US Prosecutors Challenge ‘Unusually Lenient’ Sentence in HashFlare Mining Fraud

Federal prosecutors have moved to overturn what one legal expert called an “unusually lenient” outcome in one of the largest crypto frauds ever tried in the region.

The government on Tuesday appealed with the Ninth Circuit Court of Appeals the “time served” sentences handed down to Estonian nationals Sergei Potapenko and Ivan Turõgin, who pleaded guilty to conspiracy in a $577 million cryptocurrency mining Ponzi scheme.

The notice challenges both the sentencing hearing decisions and Judge Robert S. Lasnik’s written “Order on Sentencing” issued on Tuesday.

The appeal targets Lasnik’s decision to sentence Potapenko and Turõgin to only three years of supervised release and $25,000 fines each, rejecting prosecutors’ request for 10-year prison terms in what authorities called “the largest fraud ever prosecuted” in the Western District of Washington.

Ishita Sharma, a blockchain and crypto lawyer and managing partner at Fathom Legal, told Decrypt that “the chances are high for the sentence to be upheld” because “the Ninth Circuit generally defers to a district judge’s discretion unless it finds the sentence was clearly outside the bounds of reasonableness.”

Sharma said the Ninth Circuit will weigh whether the judge “properly calculated and considered the U.S. Sentencing Guidelines,” the “consistency” of the ruling with national norms for large fraud cases, and if leniency “undermines general deterrence” in economic crimes.

Navodaya Singh Rajpurohit, legal partner at Coinque Consulting, shared the same view, telling Decrypt that while the sentence may seem “unusually lenient,” Judge Lasnik clearly articulated his reasoning around “time already served, immigration risks, and restitution concerns.”

The legal expert noted Judge Lasnik’s “reasonings are genuine there could actually be problems if they are retained in us,” referring to the systemic concerns about foreign defendants’ treatment that formed the foundation of the sentencing decision.

While “prosecutors can argue it downplays the fraud, but history shows the Ninth Circuit rarely reverses sentences when the judge ties them to specific, well-reasoned order,” he said.

The HashFlare defendants pleaded guilty in February to defrauding 440,000 victims worldwide through fraudulent crypto mining contracts from 2015 to 2019.

They showed customers “fake online dashboards” with fictitious returns while lacking the mining infrastructure they promised, instead using investor funds for luxury purchases and buying Bitcoin through exchanges to pay early withdrawers.

Judge Lasnik has described the case as “one of the most difficult sentencings the Court has encountered during 27 years on the federal bench.”

He noted that all parties agreed the defendants should serve any prison sentence in Estonia through a treaty transfer, but is “taking too great a risk by assuming that office [Department of Justice’s Office of International Affairs] will approve defendants’ treaty transfer rather than reject it,”

Lasnik warned that without treaty transfers, the defendants would “face a significantly longer and harsher term of imprisonment” than American white-collar criminals receiving identical sentences, followed by “indefinite detention” by Immigration and Customs Enforcement before deportation.

However, Sharma noted that the sentence’s “leniency in the face of a massive fraud raises serious concerns about consistency and deterrence.”

The defendants forfeited approximately $400 million in assets for victim compensation.