Bitcoin’s ‘First Felon’ Faces More Legal Trouble

SAN FRANCISCO — Over the last year, Charlie Shrem, a 28-year-old Bitcoin investor, has bought two Maseratis, two powerboats — one of them 32 feet long — and a $2 million house in Florida, along with smaller pieces of real estate.

In the world of cryptocurrencies, where millions can be made and lost in a day, that might not make Shrem stand out. But unlike most Bitcoin entrepreneurs, in 2016, Shrem got out of prison, where he had spent a year after pleading guilty to illegally helping people turn dollars into Bitcoin to buy drugs online.

Shrem, who had been the chief executive of Bitinstant, one of the first prominent Bitcoin businesses in the United States, has said in recent interviews that he went to prison with almost no money.

So where did the money for the expensive toys come from? That’s what two former business partners want to know.

Cameron and Tyler Winklevoss, the twins who turned money from a settlement with Facebook’s Mark Zuckerberg into a Bitcoin fortune, said they suspected Shrem had actually been spending Bitcoin that he owed them since 2012, according to a lawsuit unsealed in federal court Thursday. The Bitcoin would be worth around $32 million at current prices.

“Either Shrem has been incredibly lucky and successful since leaving prison, or — more likely — he ‘acquired’ his six properties, two Maseratis, two powerboats and other holdings with the appreciated value of the 5,000 Bitcoin he stole from” the Winklevoss twins in 2012, the lawsuit says.

The judge who oversaw Shrem’s earlier trial has already agreed to freeze some of Shrem’s financial assets, according to court documents.

The lawsuit could blossom into an ever bigger problem for Shrem because an affidavit filed in court suggests that Shrem has also not paid the government $950,000 in restitution that he agreed to as part of his 2014 guilty plea.

Shrem’s lawyer, Brian Klein, said in a statement that the claims by the Winklevoss brothers were baseless. “The lawsuit erroneously alleges that about six years ago Charlie essentially misappropriated thousands of Bitcoins,” he said. “Nothing could be further from the truth. Charlie plans to vigorously defend himself and quickly clear his name.”.

The lawsuit from the twins threatens another reversal of fortune for Shrem, who went from being one of the earliest Bitcoin millionaires to being called Bitcoin’s “first felon.”

When he was arrested in 2014, Shrem was accused by federal authorities of using his company, Bitinstant, to knowingly sell Bitcoin to people who wanted it to buy drugs from the online black market, Silk Road.

Since his release in 2016, Shrem has said in numerous interviews that he recognizes his past mistakes and wants to cut a new and legal path. On the podcast “Love, Sex and Money,” Shrem said that in the first months out of prison, he worked as a dishwasher and didn’t look at his email.

Over the last year, though, Shrem has already gotten involved with a number of troubled projects.

He was among the leaders of two efforts — one a cryptocurrency credit card and the other an initial coin offering — that had to give money back to investors after various partnerships that Shrem had promised fell through.

But those are likely to be mere headaches compared with what he could face in a confrontation with the Winklevoss twins. Shrem helped get the brothers interested in Bitcoin in 2012 and became their first adviser in the young industry.

The twins asked Shrem to help them amass the beginnings of what would become an enormous stockpile of cryptocurrencies, giving him $750,000 to buy Bitcoin from other deep-pocketed investors.

A few months into this partnership, the twins said they realized that Shrem had not given them all the Bitcoin they were due. The brothers gave Shrem $250,000 in September 2012, but the lawsuit says that a month later, he only delivered around $189,000 worth of Bitcoin at the going price, which was around $12.50 at the time.

The 5,000 or so missing Bitcoins became a point of tension between the twins and Shrem. They asked him numerous times for an accounting of the Bitcoins he had purchased and eventually brought in an accountant who documented the missing funds, according to court documents.

“I have been patient and at this point it’s getting a bit absurd,” Cameron Winklevoss wrote to Shrem in 2013 in an email quoted in the lawsuit. “I don’t take this lightly.”

The missing Bitcoin, which were worth 98 percent less at the time, appeared to have been forgotten in a broader battle between the brothers and Shrem over an investment in Bitinstant.

In 2013, Bitinstant fell apart, and the twins blocked Shrem’s efforts to revive the company with new investors because of their concerns about his management style. By the time Shrem was arrested in 2014, as a result of activities at Bitinstant that took place before the brothers invested, they had cut off contact with him.

The Winklevoss twins’ problems with Shrem have not held them back. They were briefly each cryptocurrency billionaires last year, and they have built one of the leading cryptocurrency exchanges, Gemini. Despite this year’s big drop in cryptocurrency prices, their holdings are still worth nearly a billion dollars.

Cameron Winklevoss said that he and his brother decided to pursue the missing Bitcoins again after they saw Shrem’s recent spending patterns.

“When he purchased $4 million in real estate, two Maseratis and two power boats, we decided it was time to get to the bottom of it,” Winklevoss told The New York Times. The brothers hired an investigator, who found that 5,000 Bitcoins were transferred in 2013 through addresses associated with Shrem and onto the Bitcoin wallet services Xapo and Coinbase, according to the complaint. The investigator traced the money on the blockchain, the public ledger where all Bitcoin transactions are recorded.

Jed S. Rakoff, a judge in the U.S. District Court for the Southern District of New York, approved an application the twins made in September to freeze any funds that Shrem holds with those companies. Rakoff wrote in his order that Shrem had “evidenced an intent to frustrate the collection efforts of his creditors.”

The court fight could cause problems for Shrem’s latest venture, a firm called Crypto.IQ. The company, which promises market intelligence to Bitcoin traders, is holding a conference for customers in Las Vegas this month promising “unparalleled insights from a roster of experts at the very epicenter of the crypto universe.”

In an interview with Breaker magazine last month, Shrem said he was getting used to the ups and downs.

“My personal life goes through bull and bear markets, too,” he said. “So the key is how to deal with it when you’re in the bear markets.”