A Russian national responsible for a debit card fraud scheme that cost his victims over $4.1 million in losses and drove one company out of business has been sentenced to 70 months in federal prison.
Mikhail Malykhin, 36, will also forfeit about $1.3 million in cash, more than $22,000 in gift cards, several gold bars, and a 1966 Ford Mustang that the FBI previously seized from him.
Malykhin in 2016 had pleaded guilty to conspiring to use stolen debit cards and unauthorized access to a protected computer. At his sentencing last week, United States District Judge Dolly Gee of the Central District of California described Malykhin actions as "reprehensible" and "ruining the lives of many," a statement issued by the Justice Department Friday noted.
Court documents associated with the case show that in December 2015 Malykhin illegally accessed a computer belonging to Polestar Benefits, a Lake Oswego, Oregon-based healthcare company that administers flexible spending accounts (FSAs) and COBRA services to other companies.
In that role, the company creates and manages FSA's, which are accounts into which employees can deposit pre-tax money for out of pocket healthcare expenses. Polestar also administers dependent care accounts, which are another type of special account to pay for elderly and dependent care.
Like other administrators of FSA accounts, Polestar issues a restricted type of debit card that an FSA account holder can use to pay for certain types of medical expenses. When the holder of a dependent care account spends money on dependent care, Polestar reimburses them from the account holder's previously funded account.
Malykhin used his access to Polestar's systems to reactivate the dormant accounts of 43 previous employees at Lane Community College, a Eugene, Oregon-based client of Polestar. He created new dependent care accounts for those employees, fraudulently funded several of them, and had debit cards linked to those accounts mailed to associates in various locations.
Malykhin set limits ranging from $500,000 to a staggering $5 million for the debit cards and modified them in such a way that the usual restrictions on the use of such cards were removed. In other words, debit cards that normally could have been used only to pay for qualified medical expenses were modified so they could be used as high-limit payment cards at any location.
Five associates of Malykhin — four Russian and one identified only as East European — used the fraudulent cards to buy hundreds of thousands of dollars worth of electronic goods, expensive furniture, and other big-ticket items from retail stores in California. In several cases, the associates then returned the fraudulently purchased goods for cash or for gift cards. Malykhin himself, who was the head of what prosecutors have described as a Russian organized crime syndicate, got to keep his share of the luxury goods, cash, and debit cards.
All five of his associates were subsequently arrested and sentenced to periods ranging from one year to three years in federal prison.
The court papers filed in connection with Malykhin's arrest show that he was responsible also for breaking into FlexMagic Consulting, another third-party administrator like Polestar, and similarly defrauding them of $3.5 million. The March 2016 break-in later forced FlexMagic out of business, leaving responsibility for the losses to Alegeus, the maker of a software platform that both Polestar and FlexMagic used for creating and managing FSA accounts for clients.
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