Silk Road Dark Web Scam Defendant Sentenced After Seizing and Forfeiting Over $3.4 Billion in Cryptocurrency | USAO-SDNY

Damian Williams, United States Attorney for the Southern District of New York, announced today that JAMES ZHONG was sentenced to one year and one day in prison for wire fraud in September 2012 when he illegally obtained approximately 50,000 Bitcoins from the Silk Road dark web internet marketplace. United States District Judge Paul G. Gardephe imposed today’s sentence.

As part of the ZHONG investigation, the government has obtained final orders to forfeit, among other things, 51,680.32473733 Bitcoins, valued at over $3.4 billion at the time of seizure and over $1.57 billion today.

US Attorney Damian Williams said: “Back in 2012, James Zhong committed wire fraud by stealing 50,000 Bitcoin from Silk Road, and for the next 10 years he managed to hide what he had done and how he obtained the wealth. Zhong used a decentralized Bitcoin mixer, a foreign cryptocurrency exchange and an impressive array of technological tools to frustrate tracing efforts. But thanks to the relentless and skilled efforts of law enforcement to follow the money, the federal government exposed Zhong’s scheme and obtained final forfeiture orders for over 51,680 Bitcoin. Cybercriminals should heed this message: we will follow the money and hold you accountable, no matter how sophisticated your scheme and no matter how long it takes.”

According to court documents and statements made in court proceedings:

ZHONG’s scheme of fraud

Silk Road was an online black market. Operating from approximately 2011 to 2013, Silk Road was used by a variety of drug traffickers and other illegal suppliers to distribute vast amounts of illegal drugs and other illegal goods and services to many buyers and to launder any funds passing through it. In 2015, following a groundbreaking prosecution by this office, Silk Road founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison. United States v. Ulbricht14-cr-68 (SDNY).

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

While perpetrating the fraud in September 2012, ZHONG did not list any item or service for sale on Silk Road, nor did he purchase any item or service on Silk Road. ZHONG registered the accounts by providing the minimum information required by Silk Road to create the account; the fraud accounts were just a conduit for ZHONG to defraud Silk Road of Bitcoin.

ZHONG funded the fraudulent accounts with an initial deposit of between 200 and 2,000 Bitcoin. After the first deposit, ZHONG quickly made a series of withdrawals. Through his scheme to defraud, ZHONG was able to withdraw many times more Bitcoin from Silk Road than he had initially deposited. As an example, on September 19, 2012, ZHONG deposited 500 Bitcoin into a Silk Road wallet. Less than five seconds after the first deposit, ZHONG made five withdrawals of 500 Bitcoin in quick succession – i.e, within the same second — resulting in a net gain of 2,000 Bitcoin. As another example, another scam account made a single deposit and over 50 Bitcoin withdrawals before the account stopped its activity. ZHONG moved this Bitcoin out of Silk Road and within days consolidated them into two high value amounts.

Almost five years after ZHONG’s fraud, in August 2017, solely by virtue of ZHONG’s possession of 50,000 Bitcoins that he illegally obtained from Silk Road, ZHONG received a corresponding amount of a related cryptocurrency – 50,000 Bitcoin Cash (“BCH Crime Proceeds” ) on top of 50,000 Bitcoin. In August 2017, in a hard fork 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 (as ZHONG’s addresses did) now had exactly the same balance on both the Bitcoin blockchain and the Bitcoin Cash blockchain. As of August 2017, ZHONG thus had 50,000 BCH in addition to the 50,000 Bitcoin that ZHONG illegally obtained from Silk Road. ZHONG then exchanged through a foreign cryptocurrency exchange the entire BCH Crime Proceeds for additional Bitcoin, equivalent to approximately 3,500 Bitcoin of additional crime proceeds. In total, by the last quarter of 2017, ZHONG thus had approximately 53,500 Bitcoin of the total proceeds of crime (the “Proceeds of Crime”).

The government’s seizure of over 50,000 Bitcoin

On November 9, 2021, pursuant to a judicially authorized search warrant, law enforcement agents recovered approximately 50,491.06251844 Bitcoin of crime proceeds from ZHONG’s Gainesville, Georgia, house. Police found these proceeds of crime in an underground safe and on a single desktop computer submerged under blankets in a popcorn box stored in a bathroom cabinet. In addition, law enforcement recovered $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 Bitcoin, 11.1160005300044 additional Bitcoin, four one-ounce silver bars, three one-ounce gold bars, four 10- ounce silver-colored bars, and a gold-colored coin. Photographs of the popcorn box, single desk computer, underground safe and some of the seized items are included below:

Beginning in March 2022, ZHONG began voluntarily surrendering to the government additional Bitcoin that ZHONG had access to and had not disappeared. In total, ZHONG voluntarily surrendered 1,004.14621836 additional Bitcoin.

Using a conservative estimate of the lowest spot price of Bitcoin on the seizure dates, the total value of all seized Bitcoins for which the government has obtained final confiscation orders is approximately $3.4 billion.

Forfeiture actions

7 February 2023, i United States v. Ross Ulbricht, S1 14 Cr. 68 (SDNY), District Judge Lorna G. Schofield entered a final order of forfeiture of the property below seized from ZHONG, granting all right, title and interest in the property below in the United States:

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

On March 14, 2023, District Judge Gardephe entered a final order of forfeiture of the property below, granting all right, title and interest in the property below in the United States:

• ZHONG’s 80% interest in RE&D Investments, LLC, a Memphis-based company with significant real estate holdings;
• $661,900 in US currency seized from ZHONG’s home on November 9, 2021;
• Metal objects, 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 November 9, 2021;
• 25 Casascius coins (physical Bitcoin) with an approximate value of 174 Bitcoin, collected, 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 Apr 28, 2022; and
• 4.57427222 Bitcoin provided by ZHONG on June 8, 2022.

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ZHONG, 32, of Gainesville, Georgia, and Athens, Georgia, previously pleaded guilty to one count of wire fraud before Judge Gardephe.

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

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