As the bitcoin bubble was nearing its height in mid-2017, a Seattle cryptocurrency startup hired a man who promised to craft a winning pitch to potential investors.
The man, Steven Nerayoff, was a big name in blockchain circles: He claimed that he had helped launch Ethereum, the world’s second most-popular cryptocurrency. His Twitter account shows him speaking at blockchain conferences and hobnobbing with Ethereum creator Vitalik Buterin and Bitcoin entrepreneur Charlie Shrem, who pled guilty in 2014 to charges he helped people exchange cash for cryptocurrency to purchase drugs and other illegal goods on online black market SilkRoad.
But months after he was hired, Nerayoff was threatening to “wreck the company” unless he was paid millions of dollars in cryptocurrency, according to federal prosecutors in Brooklyn who allege he and a colleague, Michael Hlady, extorted over $8 million from the company. Both were arrested Tuesday.
“Nerayoff and Hlady carried out an old-fashioned shakedown, to be paid off with 21st century cryptocurrency,” said the U.S. Attorney for the Eastern District of New York, Richard Donoghue, in a press release.
The federal charges don’t name the target of the alleged extortion, calling it “Company 1,” but all signs point to StormX, which pays users in cryptocurrency to test third-party apps.
Founded in 2015 by then-24-year-old Simon Yu, a graduate of the University of Washington, StormX is backed by a pantheon of local blockchain titans, including Bill Shihara, the founder of Bittrex, one of the world’s most popular cryptocurrency exchanges.
Nerayoff’s lawyer disputed the allegations, countering that the unidentified company owed Nerayoff money and complained to the federal government rather than pay. Nerayoff was released on $750,000 bail; Hlady is also out, on $50,000 bail. If convicted, Nerayoff and Hlady each face up to 20 years’ imprisonment.
Reached by text message, Yu, the StormX CEO, said he had been asked not to comment on the investigation. But the timeline of Nerayoff’s involvement in the company laid out in the warrants matches StormX documents.
The complaint alleges that in July 2017, the Seattle company contracted Nerayoff to help craft the startup’s image and line up strategic partnerships and investors prior to a public sale of its cryptocurrency tokens — what’s known as an “initial coin offering.” In exchange, Nerayoff would be paid 22.5% of all cryptocurrency tokens issued and the same percentage of all funding the company raised.
Part of Nerayoff’s job was to help the company draft a “white paper,” a position statement for investors. StormX’s October 2017 white paper gives “a very special thanks to our advisors” — including Steven Nerayoff, listed in the document as StormX’s chief strategist, the same title he uses on LinkedIn to characterize his time at StormX.
Federal prosecutors allege that before the company’s initial coin offering, or “crowdsale,” Nerayoff helped attract $16 million in seed funding, in the form of the cryptocurrency Ethereum. According to the terms of his contract, Nerayoff would have been entitled to $3.7 million. Instead, he demanded more than twice that amount — $8.75 million — and told executives that if they did not pay, he would “sabotage the crowdsale, generate negative press … and use his contacts with influential people to ‘destroy'” the company.
Under pressure, executives paid Nerayoff an additional $3.78 million in Ether tokens, the complaint alleges.
Days before, StormX had posted a photo on Twitter of Shihara, Nerayoff and Simon Yu with their arms around each other and two other cryptocurrency pioneers, Anthony Di Iorio and Jeff Pulver. “A few of our key advisors,” the post read. “Excited to continue working alongside you all.”
But Nerayoff’s demands didn’t stop there, according to the complaint. As the value of cryptocurrencies crashed in early 2018, he demanded 350 million in company tokens. And in March 2018, he asked for a $4.45 million loan, paid in 10,000 Ether tokens.
And he only grew more intimidating, introducing company executives to his “operations guy,” Michael Hlady. Hlady claimed “that he had been shot at and killed people, that he had ‘taken down’ a head of state, and that he had been part of the Irish Republican Army, the National Security Agency, the Central Intelligence Agency and the Federal Bureau of Investigation,” according to the charges.
Hlady made various threats, including telling the company’s chief operating officer — presumed to be former StormX COO Arry Yu — he knew where her child went to school. And Nerayoff and Hlady “threatened to expose Company 1 to potential litigation,” prosecutors allege.
The complaint includes a text message Hlady allegedly sent to the COO in late March, while he was en route to Cancun, demanding that Nerayoff be paid the $4.45 million loan “by the time I land or I promise I will destroy your community.”
“We will sell and get everyone we know to sell,” the message read. “We will sue you … a story will be written about [Company 1]. You are stalling for stalling’s sake.”
The company gave Nerayoff the loan, which Nerayoff later refused to pay back. And in May 2018, he unsuccessfully attempted to take over the company, according to an email he wrote to Hlady and an unnamed co-conspirator. The takeover failed when employees of his own consultancy firm staged an “intervention,” prosecutors allege.
Nerayoff stopped promoting StormX on Twitter around the time of the unsuccessful takeover, and he’s not listed as an adviser on the company’s website. Last September, Arry Yu left StormX, citing “disagreements” with Simon Yu, according to Seattle-based cryptocurrency news site CryptoSlate. Through a spokesperson, Arry Yu declined to comment.
The blockchain community has been left guessing who turned Nerayoff in. Amid silence from StormX, Simon Yu and Arry Yu, speculation has turned to the unnamed co-conspirator, who according to the filings, is an employee of Nerayoff’s consultancy firm, Alchemist.
This spring, according to SEC filings, Nerayoff launched a Cayman Islands-based company, Adaptive Holdings, to oversee work on an all-new blockchain.