Extortionist Pleads Guilty to Crypto Firm Shakedown

A New York man has pleaded guilty to being part of an extortion campaign that took millions of dollars’ worth of Ethereum digital assets from a Seattle-based cryptocurrency startup.

Michael Hlady, who falsely claimed to be part of the FBI, the CIA, the National Security Agency (NSA), and the Irish Republican Army (IRA), had threatened to destroy the unidentified company if it didn’t give him and a co-conspirator millions of dollars’ worth of ether coins.

The company, whose name was omitted from court documents, is a startup mobile-based business that specializes in generating user traffic to clients’ products by issuing rewards in the form of cryptocurrency tokens. In 2017, the company planned an initial coin offering (ICO) to raise capital and signed an agreement with Maple Ventures, a company operated by Hlady’s co-conspirator Steven Nerayoff, to help with the ICO.

Under the deal, Maple Ventures was to receive 22.5% of all the funds raised by the company in exchange for services that included revising the company’s white paper, adding advisers and strategic partnerships to ensure a successful crowdsale, and sourcing and curating pre-seed funding from strategic partners in the blockchain community. The percentage was roughly equal to about 17,000 ether.

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However, days before the ICO was to launch, Nerayoff demanded company executives allow Maple Ventures to keep 30,000 ether that the firm had been holding from the pre-sales, which was worth approximately $8.75 million at the time.

Nerayoff also allegedly introduced Hlady to the company’s executive as his “operations guy” and the president of another company Nerayoff controlled called Alchemist LLC. Hlady told the executives that he had been part of the FBI, CIA, NSA, and IRA, and bragged that he had “taken down” a head of state. Nerayoff and Hlady allegedly threatened one of the executives with destruction of the company if they were not paid additional funds and company tokens.

Nerayoff also allegedly demanded a purported loan of 10,000 ether, worth approximately $4.45 million at the time, and Hlady followed up with a threatening text message to the executive saying, “I promise I will destroy your community” if the demands were not met. The company then transferred 10,000 ether to Nerayoff, who never repaid the loan.

“Hlady and his co-conspirator used strong-arm tactics to shake down a startup company of cryptocurrency and will now face punishment just like anyone else who extorts a business,” Mark Lesko, acting US attorney for the Eastern District of New York, said in a statement.

Nerayoff has entered a plea of not guilty to extortion charges and is awaiting trial, while Hlady has pleaded guilty. Nerayoff and Hlady could each face up to 20 years in prison.

The Importance of Saudi Aramco

MBS aims to use the PIF as a key vehicle to transition his economy from a dependence on oil to a more diversified base. But analysts say the crown prince faces a host of obstacles, including finding foreign investment partners, attracting international residents to live in new Saudi Arabia cities, and building a visitor industry in a country not known for tourism.

But most of all, bin Salman still needs the revenue from oil for now to grow the PIF’s assets.

MBS is largely using cash from the majority state-owned oil company, Saudi Aramco, to build a new economy through the PIF. The oil company is one of the largest corporations in the world. MBS’s aim: create 1.8 million direct and indirect jobs, in a county with a high unemployment rate of more than 10%.

MBS has a direct ally in his plan. He installed PIF Governor Yasir Othman Al-Rumayyan, the top investment official of the sovereign wealth fund, as chairman of Saudi Aramco in September 2019, several months before the oil company’s initial public offering (IPO). Al-Rumayyan today continues to hold the dual roles.

The government ended up selling just 1.7% of Saudi Aramco in its December 2019 IPO, but the $29.4 billion profit all went to the PIF.

By having the PIF governor serve as chairman of Saudi Aramco, it assures that the PIF will get as much oil revenue money as it needs to build its investments, said Jean-François Seznec, a senior fellow at the Atlantic Council, a Washington D.C., think tank.

“The PIF is basically able to squeeze Saudi Aramco and make sure that the money will flow to them,” he told CIO.

The crown prince told the January investment conference that future Saudi Aramco public offerings will also mean more money directed to the PIF.

“There are going to be more share sales by Aramco in the following years,” MBS said at the Riyadh, Saudi Arabia, conference, known as the Future Investment Initiative. “This cash will be transferred to the Public Investment Fund and be re-injected inside and outside of Saudi Arabia for the benefit of the fund.”

The PIF has also received money from the Saudi Central Bank. The bank authorized the transfer of $40 billion to the PIF last year, though it stated it was a one-time payment. The bank at the time had about $460 billion in assets.

Seznec said Saudi Aramco is the only reliable funder for MBS’s massive list of projects. “They cannot fund them without Saudi Aramco,” he said.

Seznec added that while the PIF is relying on more Saudi Aramco IPOs for capital, the company is facing its own financial issues.

Saudi Aramco last month said its profits were cut in half in 2020 to $49 billion, because global oil markets saw price drops as COVID-19 slowed the demand for oil. Company officials reiterated an MBS promise that it would still pay $75 billion in dividends per year for the next five years, most of which goes to the Saudi government.

But given that Saudi Aramco free cash flow was also $49 billion in 2020, the company will have to borrow $26 billion to pay the dividends.

The oil company said it is reducing capital spending this year to $30 billion to $35 billion from $45 billion.

Seznec said he is concerned such capital reductions will continue and ultimately hurt Saudi Aramco and, over the long-term, make it less reliable in providing funds for the PIF.

“A lot of its capital expenses have kept it really ahead of the pack in terms of innovation among all the oil companies,” he said.

The PIF has also sold assets to Saudi Aramco to help booster its assets. Saudi Aramco purchased the sovereign wealth fund’s 70% interest in petrochemical company Saudi Basic Industries Corporation in June 2020 for nearly $70 billion.

