FBI Arrests Alleged Operator of Longest-Running Bitcoin Laundering Service

The FBI has arrested a Russian-Swedish national for allegedly operating the longest-running Bitcoin money laundering service on the darknet, which moved nearly $336 million worth of the cryptocurrency.

According to court documents, for the past 10 years, Roman Sterlingov allegedly operated Bitcoin Fog, a so-called cryptocurrency “tumbler” or “mixer” service. The service allowed users to send bitcoin in a way that was designed to conceal and obfuscate the source of the bitcoin.

The process works by disassociating incoming bitcoin from particular Bitcoin addresses or transactions, and then co-mingling that bitcoin with other incoming bitcoin before conducting any additional transactions. This allowed Bitcoin Fog customers engaged in unlawful activities to launder their proceeds by hiding the nature, source, and location of their “dirty” Bitcoin, according to the IRS. Bitcoin Fog allegedly even publicly advertised the service on Twitter as a way to help users conceal the source of their bitcoin, and charged a fee for the service.

Bitcoin Fog was launched in 2011, and, according to the IRS, was still operational as of last week. The website is allegedly one of the original Bitcoin mixing sites on the darknet, and more than 1.2 million bitcoins worth approximately $335.8 million have moved through the site since it began operation. According to the IRS, the largest senders of bitcoin through Bitcoin Fog have been darknet markets that mainly traffic in illegal narcotics and other illegal goods.

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Although a Bitcoin address owner is generally anonymous, law enforcement officials have been able to identify owners of particular Bitcoin addresses by analyzing the blockchain. The analysis can also reveal additional addresses controlled by the same individual or entity.

For example, someone can create multiple Bitcoin addresses to receive payments from different customers. When the user wants to make a transaction with the bitcoin they have received, they may group those addresses together to send a single transaction.

Law enforcement officials used commercial services offered by several different companies to analyze the blockchain and attempt to identify the individuals or groups involved in the virtual currency transactions. This analysis helped law enforcement officials confirm the number of bitcoin that have been sent through Bitcoin Fog since the site was launched.

The court documents also said that Bitcoin Fog charges a fee of 2% to 2.5% on each deposit, and that based on the service’s transaction activity over time, Sterlingov would have made approximately $8 million in commissions from the transactions if he had cashed out the administrative fees when the transactions occurred. The IRS also said that because of the sharp rise in the value of Bitcoin over the past 10 years, the current value of the Bitcoin Fog cluster is nearly $70 million.

Sterlingov is charged with money laundering, operating an unlicensed money transmitting business, and money transmission without a license in Washington, D.C.

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Tags: Bitcoin, Bitcoin Fog, computer fraud, Cryptocurrency, darknet, identity theft, illegal narcotics, mixer, Money Laundering, Roman Sterling

A US Circuit Court of Appeals has dismissed a lawsuit brought by a member of Edison International Inc.’s 401(k) employee stock ownership plan (ESOP) that accused the plan’s fiduciaries of breaching their duty of prudence by allowing employees to invest in the company’s stock after allegedly learning that it was artificially inflated.

The case centered on the Employee Retirement Income Security Act (ERISA) requirement that a pension plan’s fiduciary act prudently in managing the plan’s assets, including as the fiduciary of an ESOP, which invests mainly in the stock of the company that employs the plan participants.

Edison International and its subsidiaries are eligible to participate in a defined contribution (DC) plan, the Edison 401(k) Savings Plan, by diverting a percentage of their earnings to be invested in funds offered by the plan. One fund option was the Edison Company Stock Fund, which is an ESOP that primarily holds the company’s common stock.

The plaintiff alleged that the fiduciaries breached their duty of prudence because they knew that undisclosed misrepresentations were artificially inflating Edison’s stock price, but did nothing to protect the plan participants from the “foreseeable harm that inevitably results when fraud is revealed to the market.”

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The alleged misrepresentations concerned subsidiary Southern California Edison Company’s failure to disclose certain ex parte communications between its executives and California Public Utilities Commission (CPUC) decisionmakers that occurred while the CPUC was overseeing the subsidiary’s rate-setting proceedings and settlement negotiations with ratepayer advocacy groups. The plaintiffs argued that Edison’s stock price “appreciated substantially” after a settlement was announced, but that the price then began to decline when news broke of the improper ex parte communications.

A 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer established that a plaintiff must “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

The appeals panel held that the plaintiff failed to state a duty-of-prudence claim “because she failed plausibly to allege an alternative action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.” The panel held that, on their own, general economic principles are not enough to constitute duty-of-prudence violations.

The amended complaint “relies solely on general economic theories and is devoid of context-specific allegations explaining why an earlier disclosure was so clearly beneficial,” the panel said in its ruling. “Therefore, plaintiff failed to state a claim for breach of the duty of prudence.”