WASHINGTON — On Monday, a federal judge in Washington, D.C. ordered that one of the suspects in an alleged massive Bitcoin-based money-laundering scheme should be released on a $3 million bond, while her husband should remain in custody.
At the end of an hours-long hearing, Chief Judge Beryl Howell partly dismissed the prosecution’s claims that Ilya Lichtenstein, 34, and his wife Heather Morgan, 31, who were arrested last week on federal charges, could not be entrusted to return to court.
Morgan, who is also known by her rap alter-ego Razzlekhan, will be set free, but must abide by what the judge called “very stringent conditions” that include wearing an ankle bracelet, limiting her Internet access and forbidding her from engaging in cryptocurrency transactions.
Federal prosecutors announced last week that the government had seized billions of dollars in bitcoins, and said the operation was the “largest financial seizure ever.” Authorities have accused the pair of laundering the proceeds stemming from the 2016 hack of the Bitfinex exchange. Lichtenstein and Morgan, a one-time Forbes contributor, have not been accused of perpetrating the hack itself. The defendants have not entered a formal plea, but their attorneys have said in previous court filings that there are “many deficiencies in the Government’s proof and unsupported, conclusory leaps.”
On January 31, prosecutors say, investigators were able to access Lichtenstein’s cloud storage account, where they broke into encrypted files that not only contained private keys — which enabled the government to seize control of billions of dollars worth of bitcoins — but also a spreadsheet of his various crypto accounts, among other documents.
Court filings also show that the government located “apparent wallet files for additional cryptocurrency that the government has not yet been able to seize.” Several of those files, “include variations of the word ‘dirty’ in their names, such as ‘dirty_wallet.dat.’” The government also claims it found folders titled “personas” and “passport ideas.”
Catherine Pelker, a federal prosecutor, walked the judge through the government’s case.
Judge Howell asked Pelker if finding those private keys in Lichtenstein’s cloud storage account was “direct proof of the charges.”
Pelker, a cryptocurrency expert who formerly worked at the FBI, was unequivocal.
“Yes, your honor,” she said.
“Sort of like the smoking gun?” Judge Howell asked.
“Yes, your honor,” Pelker said.
At another point during the hearing, Judge Howell also directly asked Pelker how the government managed to bust through the strong encryption on Lichtenstein’s data file held in an unnamed cloud storage account.
Pelker offered few details, but did say “sometimes you learn other things that may allow you to make more educated guesses.”
Lichtenstein and Morgan, who were masked and dressed in dark, short-sleeve prison clothes during the hearing, sat next to each other and appeared engaged and attentive, with Lichtenstein passing along several notes to their attorney. The only time they addressed the court was in response to questions from the judge about their understanding of the potential conflicts of interest that could arise from them sharing an attorney.
For his part, defense attorney Samson Enzer spent most of his efforts highlighting the numerous ties that the pair has to the US, indicating that they would not flee. That included pointing out that even though Lichtenstein was born in Russia, his parents have “lived in the Chicago suburbs for decades.” Morgan’s parents continue to live in northern California, where she grew up.
Both defendants’ parents looked glum as they entered the courtroom, carrying backpacks and plastic grocery bags, and declined to speak with reporters in the hallway of the courthouse.
“They have made their lives here,” Enzer said, referring to the defendants, Lichtenstein and Morgan. “They would not want to abandon them.”
Enzer also made reference to the fact that the young couple may not be able to have children unless Morgan has in-vitro fertilization and that her eggs are already frozen at a facility in New York. As such, the defense lawyer argued, this was another reason as to why the duo would stay in the United States and respond to the criminal charges.
“They would literally be leaving their future behind,” he said.
At one point, Enzer called the evidence specifically against Morgan “flimsy,” speculating that she could have been the unwilling recipient of the hacked bitcoins. Judge Howell pointed out that false statements Morgan allegedly made when opening financial accounts and speaking with an accountant make it likely she knew what she was doing.
Judge Howell, who has presided over an earlier case involving laundering cryptocurrency, seemed comfortable with the technical language used on Monday, referencing private keys, encryption, blockchain, and other related terms like they were part of her everyday vocabulary.
Still, despite a spirited defense in court, Judge Howell was very skeptical of Enzer’s overall argument, even though she did ultimately grant Morgan’s release.
“The blockchain leaves a clear path for those willing to follow it,” the judge said.
For now, no further hearings have been scheduled.
