U.S. Attorney Announces Landmark $3.36 Billion Cryptocurrency Seizure and Conviction in Link to Silk Road Dark Web Fraud

U.S. Attorney Announces Landmark $3.36 Billion Cryptocurrency Seizure and Conviction in Link to Silk Road Dark Web Fraud

Damian Williams, United States Attorney for the Southern District of New York, and Tyler Hatcher, Special Agent in Charge of the Internal Revenue Service, Criminal Investigation, Los Angeles Field Office (“IRS-CI”), announced today that JAMES ZHONG pleaded guilty to committing wire fraud in September 2012 when he illegally obtained over 50,000 Bitcoin from the Silk Road dark web internet marketplace. ZHONG pleaded guilty on Friday, November 4, 2022 before U.S. District Judge Paul G. Gardephe.

On November 9, 2021, pursuant to a court-authorized premises search warrant of ZHONG’s home in Gainesville, Georgia, law enforcement seized approximately 50,676.17851897 Bitcoins, then valued at over 3, $36 billion. This seizure was then the largest cryptocurrency seizure in the history of the US Department of Justice and today remains the second largest financial seizure ever by the department. The government seeks to confiscate, collectively: approximately 51,680.32473733 bitcoins; ZHONG’s 80% interest in RE&D Investments, LLC, a Memphis-based company that owns significant real estate; $661,900 in cash seized from ZHONG’s home; and various metals also seized from ZHONG’s home.

US Attorney Damian Williams said, “James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 Bitcoins from Silk Road. For nearly a decade, the whereabouts of this massive missing piece of Bitcoin had become a $3.3 billion+ mystery. Using state-of-the-art cryptocurrency tracing and some good old-fashioned police work, law enforcement has located and recovered this impressive cache of proceeds of crime. This case shows that we won’t stop following the money, no matter how cleverly hidden, even to a circuit board in the bottom of a popcorn box.

IRS-CI Special Agent in Charge Tyler Hatcher said, “Mr. Zhong executed a sophisticated scheme designed to steal bitcoins from the famous Silk Road Market. Once he pulled off his heist, he attempted to hide his loot through a series of complex transactions that he hoped would be enhanced by hiding behind the mystery of the “darknet”. IRS-CI Special Agents are the best in the world at tracking money in cyberspace or wherever our financial investigations take us. We will continue to work with our partners in the US Attorney’s Office to track down these criminals and bring them to justice.

According to the allegations contained in documents filed in Manhattan federal court and statements made during the court proceedings:

ZHONG’s scheme to defraud

Silk Road was an online “darknet” black market. In operation from approximately 2011 to 2013, Silk Road was used by numerous drug dealers and other illegal sellers to distribute massive amounts of illegal drugs and other illicit goods and services to numerous buyers and to launder all funds who passed through it. In 2015, following an unprecedented prosecution by this bureau, Silk Road founder Ross Ulbricht was found guilty by a unanimous jury and sentenced to life in prison.

In September 2012, ZHONG executed a scheme to defraud Silk Road of his money and property by (a) creating a series of approximately nine Silk Road accounts (the “Fraudulent Accounts”) in a manner designed to conceal his identity ; (b) trigger over 140 transactions in quick succession to trick Silk Road’s withdrawal processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system to ZHONG’s accounts; and (c) transfer such Bitcoin to a variety of separate addresses also under ZHONG’s control, all in a manner designed to prevent detection, conceal its identity and ownership, and obscure the source of the Bitcoin.

During the execution of the September 2012 fraud, ZHONG did not list any items or services for sale on Silk Road, and did not purchase any items or services on Silk Road. ZHONG registered the accounts by providing the bare minimum of information required by Silk Road to create the account; the fraud accounts were just a way for ZHONG to defraud Silk Road of Bitcoin.

ZHONG funded the fraud accounts with an initial deposit of between 200 and 2,000 Bitcoin. After the initial deposit, ZHONG then quickly executed a series of withdrawals. Thanks to his fraud scheme, ZHONG was able to withdraw far more Bitcoin from Silk Road than he had deposited in the first place. For example, on September 19, 2012, ZHONG deposited 500 Bitcoins into a Silk Road wallet. Less than five seconds after making the initial deposit, ZHONG executed five withdrawals of 500 Bitcoin in quick succession — that’s to say, in the same second – resulting in a net gain of 2,000 Bitcoin. Another example, another fraudulent account made a single deposit and more than 50 Bitcoin withdrawals before the account ceases trading. ZHONG moved this Bitcoin off the Silk Road and, within days, consolidated them into two large amounts.

