In $3.6B Crypto Launder Case Lichtenstein Detained But Morgan Freed After DDC Hearing

Cahill Gordan wanted Lichtenstein moved by the MDC in NY but Judge Howell said no, take Acela. Inner City Press will continue to cover the Bitfinex hack and other crypto cases.

By Matthew Russell Lee, Patreon Maxwell Book Song
BBC - Guardian UK - Honduras - DDC Filing -  Vlog

FEDERAL COURT, Feb 14 – After Ilya “Dutch” Lichtenstein and his wife, Heather Morgan were arrested in lower Manhattan for allegedly trying to launder $3.6 billon in crypto-currency linked to the hack of Bitfinex, they appeared in before Magistrate Judge Debra C. Freeman of the U.S. District Court for the Southern District of New York.

  After a lengthy proceeding, conditions of release were set: $5 million and $3 million bond, respectively. Vlog.  Then, as Inner City Press predicted at 7 pm, the order was stayed by the DDC - Chief Judge Beryl Howell, pending DDC review. Photo here.

   Judge Howell ordered the Marshals to move Lichtenstein and Morgan to DC for an in-person hearing on February 14. There was no provision for a call-in line, so Inner City Press wrote to Judge Howell and counsel to request a call in line. Letter on DocumentCloud here.

 On February 14, Judge Howell conducted the hearing, and ultimately detained Lichtenstein while allow Heather Morgan / Razzlekhan out on the NY conditions. Inner City Press live tweeted it, thread here:

OK - now in #Bitfinex hack case of US v. Lichtenstein, now 2d bail hearing, before DDC Chief Judge Beryl Howell.

Judge Howell: We are here on the US' motion for pre-trial detention. The NY facility [MDC] was unable to provide virtual access to the defendants, so I ordered them transported here... I have questions; I have reviewed the Complaint and subsequent filings. Judge Howell: I do not have the pre-trial service report used in the SDNY. Assistant US Attorney: SDNY does not provide it to anyone. We do not have a copy, either. Defense: Neither do we. [True? In SDNY Mag Court, they give the report to the parties]

Judge Howell: Are you not relying on risk of obstruction as well as risk of flight? AUSA: We have concerns about that, sure.  Judge Howell: That's how it appears to me. So you are raising risk of flight - but also further dissipation?

AUSA: Yes. Judge Howell: So this concerns the 2016 hack, and attempts to money launder those funds. You have not charged the defendants will the actual hack, correct? AUSA: Correct, your Honor. As currently charged.

Judge Howell: And the government has not named who it believes were the hackers? AUSA: We have not. At the moment.  Judge Howell: So the victim(s) could see the Bitcoin in the wallet, but could not access it, correct? AUSA: Yes, Your Honor.

Judge Howell: Defense counsel argue that there is not direct proof. But are you saying that having the private keys to the wallet is direct proof, like the smoking gun? AUSA: Yes, your Honor.

Judge Howell: So, using the private keys found in Defendant Lichtenstein's cloud account, the US was able to seize the $3.6 billion in Bitcoin? AUSA: Yes. Judge Howell: How are you sure it came from the hack? It's just one hop? AUSA: Exactly.

Judge Howell: So when the US seized the bitcoin in Wallet 4F, do you move it? Or just switch the private keys? AUSA: We move it to a new wallet. Judge Howell: As a prosecutor I had experience of bitcoin being taken back from the US, by recreating the seized wallet

Judge Howell: So how secure is this $3.6 billion of bitcoin that the government has seized?  AUSA: In the case you're referring to, we only had the hardware wallet, not the keys.

Judge Howell: So it's this is not a possibility with Wallet 4F? AUSA: But there are $100s of millions we haven't been able to seize, more than a hop away. Judge Howell: The defense says there no connection between those and the hack.

Judge Howell: Do you know where the rest of the bitcoin is? and how much it is? AUSA: Some funds have been laundered, in wallets we don't know the location of.

 Judge Howell: What links the 24 accounts? AUSA: We traced them to the defendants. Judge Howell: Were these 24 accounts linked to Wallet 4F? AUSA: Yes, they are separately by a single transaction. We have a listing of the private keys.

Judge Howell: So this other money, you can't access it, you just look at it? AUSA: Yes... The cloud account was tied to Mr. Lichtenstein's email. It was a comprehensive offering. Judge Howell: Do you have info that his wife accessed it? AUSA: Common devices.

