Illustrations and additional reporting by Susie Cagle.
Day 3 of the Silk Road trial took a turn for the surreal when defense attorney Joshua Dratel began his cross-examination of Homeland Security Investigations agent Jared Der-Yeghiayan. The witness admitted that he had actively pursued Mark Karpeles, the erstwhile CEO of the notorious failed Bitcoin exchange Mt. Gox, as a possible match for the Dread Pirate Roberts, the operator of Silk Road. In August 2013, less than two months before the arrest of Ross Ulbricht, Der-Yeghiayan swore in an affidavit that he had probable cause to suspect that Karpeles was DPR.
Der-Yeghiayan is the very same agent who went undercover as a Silk Road moderator and assisted in the arrest of Ross Ulbricht, the man alleged to be DPR.
The defense has yet to assert that Mark Karpeles and his “right hand man,” Ashley Barr, had together assumed the identity of the Dread Pirate Roberts. But the line of questioning is unmistakable—the defense seems poised to point the finger at Karpeles and Barr as the masterminds who lured Ross Ulbricht, “the perfect fall guy,” into administering Silk Road, ultimately leaving him “holding the bag” when law enforcement pounced on him in October 2013.
This theory links two major stories about bitcoin and the dark web from 2013 and 2014, while placing two important (and controversial) institutions in the bitcoin economy squarely under the control of one man. In April 2013, Mt. Gox processed 76% of all exchanges between Bitcoin and fiat currency. In 2012, Nicolas Christin, Associate Research Professor at Carnegie Mellon, showed that “4.5%-9% of all exchange trades” were in connection with Silk Road. Since the majority of exchange trades are speculative in nature, even that modest percentage could represent the bulk of transactions for real goods and services. Christin estimated an annual revenue of $15 million for the entire marketplace.
The idea that Mark Karpeles was the real kingpin of Silk Road appears—for lack of a better phrase—too good to be true, the stuff of second-rate Hollywood. But it is a theory that a federal agent formed over months of investigation, and documented in sworn affidavits.
Special Agent Der-Yeghiayan suspected Karpeles of many things. He thought Karpeles was running an unlicensed money service business, which can lead to criminal charges under 18 U.S.C. § 1960. But he also believed Karpeles was running Silk Road in tandem with Mt. Gox, using the drugs marketplace to bolster the price of Bitcoin and thus increase his profits from the exchange.
Der-Yeghiayan testified that silkroadmarket.org and tuxtele.com (the latter of which is known to be owned by Karpeles) were both registered by Mutum Sigillum, a Karpeles holding, and hosted at the same place. The forums at silkroadmarket.org and bitcointalk.org ran the same software—and not only that, they ran the same outdated version. (BitcoinTalk is also operated by Karpeles). He also swore in an affidavit that Karpeles was “someone with extensive technical expertise,” capable of running a technologically sophisticated operation like Silk Road. And he claimed the Dread Pirate Roberts interviewed by Andy Greenberg for Forbes in August 2013 “sounded” exactly like Karpeles.
When asked for comment, Karpeles gave the same statement to all media outlets (with one exception). He emphatically denied that he was the Dread Pirate Roberts: “I have nothing to do with Silk Road and do not condone what has been happening there.” He also clarified that the silkroadmarket.org domain had been “registered by a KalyHost.com customer.” KalyHost.com is a service of Karpeles’s current venture, Tibanne, which specializes in web hosting. According to Karpeles, KalyHost.com has been running since 2009.
“I can only feel defense attorney Joshua Dratel [is] trying everything he can to point the attention away from his client,” said Mark Karpeles in his statement to the media. When it comes to Der-Yeghiayan, however, his own dogged investigation of Karpeles most likely came from a place of genuine belief.
In May 2013, Der-Yeghiayan issued a subpoena to Dwolla, a payments system company, for information regarding Karpeles and his holding company, Mutum Sigillum, LLC. Dwolla had been processing Mutum Sigillum transactions, essentially turning Mt. Gox bitcoins into U.S. dollars. The agent also sought a search warrant for Karpeles’s e-mail account, swearing in a draft affidavit on May 29, 2013, that he suspected Karpeles of being the Dread Pirate Roberts. In August 2013, he again swore that he had probable cause to believe Karpeles was operating Silk Road.
But for all his efforts, another investigation by Homeland Security Investigations, hundreds of miles away in Baltimore, was also closing in on Karpeles, and potentially undermining Der-Yeghiayan. At about the same time Der-Yeghiayan subpoenaed Dwolla in May, HSI in Baltimore seized $2 million from Mutum Sigillum’s Dwolla accounts, then another $3 million from its Wells Fargo account. Der-Yeghiayan was upset. He complained that HSI Baltimore should not have carried out the seizure due to his ongoing criminal investigation of Karpeles.
Even as Der-Yeghiayan struggled to right his capsized investigation, HSI Baltimore was making plans to meet with Karpeles’s lawyers. It seems that the Mt. Gox CEO was facing criminal charges—probably for operating a money service business without a license and for money-laundering.
