Damian Williams, United States Attorney for the Southern District of New York, and Tyler Hatcher, Internal Revenue Service Special Agent in Charge, Criminal Investigation, Los Angeles Field Office (“IRS-CI”), announced today that JAMES ZHONG pleaded guilty to wire fraud in September 2012 when he wrongfully obtained over 50,000 bitcoin from the dark web internet marketplace Silk Road. ZHONG pleaded guilty before U.S. District Judge Paul G. Gardephe on Friday, November 4, 2022.
On November 9, 2021, law enforcement seized approximately 50,676,17851897 Bitcoin, valued at over $3.36 billion at the time, pursuant to a court-approved search warrant of ZHONG’s home in Gainesville, Georgia. This seizure was then the largest cryptocurrency seizure in US Department of Justice history and is now the second largest financial seizure by the Department of all time. The government aims to lose a total of: 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 cash seized at ZHONG’s home; and various metals, which were also confiscated from ZHONG’s home.
US Attorney Damian Williams said: “James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 Bitcoin from Silk Road. For nearly a decade, the whereabouts of this massive chunk of missing bitcoin had remained a $3.3 billion mystery. Thanks to state-of-the-art cryptocurrency tracking and good old-fashioned policing, law enforcement found and recovered this impressive stash of crime proceeds. This case shows we won’t stop following the money, no matter how expertly hidden, even down to a circuit board in the bottom of a popcorn can.”
Acting IRS-CI Special Agent Tyler Hatcher said, “Mr. Zhong executed an elaborate scheme to steal bitcoin from the infamous Silk Road marketplace. After being successful in his heist, he attempted to hide his loot through a series of complex transactions that he hoped would be enhanced by hiding behind the mystery of the “dark web.” IRS-CI Special Agents are the best in the world at tracking money through cyberspace or where our financial investigations are taking us. We will continue to work with our partners in the US Attorney’s Office to track down and bring these criminals to justice.”
According to allegations contained in filings in federal court in Manhattan and statements made during the trial:
ZHONG scam scheme
Silk Road was an online “dark web” black market. Operating from around 2011 to 2013, the Silk Road was used by numerous drug dealers and other illicit vendors to distribute large quantities of illicit drugs and other illicit goods and services to many buyers and to launder any funds passing through. In 2015, following a landmark prosecution by that office, Silk Road founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison.
In September 2012, ZHONG carried out a scheme to defraud Silk Road of his money and property by (a) creating a series of approximately nine Silk Road accounts (the “Fraud Accounts”) to disguise his identity; (b) Triggering over 140 transactions in rapid succession to cause Silk Road’s withdrawal processing system to release approximately 50,000 Bitcoin from its Bitcoin-based payment system to ZHONG’s accounts; and (c) transmitting that bitcoin to a variety of separate addresses also under the control of ZHONG, all in a manner designed to prevent detection, conceal its identity and ownership, and obscure the source of the bitcoin .
During the conduct of the September 2012 scam, ZHONG did not list any items or services for sale on Silk Road, nor did he purchase any items or services on Silk Road. ZHONG registered the accounts by providing the bare minimum information required by Silk Road to create the account; the scam accounts were merely a channel for ZHONG to scam Silk Road out of bitcoin.
ZHONG funded the scam accounts with an initial deposit of between 200 and 2,000 Bitcoin. After the initial deposit, ZHONG quickly processed a series of withdrawals. Through his scam scheme, ZHONG was able to withdraw Bitcoin from Silk Road in multiples of what he originally deposited. For 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 profit of 2,000 bitcoin. As another example, another scam account made a single deposit and over 50 bitcoin withdrawals before the account ceased activity. ZHONG removed this bitcoin from the Silk Road and consolidated it into two high-value amounts in a matter of days.
