A U.S. judge on Monday jailed a New York husband but set free his wife as they await trial on charges alleging they tried to launder $3.6 billion in stolen bitcoin. During a detention hearing Monday in Washington, the judge cited searches of the couple’s apartment and office that yielded $40,000 in cash, more than 50 electronic devices and bitcoin wallets, hollowed-out books and a bag marked “Burner Phone.”
Chief U.S. District Judge Beryl A. Howell of Washington called the government’s evidence against tech entrepreneur and dual U.S.-Russia citizen Ilya “Dutch” Lichtenstein, 34, and his rapper wife, Heather Morgan, 31, “so weighty as to be overwhelming.” In her decision, the judge pointed to what she called the electronic equivalent of a “smoking gun” — the encrypted key codes in Lichtenstein’s cloud storage account that unlocked the largest single seizure of funds two weeks ago in Justice Department history.
Howell rejected Lichtenstein’s pledge of a $5 million bond and his parents’ home. She ordered him held at the D.C. jail while he defends himself from charges of money laundering and conspiracy.
But for Morgan, the judge accepted a $3 million bond package that included her parents’ home. She was released her to home incarceration with electronic bracelet monitoring and strict limits on her access to virtual currency accounts. The judge said it appeared from government evidence so far that Morgan’s alleged lies and evasions to financial institutions came only at the back end of withdrawing laundered funds.
Howell credited prosecutors’ depiction of the couple as “extraordinarily sophisticated” cyber criminals and money launderers whose risk of flight “increased exponentially” upon their arrest, which could expose each to decades behind bars if convicted.
“Finances are available to the defendant that could easily be used to finance flight” and avoid accountability for their alleged conduct, Howell concluded. “They also have skill sets to access and evade detection,” including roughly $200,000 in one-ounce gold coins that the couple apparently had delivered to home addresses in California and New York.
At the time of the 2016 hack of Bitfinex, the stolen bitcoin was worth about $71 million. But its value has appreciated to more than $5 billion, far more than the $3.6 billion worth of bitcoin seized, and law enforcement estimates that at least $368 million in cryptocurrency linked to the hack remains unsecured. At the same time, prosecutors allege, Lichtenstein’s files indicate he researched and identified “vetted” dark net vendors of fake banking, passport and identification credentials. Authorities also accuse him of making transactions and taking a delivery of a package obtained from such a vendor in a Ukraine hotel in September 2019, setting up financial accounts in Russia, and possessing a portfolio of Russian and Ukrainian male and female “personas,” with biographical and identification records.
While U.S. prosecutors said neither Lichtenstein nor Morgan are “currently charged” in the 2016 hack of the cryptocurrency exchange Bitfinex, Howell said proof that Lichtenstein controlled accounts that the stolen funds were sent to “does not get more direct” than his control of their access keys. The judge also cited a spreadsheet listing fictitious accounts and other information allegedly used in hundreds of laundering transactions.
“Both defendants conspired to transfer and launder proceeds of unlawful activity,” Howell said.
The judge added that when federal agents searched the couple’s Manhattan apartment in January, Morgan used the opportunity of retrieving their pet cat from underneath a bed to grab her cellphone from a nightstand and repeatedly hit the lock button, prompting law enforcement to wrest it away from her. Under the same bed, agents located a bin containing various bags holding multiple cellphones, SIM cards and assorted electronics, including a bag labeled “Burner Phone,” Howell said, citing prosecutors.
In seeking bond, the couple argued that they have extensive family in the United States and no criminal history, and that they have not attempted to flee since learning of the government investigation into them in November.
That includes a Jan. 5 FBI search and the Jan. 31 seizure of 94,000 of 119,754 bitcoin stolen after a 2016 hack. In addition, Morgan’s lawyers said she underwent breast surgery that tested negative for cancer on Jan. 31 and is still recovering.
“The Government’s flight risk concerns are belied by the fact that Ms. Morgan and Mr. Lichtenstein both stayed put in their residence in Lower Manhattan in New York even after learning of the Government’s investigation targeting them in this case,” attorney Samson Enzer argued in court filings and a Monday afternoon bond hearing in Washington.
Prosecutors countered that the couple had the means and skill sets to travel, evade detection and create new lives abroad.
“Lichtenstein is a dual Russian national, both Defendants have traveled extensively and have foreign ties, and evidence uncovered in the investigation indicates preparation to obtain false passports,” Assistant U.S. Attorney Christopher B. Brown and Justice Department computer crime trial attorneys Jessica Peck and Catherine Pelker argued in court filings.
“The government doesn’t doubt the sincerity of their parents, but several hundred million dollars in cryptocurrency can buy a new house, it can by each of their parents a private island and buy them access to medical care,” Pelker added.
The couple’s lawyers noted the presence of their parents and a sibling in court and argued that their future was literally in New York because they had fertilized embryos in storage in hopes of starting their own family. Pelker argued in response, “It’s incredibly difficult to have and raise children if you’re in jail for 25 years, it’s really more incentive for them to flee.”
Photographs taken during the FBI search of the couple’s effects more than a month before their Feb. 8 arrest add striking details to a wild story already laid out in the couple’s business and social media accounts expected to be included in a reported Netflix documentary about them.
Prosecutors also showed a purported photos one of two hollowed-out books allegedly found in Lichtenstein’s office, whose pages appeared to be roughly cut out by hand leaving empty compartment, and argued the couple also purchased over 70 one-ounce gold coins, worth about $200,000, that were not found at the couple’s home or storage unit.
An affidavit filed by an IRS agent against the couple alleges they spent only a small fraction of the stolen money, some of it on gold and some on non-fungible tokens, or NFTs, unique digital representations that are sold or traded as works of art or collectibles. Other payments were made for a Walmart gift card as well as payments to Uber, Hotels.com and PlayStation, according to the charging papers.
Morgan’s attorneys describe her as a journalist and chief executive of a sales consulting business who has claimed to have worked in Hong Kong and Cairo, including with the World Bank. Growing up in a small town in northern California and graduating from the University of California at Davis, Morgan crafted a rap persona of Razzlekhan, the self-proclaimed “Crocodile of Wall Street.” She has rapped about investing in meme stocks, dealing with the pandemic and getting high in a cemetery.
Lichtenstein, a tech entrepreneur who goes by the nickname “Dutch,” was born in Russia, and his family emigrated to the United States to avoid religious persecution, settling in suburban Chicago. He studied at the University of Wisconsin at Madison and co-founded MixRank, a sales firm initially funded by Y Combinator and investors, including Mark Cuban, according to the company’s website. He described himself as a “tech entrepreneur, explorer, and occasional magician” in a 2018 blog post.
