
The utmost potential sentence on this case is prescribed by Congress and is supplied right here for informational functions solely, as any sentencing of the defendant might be decided by the decide. ZHONG is scheduled to be sentenced by Decide Gardephe on February 22, 2023, at 3:00 p.m.
Mr. Williams praised the excellent work of the Inside Income Service, Legal Investigation’s Western Cyber Crimes Unit of the Los Angeles Area Workplace. Mr. Williams additionally thanked the Athens-Clarke County Police Division in Athens, Georgia, for its assist and help with the case.
The prosecution of this case is being overseen by the Workplace’s Cash Laundering and Transnational Legal Enterprises Unit. Assistant U.S. Lawyer David R. Felton is answerable for the case.