Controversy with a Dream City

The PIF’s most ambitious project is NEOM, a multi-year undertaking that would require an injection of $500 billion to build a futuristic city that would cover an area of 10,200 square miles along the coast of the Red Sea in Northwestern Saudi Ariba.

The city would be 33 times the size of New York City and would include flying cars, artificial rain, and robot maids. Under one proposal, alcohol would also be available even though the conservative, Islamic country currently bans drinking.

While the technology doesn’t yet exist for flying cars and other innovations, that is only part of the problem, said Robert Mogielnicki, a resident scholar at the Arab Gulf States Institute in Washington.

The project is so ambitious that the PIF can’t execute the development of NEOM alone, Mogielnicki said. “They need foreign investment partners.” So far, none have been named.

MBS first announced NEOM in 2017, but in January, he said the first phase of the project was starting. It is called The Line, a l05.6 mile car-free urban ribbon across the Saudi Arabian desert that would parallel the Red Sea.

The linear city would be car free—expect for the flying cars that is—and everything a resident would need, including doctors, dentists, and retail stores, would be within a five-minute walk.

High-speed trains on an underground level would take residents across all 106 miles in 20 minutes and would go more than 300 miles per hour. Never mind that the maximum speed would be significantly faster than Japan’s bullet train and the technology still needs to be developed for the fast trains.

The city would also be carbon-free and powered entirely by renewable energy.

Construction of The Line is supposed to start this month, and MBS says it will be finished by 2025. He has not given more specifics, leaving observes with many questions.

“It’s not necessarily demonstrated that some of these domestic commitments like The Line, will be able to generate the kinds of growth and revenue that that would turn the PIF into a $2 trillion fund,” said Karen Young, a resident scholar at the American Enterprise Institute.

Already, the entire NEOM project, at the borders Saudi Arabia shares with Jordan and Egypt, has caused some controversy beyond the financial questions.

Saudi authorities acknowledge they fatally shot a Saudi tribal activist in April 2020 who was living on land planned for NEOM. Saudi officials have been evicting members of the tribe in northwestern al-Khuraybah, but one resident, Abdul-Rahim al-Howeiti said in videos he posted to YouTube that he wasn’t leaving.

“I would not be surprised if they come and kill me in my home now like they do in Egypt, throw weapons in your home and call you a terrorist,” he said in Arabic in one video reviewed by CIO.

Government officials acknowledged his death, saying in a statement at the time that the tribal activist had allegedly “shot at security forces while holed up behind sandbags at the top of the building.

“He did not respond to appeals to surrender and as a result of continued shooting and the throwing of Molotov cocktails, security forces neutralized the threat,” the statement added.

His death has received little publicity worldwide, particularly compared with the killing of US-based journalist Jamal Khashoggi at the Saudi Arabian embassy in Istanbul in October 2018.

A declassified US intelligence report released last month said the crown prince had ordered his death.

US President Joe Biden has refused to put sanctions on MBS because of concern that they could cause harm the relationship between the US and Saudi Arabia.

MBS has denied any involvement in killing.

The US Connection

The PIF also has strong ties to the US in its investment activity.

The Public Investment Fund on April 6 disclosed an 8.2% stake in coronavirus-hit Carnival Corp., sending the cruise operator’s shares nearly 30% higher. It’s unclear if Carnival could base some of its ships from cruise ports Saudi Arabia plans to build in the country.

Back in 2016, the PIF took a more than 5% interest in Uber Technologies, worth more than $3 billion. The fund still holds about 5% of Uber’s shares and Al-Rumayyan sits on Uber’s board.

Another big PIF investment in the US is a more than $1 billion commitment to Lucid Motors, the California electric car maker that plans to compete with Tesla and offer its first electric vehicle this spring.

The PIF is also the largest investor in the $100 billion Softbank Vision Fund, which invests in technology companies in the US and around the world.

Courting Tourists

Back home in Saudi Arabia, The PIF is also aiming to build a tourism industry. The sovereign wealth fund is spearheading efforts to bring tourists to the country with a goal that visitors would contribute 10% of the gross domestic product (GDP) by 2030.

The PIF plans to invest billions in what is being billed as a luxury tourism destination located on the west coast of Saudi Arabia, spanning 28,000 square kilometers and covering more than 20 islands.

The project, scheduled to start opening in 2023 and be finished by 2030, will include 50 hotels with 8,000 rooms, 1,300 residences, and an international airport.

In late February, the PIF announced another tourism project. The fund will provide $3 billion to the Soudah Development Co., which will build 2,700 hotel rooms and 1,300 homes in an area that includes al-Soudah, the tallest mountain peak in Saudi Arabia. The mountainous area is known as an escape area for locals fleeing the Saudi Arabian heat.

Yet another PIF project—this one aimed at the 35 million people who live in Saudi Arabia—is in Qiddiya, 40 miles from Saudi Arabia’s capital city of Riyadh. The project will feature a Six Flags Amusement Park, a sports stadium, a water park, a safari park, theaters, residential units, and hotels.

The cost of the project has not been disclosed but the first phase, which involves the PIF-owned amusement park, is scheduled to open in 2023. Six Flags Entertainment Corp. has signed up as a consultant on the project but has no equity interest in it.

Besides the PIF’s need to find additional investors, the success of such tourist projects for the PIF will depend on a post-COVID-19 recovery of the tourism industry, and “whether Saudi Arabia can convince global tourists to vacation in the country,” Mogielnicki said.

“There are still a lot of question marks,” he said.

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Tags: Crown Prince Mohammed bin Salman, Crown Prince of Saudi Arabia, Funding, House of Saud, Mohammed bin Salman, money, Public Investment Fund, royal family, Salman of Saudi Arabia, Saudi Arabia