Judge Howell: You say it was a long password that couldn't be broken in a lifetime. So how did you do it? AUSA: Without getting into specifics, one way is to randomly guess. But sometimes you learn other info to make more educated guesses. It wasn't password 1-2-3

AUSA: Even after we search, the defendants didn't know we could gain access. We didn't seek specific evidence from the search to gain access.  Judge Howell: In the cloud account, is it fair to say only the inculpatory files were encrypted?

AUSA: The "personas" file was split between UA meaning Ukraine and RU, Russia. Judge Howell: So the US has an interesting story how it traced the stolen bitcoin to 4 pounds of gold. Was that all shipped directly to Lichtenstein in NY?

AUSA: They were living in SF. Judge Howell: Was it sent only to Mr. Lichtenstein? AUSA: They were living together. 4 pounds of gold were $200,000.  Judge Howell: You also have photos of foreign currency. How much? Was it left over from a trip? AUSA: We said, what appears to be substantial.

Judge Howell: So you don't have evidence that defendant Morgan had access to Mr. Lichtenstein's cloud account...  These defendants didn't flee. I want to pin down the time frame. What notice did they have from the ISPs? November? AUSA: Yes.

Judge Howell: Did the government fail to get a gag order on the ISP?  Or did the ISP not comply? AUSA: Administrative oversight.

Judge Howell: So was it the same ISP that posted to the cloud account? AUSA: No, a different one. Let me consult with my colleague. We have a medium degree of confidence. Let me address of Ms. Morgan has been tricked. No, she is sophisticated & could buy dark IDs

Judge Howell: But the evidence against Mr. Lichtenstein is stronger? AUSA: It's very strong against her. She knows what cold storage is -- Judge Howell: I don't know what it that is. AUSA: Safekeeping. She told financial institutions she got the coins in 2014.

Judge Howell: OK, I'll hear from Mr. Enzer. First, I understand they are a married couple. Still, I'm concerned at conflict of interest in joint representation. It's said Ms. Morgan may be an unwitting recipient of tainted funds.

Judge Howell: It's my feeling I should conduct a Rule 44(c) hearing even in the bail hearing. Enzer: We don't want to delay anything. Feel free to inquire, and do a colloquy. AUSA: Pre arrest we asked for clarification Judge Howell: Mr. Enzer, sit down please.

AUSA: We could see arguments about relative culpability, right up to sentencing. We have seen it in the detention filings. Judge Howell: This wasn't raised in front of the NY Magistrate Judge, she didn't do a Rule 44 inquiry. It would have been appropriate then.

Judge Howell: So Mr Enzer do you really think this inquiry is interfering with clients' 6th Amendment rights? Enzer: I never said that. Judge Howell: Maybe it was another lawyer on the team. Enzer: I did say on the call [Why was there no public call in to that?]

Judge Howell (addresses Lichtenstein and Morgan) - You may waive a conflict. But I am obliged to determine you fully understand the conflict. You may have a counsel appointed, if you qualify. [Billions in bitcoin]

Enzer: They got the subpoena in November 2021, they retained counsel, not Cahill, but prior counsel. In January, they still didn't run, but they retained Cahill, a sign they were taking it seriously. [And retaining prior counsel didn't?]

Judge Howell: Mr. Enzer you say you were shocked they were arrested. I'd be shocked it took so long.

Enzer: By the government's own account it was February 1 -- Judge Howell: So they didn't flee Feb 1-8. But wasn't defendant Morgan recuperating from surgery?

Enzer: Sure there was a January 31 surgery. But she was mobile. She came to Cahill. I could document that. And the snow storm? In NY it doesn't slow anyone. If snow would stop them, home detention would.

Enzer: They are unlikely to flee because it's only in New York they can have children. Their eggs are stored here.

Judge Howell: I think they could do that elsewhere. Enzer: The eggs are good, and they are here. And there is Chainalysis KYC

Enzer: I can't speak to the dark net. I didn't consult an expert about that - the prosecution has more access. But if you're on the dark web, you don't want to do business with someone who's hot.

Enzer: We need bail because we can't access our clients. They were arrested on Tuesday. We tried to visit the jail on Thursday, we were turned away. Friday, a short call on his way to DC. Less than an hour. Today, let than 10 minutes. Ms. Morgan, 2 legal calls

Enzer: I think this evidence may be suppressed --- Judge Howell: This is not a suppression hearing. Enzer: But it goes to the strength of the evidence. Judge Howell: It would turn every bail hearing into a suppression hearing.

