Feds Shift Into DeFi With Prosecution of $340M Alleged Ponzi Scheme

The founders call it “DeFi.” The Department of Justice calls it a ponzi scam.

A federal grand jury in Oregon on Wednesday indicted the founders of Forsage, a decentralized cryptocurrency platform, of defrauding investors of more than $340M.

The defendants, four Russian nationals, allegedly coded and deployed smart contracts to “systematize” a Ponzi-pyramid scheme on the Ethereum, BNB and Tron blockchains, prosecutors said.

Analyzing Code

By analyzing the code underlying Forsage’s operations, prosecutors learned that as soon as an investor invested in the venture by purchasing a “slot” in a Forsage smart contract, it automatically diverted the investor’s funds to other investors. In this way, new investors’ proceeds were used to pay off earlier investors.
That is the classic model for a pyramid or Ponzi scam.

The U.S. Justice Department said 100% of the venture’s income went directly to the members of the project with zero risk. The founders promoted the platform as a legitimate, low risk investment opportunity.

Crypto Makes Its Peace with New EU Law, But What Does It Do?

Here's How MiCA is Changing the Rules of the Road for Tokens, Stablecoins, and NFTs

The Defiant

The case breaks new ground in the U.S. government’s widening crackdown on the cryptocurrency industry. Until now, most law enforcement and regulatory actions have focused on centralized projects such as FTX, the exchange that failed last November. Now it appears ostensibly DeFi projects may also be in the crosshairs of the Feds.

“Together with our partners, the department is committed to holding accountable fraudsters whgo cheat investors, including in the emerging DeFi space,” said Assistant Attorney General Kenneth Polite of the Justice Department’s Criminal Division.

Single Payout

After analyzing blockchain data, prosecutors found that over 80% of Forsage investors on Ethereum received fewer ETH back than they had invested. Over 50% of investors never received a single payout, prosecutors said.

The defendants — Vladimir Okhotnikov, Olena Oblamska, Mikhail Sergeev, and Sergey Maslakov — were each charged with conspiracy to commit wire fraud, the Justice Department said. If convicted, each faces a maximum sentence of 20 years in prison.