US Attorney Announces Historic $3.36 Billion Cryptocurrency Seizure and Conviction in Silk Road Dark Web Scam | USAO-SDNY

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 to have committed wire fraud in September 2012 when he illegally obtained over 50,000 Bitcoins from the Silk Road dark web internet marketplace. ZHONG pleaded guilty on Friday the 4th. November 2022, before United States District Judge Paul G. Gardephe.

On November 9, 2021, pursuant to a judicially authorized search warrant from ZHONG’s Gainesville, Georgia, home, 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 Department’s second largest financial seizure ever. The government seeks to lose, in total: approximately 51,680.32473733 Bitcoin; ZHONG’s 80% interest in RE&D Investments, LLC, a Memphis-based company with significant real estate holdings; $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 ten years, the whereabouts of this huge chunk of missing Bitcoin had become a mystery over 3.3 billion dollars. Thanks to state-of-the-art cryptocurrency tracking and good old fashioned police work, the police found and recovered this impressive cache of crime proceeds. This case shows that we will not stop following the money, no matter how skillfully it is hidden, even to a circuit board in the bottom of a popcorn can.”

IRS-CI Special Agent Tyler Hatcher said, “Mr. Zhong executed a sophisticated scheme designed to steal bitcoin from the infamous Silk Road Marketplace. Once he was successful in the robbery, he attempted to conceal his loot through a series of complex transactions that he hoped would be reinforced as he hid behind the mystery of the ‘dark web.’ to track down these criminals and bring them to justice.”

According to allegations in filings in Manhattan federal court and statements made during 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.

In September 2012, ZHONG executed a scheme to defraud Silk Road of the 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 Bitcoins from the Bitcoin-based payment system into ZHONG’s accounts; and (c) transfer that Bitcoin to a number of separate addresses also under ZHONG’s control, all in a manner designed to prevent detection, 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 loss-free property

On November 9, 2021, pursuant to a judicially authorized search warrant (the “Search”), IRS-CI agents recovered approximately 50,491.06251844 Bitcoin of the proceeds of crime from ZHONG’s Gainesville, Georgia, home. Specifically, law enforcement located 50,491.06251844 Bitcoin of the approximately 53,500 Bitcoin Crime Proceeds (a) in an underground safe; and (b) on a single desktop computer that was 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 Bitcoins, 11.1160005300044 additional Bitcoins, and four one-ounce silver bars, three one-ounce gold bars, four 10 -ounce silver-colored bars, and a gold-colored coin.

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.

Forfeiture actions

In connection with ZHONG’s guilty plea, on November 4, 2022, Judge Gardephe entered a preliminary order of forfeiture of consent with respect to specific property and compensatory assets/money judgment forfeiting ZHONG’s interest in the following property:

• 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.

Today, i United States v. Ross Ulbricht, S1 14 Cr. 68 (LGS), the Government filed a Motion for Entry of an Amended Preliminary Order of Forfeiture, seeking to forfeit approximately 51,351,89785803 Bitcoins traceable to Silk Road, valued at approximately $3,388,817,011.90 at the time of the seizure, as follows:

• 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.

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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 scheduled to be sentenced by Judge Gardephe on 22 February 2023 at 3 p.m

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.