Der-Yeghiayan strongly emphasized that they should not bring up Silk Road, as that would jeopardize his own investigation. HSI Baltimore didn’t exactly ignore him—when they met up on July 11, it was Karpeles’s attorneys who brought up Silk Road first. They said that Mark Karpeles was willing to give up DPR if he “could get a walk on his charges.”
As of January 15, 2015, Karpeles has never been charged for money laundering or for running an unlicensed money service business.
Der-Yeghiayan’s testimony about the HSI Baltimore meeting with Karpeles’s attorneys has not yet been ruled admissible in court. Assistant U.S. Attorney Serrin Turner lashed out over the statement, calling it “double, maybe even triple hearsay.”
This was the first time the prosecutor seemed anything but cool and controlled. Der-Yeghiayan’s cross-examination also brought out an uncharacteristic reaction from another person in the courtroom. As Dratel’s questioning of Der-Yeghaiyan went on, drawing out the story of how the agent had suspected and investigated Karpeles, Ross Ulbricht’s mouth turned up into a small, pleased smile.
Why would running Silk Road make sense for a Bitcoin exchange operator? Silk Road was certainly profitable for its operator, but Der-Yeghiayan thought there was more to it than that—that Silk Road and Mt. Gox worked synergistically to boost profits. What might his rationale have been?
This was only vaguely hinted at during trial. If Mt. Gox and Silk Road both had significant impact on the bitcoin economy as a whole, it might not be absurd to postulate that someone in control of both could manipulate the price and end up making huge profits. The price of bitcoin did drop right after the arrest of Ross Ulbricht and the closure of Silk Road, and by December 2013 it reached record highs, over $1000 per 1 BTC.
In his cross-examination of Der-Yeghiayan, Dratel asked about the soaring bitcoin prices in late 2013: “So the people holding bitcoin at the time of Mr. Ulbricht’s arrest could make a killing, is that right?”
“I believe there are a lot of people who made money, yes,” Der-Yeghiayan replied.
As late as mid-August, Der-Yeghiayan was still in pursuit of Karpeles. So how did he go from believing Mark Karpeles was the mastermind behind Silk Road to assisting in the arrest of Ross Ulbricht on October 1?
Based on what has been presented in court so far, all we know is that in mid-September, IRS Special Agent Gary Alford informed HSI that Ross Ulbricht was a good match for DPR. Less than three weeks later, Der-Yeghiayan flew to San Francisco to play a key role in the sting that nabbed Ulbricht.
Even if you find the theory that Karpeles is DPR to be absurd, the timeline is enough to give anyone whiplash.
So is Mark Karpeles the Dread Pirate Roberts? There are already a number of holes in the narrative that the defense has only begun to build.
It’s true that Mark Karpeles runs a web hosting service, so the connection between silkroadmarket.org and any of his other domains can be easily explained away. The other links are even shakier—that two forums ran the same outdated version of MediaWiki does not seem remarkable. And the claim that the DPR from Greenberg’s interview “sounds” like Mark Karpeles is bizarre, since Karpeles is a French citizen without the same level of English fluency that DPR demonstrated in forum posts. This was, in fact, the reason why Der-Yeghiayan suggested elsewhere that Karpeles and Ashley Barr had combined forces to be DPR. Karpeles was the brains, while Barr was the “voice” of DPR, handling forum posts and e-mails.
What about the suggestion that Karpeles’s experience as a Bitcoin exchange CEO gave him the expertise to run Silk Road? It’s thought that Mt. Gox collapsed because it suffered either from “transaction malleability” (a bug that allowed bitcoin to be lost), or internal incompetence, or both. Did Karpeles really have the technical expertise and capacity to successfully run a service like Silk Road?
“While Mark Karpeles was terrible at following well-established web development practices, he did have the proficiency to run a website like Silk Road,” Emin Gün Sirer, Associate Professor of Computer Science at Cornell University, told me. “His current company, Tibanne, is engaged in web hosting, and certainly the challenges involved in running Mt. Gox are similar to those for Silk Road.”
But, Sirer added, “I’m speaking solely to the narrow question of whether Mark Karpeles had the requisite proficiency. I think the claim that DPR is Mark Karpeles is outlandish.”
Of course, the defense doesn’t need to convince experts like Emin Gün Sirer. They only need to worm a reasonable doubt into the minds of the jury. And there may be enough here to achieve exactly that.
When asked for comment on this development in the trial, Nicholas Weaver, a researcher at the International Computer Science Institute, responded, “Damn, I take back (most) everything I said about the defense: that strategy is brilliant.”
Day 3 of the Silk Road trial took a turn for the surreal when defense attorney Joshua Dratel began his cross-examination of Homeland Security Investigations agent Jared Der-Yeghiayan. The witness admitted that he had actively pursued Mark Karpeles, the erstwhile CEO of the notorious failed Bitcoin exchange Mt. Gox, as a possible match for the Dread Pirate Roberts, the operator of Silk Road. In August 2013, less […]