Judge Howell: If you are saying the evidence is flimsy, I disagree as I'll explain in a moment. Enzer: The unwitting receipt of tainted funds is not a crime. Judge Howell: There the Know Your Customer communcations, and her pretty clear dissembling Judge Howell: What about the false personas?

 Enzer: We're talking about Ms. Morgan. Judge Howell: Some of the personas were female.

Enzer: Their families are here. They would give up their homes. We can't prepare for trial if they're in jail. Judge Howell: The DC Jail give iPad for evidence. They allow video conferencing. And contact visit. Enzer: There's Ms. Morgan's health

Enzer: Over the weekend Ms. Morgan had a very serious asthma attack... She had a previous case of MERS. Bernie Madoff got bail. Lee Harmon got bail... Judge Howell: Government? AUSA: These defendants used complex routes.

AUSA: It's said they are so committed to having children. But that's hard, if you're in jail for 25 years. Judge Howell: Let's take 5 minutes. Enzer: I have 12 letters. Judge Howell: My court reporter needs a break. You'll have to repeat that.

Judge Howell is back. Enzer:  We have 12 letters of support.  Judge Howell: It's a little late in the day, when I'm about to rule. This is the kind of thing that's usually filed on the record, so I see them before I come out on the bench. But give them to me.

Judge Howell: Then file them not as a motion but as a notice. I see that some letter call him "Dutch." Enzer: Yes, it's an a/k/a in the caption of the complaint. Judge Howell (after a pause) OK I've read them. I'm prepared to rule.

Judge Howell: The still unidentified hacker transferred bitcoin from the exchange to Wallet 4F. I agree with the NY Magistrate Judge this case involved sophisticated means... There was the file, "Passport_Ideas." And "vetted vendors" about the dark web. Judge Howell: There was a vendor with fake Ukraine passports, and the defendants were in Kiev on that day. There were bags, with SIM cards and phones, one of which was labeled "Burner Phones."

Judge Howell: On January 5, she grabbed a phone and attempted to lock it. Law enforcement had to wrest if from her. The NY Magistrate put weight on "no flight." I'll address that in a second.

Judge Howell: The defense claims there is no direct proof is a vast over simplification. Lichtenstein's cloud account held the keys.

Judge Howell: Defendant Lichetenstein had a list of the accounts. He had wallets with file names containing variations of the word "dirty." I agree with the NY Magistrate that the evidence against Ms. Morgan is not as strong. But she actively concealed

Judge Howell: Defendant Lichtenstein renewed his Russian passport in 2019. It seems Defendant Morgan spoke to him in Russian. I disagree with the NY Magistrate on the "didn't flee" issue.

Judge Howell: If anything, the delay gave the defendants false confidence. Defendant Lichtenstein will remain in detention, given his access to the private keys. As to Defendant Morgan, she will be released on the NY conditions.

Enzer: Your Honor, the government consents for Lichtenstein to be moved (back) to jail in NYC.

Judge Howell: No, he is a DC defendant. He will stay here. Acela is running. You are excused.

  On February 10, the US filed a supplemental memo to detain them (and reverse SDNY Magistrate Judge Debra C. Freeman's order allowing release on bond). Inner City Press quickly tweeted some of the photos, here

In US v. Lichtenstein & Morgan, now in DDC Court DOJ puts in a chart of Bitfinex hack laundering they allege - including through #Uber, #WalMart, Hotels [dot] com and #PlayStation.  [Here]

Among Ilya Lichtenstein's Passport_Ideas files, this: "real russian passport from Lugansk. Must pick up in person." Also, "eu doc fakes." [Here]

More from the DOJ filing in DDC: "Morgan posted photos to social media during her trip indicating that she was staying at a Hilton hotel near the 11 Mirrors Design Hotel. Document titled “ukraine_package,”  explains “how to anonymously receive a parcel in Ukraine”

At last - photo of the "burner phone" bag in Lichtenstein's and Morgan's lower Manhattan apartment [Here]

Full filing here.

On February 9, a schedule: "as to ILYA LICHTENSTEIN, HEATHER RHIANNON MORGAN: defendants' opposition to 8 Motion for Review of Release Order due by 5:00 PM on 2/9/2022; government's reply due by 2:00 PM on 2/10/2022; Motion Hearing scheduled for 2/11/2022."

 Inner City Press live tweeted the SDNY proceeding, thread here.

    The substantive case, in DDC, is US v. Lichtenstein, et al., 22-mj-22 (RMM)

The SDNY cases: US v. Lichtenstein, 22-mj-1279 (Freeman) and US v. Morgan, 22-mj-1280 (Freeman)

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