Earlier this week, two men were arrested in Brooklyn and Rhode Island and charged in federal court with extorting an unnamed cryptocurrency startup for millions of dollars. That company appears to be Seattle startup StormX, according to a report by cryptocurrency news site CryptoSlate.
According to the allegations, cryptocurrency advisor and investor Steven Nerayoff and his accomplice Michael Hlady made repeated threats, including physical intimidation, to sabotage the company if their demands for money weren’t met. In the end, Nerayoff and Hladly took more than $8 million in digital currency from the company as part of the scheme, investigators said.
“Of the companies in Seattle’s relatively small blockchain ecosystem, only one company fits the description made in the legal complaint — StormX,” wrote CryptoSlate reporter Mitchell Moos.
StormX matches the FBI’s description of a Seattle-based organization that operates a “mobile-based business that specializes in generating user traffic to clients’ products by issuing rewards in the form of cryptocurrency tokens.”
The timing of events detailed in the FBI complaint as well as photos of former StormX executives with Nerayoff further support Cryptoslate’s conclusion.
StormX, co-founded in 2015 by Simon Yu, operates a platform that lets users earn cryptocurrency by performing small tasks. Yu is a University of Washington grad who also founded Bomba Fusion, a Korean fusion food truck and catering business in Seattle.
Yu told GeekWire that he was “asked not to comment on the DOJ investigation.” GeekWire contacted other current and former StormX employees and will update this story with their response.
Threats of ICO sabotage
According to the complaint, Nerayoff, a lawyer and CEO of blockchain consultancy and investment firm Alchemist, signed a contract with the company that promised “a successful crowdsale” during the company’s initial coin offering (ICO) in exchange for 22.5 percent of all proceeds.
Nerayoff and his company advised and invested in several well-known cryptocurrency efforts, including Ethereum, tZERO and Lisk. Nerayoff claims to have “created the token sale as we know it today,” according to Alchemist’s website. He describes himself as a “chief strategist” for StormX on his LinkedIn, beginning in May 2016.
The ICO took place in November 2017 when the global market for token sales was nearing its peak. Crypto companies raised $3 billion in January 2018 before investor enthusiasm for ICOs fell precipitously.
The timing of the ICO roughly matches that of StormX’s own offering. The company was preparing for a sale when GeekWire spoke to Yu in 2017. Yu said at the time that the company expected to raise $20 million.
After signing an initial contract, Nerayoff allegedly demanded that the company pay him the equivalent of $8.75 million in Ether (ETH), a digital currency, and vowed to “sabotage” the ICO and ruin the company if it did not pay.
The company signed a new agreement following the threats. The ICO raised 75,677 ETH from investors, which would have given Nerayoff a payout of 17,000 ETH under the original agreement. He kept an additional 13,000 ETH (valued at $3.78 million) as a result of the second contract.
After the sale, Nerayoff demanded one billion of the company’s unsold tokens, later lowering that demand to 350 million tokens, investigators said.
Multi-million “loan” and physical intimidation
Five months after the ICO, in March 2018, Nerayoff demanded a loan of 10,000 ETH, worth around $4.45 million, according to the FBI.
He also introduced the company’s executives to Michael Hlady, an “operations guy” who went by the name Michael Peters. Hladly claimed to have been a member of the Irish Republican Army, the National Security Agency, the Central Intelligence Agency and the FBI. He also said he was a killer who had “taken down” a head of state, the complaint said.
The chief operating officer of the target company, a woman, was allegedly threatened in the middle of the night by Hladly. The COO was spending the night at Nerayoff’s house due to a snowstorm that prevented her from catching a flight from New York.
“Hladly turned on the lights, pulled up a chair to the bed where Jane Doe had been sleeping” and said “we will crush you” by driving down the price of the company’s tokens unless it paid $10 million in addition to a large number of tokens, according to the complaint. Nerayoff also allegedly entered the room later in the night and threatened her and the company.
Nerayoff demanded the 10,000 ETH loan shortly thereafter, the FBI said.
Arry Yu was COO of StormX at the time of the events. She has since left the startup and now serves as chair of the blockchain council at the Washington Technology Industry Association (WTIA). Arry Yu and Simon Yu are not related.
If Nerayoff was extorting StormX, it was not obvious to the outside world. Also in March 2018, Nerayoff tweeted a photo of himself with Arry and Simon, writing, “Great friends in blockchain are immutable!”
The company later transferred the 10,000 ETH “loan” to Nerayoff, which he refused to repay, the FBI said.
Nerayoff was also considering plans to take over the target company but was confronted by his own employees at Alchemist. “One of Nerayoff’s employees stated that they were running an ‘intervention’ with Nerayoff, and that with exception of Nerayoff, they were not ‘ganging up’ on Jane Doe and John Doe,” investigators wrote.
“As alleged, Nerayoff and Hlady carried out an old-fashioned shakedown, to be paid off with 21st century cryptocurrency,” Richard Donoghue, U.S. attorney for the Eastern District of New York, said in a statement.
Nerayoff and Hlady each face up to 20 years in prison if found guilty.
Read the full FBI complaint below.