Almost five years after ZHONG was scammed, in August 2017, solely due to possession of 50,000 Bitcoin that ZHONG had illegally received from Silk Road, ZHONG received an equivalent amount of a related cryptocurrency – 50,000 Bitcoin Cash (“BCH Criminal Proceeds”) ) – in addition to the 50,000 Bitcoin. In August 2017, Bitcoin was split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash (“BCH”), in a hard fork coin split. When this split happened, every bitcoin address that had a bitcoin balance (like ZHONG’s addresses) now had exactly the same balance on both the bitcoin blockchain and the bitcoin cash blockchain. As of August 2017, ZHONG thus owned 50,000 BCH in addition to the 50,000 Bitcoin ZHONG had illegitimately received from Silk Road. ZHONG then exchanged all BCH crime proceeds for additional bitcoin via a foreign cryptocurrency exchange, totaling about 3,500 bitcoin in additional crime proceeds. In total, as of the last quarter of 2017, ZHONG owned approximately 53,500 Bitcoin in total crime proceeds (the “Crime Proceeds”).
Government confiscation of forfeitable property
On November 9, 2021, pursuant to a court-approved search warrant (the “Search”), IRS-CI agents recovered approximately 50,491,06251844 Bitcoin from the proceeds of the crime from the home of ZHONG in Gainesville, Georgia. Specifically, law enforcement found 50,491,06251844 bitcoin of the approximately 53,500 bitcoin crime proceeds (a) in an underground vault; and (b) on a single board computer submerged under blankets in a popcorn can kept in a bathroom cabinet. In addition, law enforcement seized $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 bitcoin, 11.1160005300044 additional bitcoin and four silver-colored one-ounce bars, three gold-colored one-ounce bars, four 10 -Once silver-colored bars and one gold-colored coin.
Beginning in or around March 2022, ZHONG began voluntarily surrendering additional bitcoins to the government that ZHONG had access to and had not wasted. In total, ZHONG voluntarily surrendered 1,004.14621836 additional Bitcoin.
actions of forfeiture
In connection with ZHONG’s guilty plea, on November 4, 2022, Judge Gardephe entered a consensual preliminary forfeiture order with respect to certain property and substitute assets/monetary 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;
- US$661,900 in US currency seized at ZHONG’s home on November 9, 2021;
- Metal items consisting of four 1-ounce silver-colored bars, three 1-ounce gold-colored bars, four 10-ounce silver-colored bars and one gold-colored coin, all confiscated from ZHONG’s home on November 9, 2021;
- 11.1160005300044 bitcoin seized at ZHONG’s home on November 9, 2021;
- 25 Casascius coins (physical bitcoins) with an approximate total value of 174 bitcoins confiscated from ZHONG’s home on November 9, 2021;
- 23.7112850 Bitcoin provided by ZHONG on April 27, 2022;
- 115,02532155 Bitcoin provided by ZHONG on April 28, 2022; and
- 4.57427222 Bitcoin provided by ZHONG on June 8, 2022.
Today, in the United States against Ross Ulbricht, S1 14 Cr. 68 (LGS), the Government filed an application for registration of an amended provisional forfeiture order, aiming to forfeit approximately 51,351.89785803 Bitcoin repayable on Silk Road, valued at approximately $3,388,817,011.90 at the time of the seizure, as follows:
- 50,491,06251844 bitcoin seized at ZHONG’s home on November 9, 2021;
- 825,38833159 Bitcoin provided by ZHONG on March 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 a wire fraud count that carries a maximum sentence of 20 years in prison.
The maximum possible sentence in this case is prescribed by Congress and is given here for informational purposes only, as each conviction of the defendant is determined by the judge. ZHONG is scheduled to be sentenced by Judge Gardephe on February 22, 2023 at 3:00 p.m
Mr. Williams commended the excellent work of the Internal Revenue Service, the Los Angeles Field Office’s Western Cyber Crimes Unit. Mr. Williams also thanked the Athens-Clarke District Police Department in Athens, Georgia for their support and assistance in this case.
The prosecution of this case is being overseen by the Office’s Money Laundering and Cross-Border Criminal Enterprises Division. Assistant US Attorney David R. Felton is in charge of the case.