Almost five years after ZHONG’s fraud, in August 2017, solely due to ZHONG’s possession of the 50,000 Bitcoin it illegally obtained from Silk Road, ZHONG received a corresponding amount of a related cryptocurrency – 50,000 Bitcoin Cash (“BCH Proceeds of Crime”) – in addition to the 50,000 Bitcoin. In August 2017, in a coin split, Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash (“BCH”). When this split happened, any Bitcoin address that had a Bitcoin balance (like ZHONG addresses) now had exactly the same balance on the Bitcoin blockchain and on the Bitcoin Cash blockchain. As of August 2017, ZHONG thus possessed 50,000 BCH in addition to the 50,000 Bitcoin that ZHONG had obtained illegally from Silk Road. ZHONG then traded through an overseas cryptocurrency exchange all of the BCH proceeds of crime for additional Bitcoins, or approximately 3,500 Bitcoins of additional proceeds of crime. Collectively, as of the last quarter of 2017, ZHONG therefore owned approximately 53,500 Bitcoins of the total proceeds of crime (the “Proceeds of Crime”).

Government Seizure of Forfeitable Assets

On November 9, 2021, pursuant to a court-authorized premises search warrant (the “Search”), IRS-CI agents recovered approximately 50,491.06251844 bitcoins from the proceeds of crime at ZHONG’s home in Gainesville, Georgia. Specifically, law enforcement located 50,491.06251844 Bitcoins out of approximately 53,500 Bitcoin proceeds of crime (a) in an underground vault; and (b) on a single board computer that was submerged under blankets in a box of popcorn stored in a bathroom closet. Additionally, law enforcement recovered $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 Bitcoin, an additional 11.1160005300044 Bitcoin and four one-ounce silver bars, three gold bars one ounce, four 10 one ounce silver bars and one gold coin.

Beginning in or around March 2022, ZHONG began voluntarily handing over additional bitcoins to the government that ZHONG had access to and had not dissipated. In total, ZHONG voluntarily gave away an additional 1,004.14621836 Bitcoins.

Forfeiture actions

As part of ZHONG’s guilty plea, on November 4, 2022, Judge Gardephe issued a preliminary order of forfeiture of specific assets and replacement assets/money stoppage disclaiming ZHONG’s interest in the following assets :

  • ZHONG’s 80% interest in RE&D Investments, LLC, a Memphis-based company that owns significant real estate;
  • $661,900 in US currency seized from ZHONG’s home on November 9, 2021;
  • Metal items, consisting of four one-ounce silver bars, three one-ounce gold bars, four 10-ounce silver bars and one gold coin, all seized from ZHONG’s home on November 9, 2021;
  • 11.1160005300044 Bitcoin seized from ZHONG’s home on Nov 9, 2021;
  • 25 Casascius coins (physical Bitcoin) with an approximate value of 174 Bitcoin, collectively, seized from ZHONG’s home on November 9, 2021;
  • 23.7112850 Bitcoin provided by ZHONG on April 27, 2022;
  • 115.02532155 Bitcoin provided by ZHONG on April 28, 2022; and
  • 4.57427222 Bitcoin provided by ZHONG on June 8, 2022.

Today in United States vs. Ross Ulbricht, S1 14 Cr. 68 (LGS), the government filed a motion to enter an amended preliminary order of forfeiture, seeking to confiscate approximately 51,351.89785803 traceable bitcoins at Silk Road, worth approximately $3,388,817,011.90 at the time of entry, as follows:

  • 50,491.06251844 Bitcoin seized from ZHONG’s home on Nov 9, 2021;
  • 825.38833159 Bitcoin provided by ZHONG on March 25, 2022; and
  • 35.4470080 Bitcoin provided by ZHONG on May 25, 2022.

* * *

ZHONG, 32, of Gainesville, Georgia, and Athens, Georgia, pleaded guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison.

The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge. ZHONG is to be sentenced by Judge Gardephe on February 22, 2023 at 3:00 p.m.

Mr. Williams praised the remarkable work of the Internal Revenue Service, the Western Cyber ​​Crimes Unit of the Los Angeles Field Office Criminal Investigation. Mr. Williams also thanked the Athens-Clarke County Police Department in Athens, Georgia, for their support and assistance in the case.

The prosecution of this case is overseen by the Bureau’s Money Laundering and Transnational Criminal Enterprises Unit. Assistant U.S. Attorney David R. Felton is in charge of the case.

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