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Was the Mt. Gox CEO Behind Silk Road? Unlikely, But a Jury May Believe It

Ross Ulbricht’s defense theory depends on an alternate suspect.
January 28, 2015, 2:30pm
Mark Karpeles. Photo: Mark Karpeles/Twitter

​The defense team for Ross Ulbricht, the 30-year-old accused of creating and operating the now defunct online black market Silk Road, has one main strategy: someone else was running the site as its pseudonymous leader Dread Pirate Roberts. "We have the name of the real mastermind and it's not Ulbricht," Joshua Dratel, Ulbricht's lawyer, said in his opening statement in the trial.

Based on the proceedings so far, that person is Mark Karpeles, the erratic and enigmatic CEO of the failed Bitcoin exchange Mt. Gox. So, what are the odds Karpeles is the one who should really be on trial?

The Karpeles theory first came out in the cross-examination of Jared Der-Yeghiayan, a Homeland Security special investigation agent who went undercover as a site administrator to infiltrate Silk Road. Der-Yeghiayan was convinced Karpeles was the real Dread Pirate Roberts, or DPR—but when Ulbricht became a suspect, the feds stopped looking into Karpeles.

Dratel tried to present Der-Yeghiayan's alternate suspect as a plausible theory that the feds just didn't investigate out of sloppiness. In reality—at least based on what we have heard in court—there was never much evidence to suspect Karpeles, and Der-Yeghiayan's reasons for doing so are borderline absurd. However, it might still be enough to get Ulbricht off the hook.

There was never much evidence to suspect Karpeles

Der-Yeghiayan first began to suspect Karpeles in April 2012, he testified, and in an unpublished August 2013 affidavit he had "probable cause" to believe Karpeles was behind Silk Road. His reasoning? As the CEO of the world's biggest Bitcoin exchange, Karpeles stood to benefit from using Silk Road to control the value of the semi-anonymous digital currency in which the site's transactions were conducted.

That theory doesn't carry much weight, and the only additional hard fact Der-Yeghiayan used to tie Karpeles to Silk Road was that, a site on the regular internet containing directions to reach Silk Road, was hosted by Karpeles's web hosting company KalyHost.

Adding to Der-Yeghiayan's supsicions was the fact that ran on the same outdated version of MediaWiki software as, a site that was also once hosted by Karpeles's company, but that Karpeles didn't operate either. (By this logic, every site hosted by GoDaddy might also have been created and run by the CEO of GoDaddy, which is not the most convincing argument.)

Der-Yeghiayan also testified that he thought the voice of DPR changed in April 2012. Because Karpeles is French and his written English is not that of a native speaker, Der-Yeghiayan theorized that Mt. Gox associate Ashley Barr must have transcribed his words as DPR. The agent later testified that he thought an interview in Forbes with the Dread Pirate Roberts "sounded very much like Karpeles," but did not back this up with an expert analysis.

Der-Yeghiayan's pursuit of Karpeles ultimately fell apart when a Baltimore Homeland Security Investigation team, conducting a separate investigation into Karpeles for money laundering, seized millions of dollars in assets from his company in May 2013. Der-Yeghiayan admonished the team in an email for blowing his chances of pinning down Karpeles as the head of Silk Road. Then in September of that year, a Google search revealed Ulbricht's connection to Silk Road, and Der-Yeghiayan turned his focus to him instead.

In contrast to the limited circumstantial evidence connecting Karpeles to Silk Road, the prosecution has presented a plethora of material against Ulbricht. That includes a journal found on Ulbricht's laptop that talks about Silk Road, emails and chats that reference the site, and testimony from a friend who says he helped Ulbricht build it. The feds arrested Ulbricht while he was logged into the Silk Road admin panel on October 1, 2013.

For many people familiar with Bitcoin and the implosion of Mt. Gox, the idea that Karpeles was behind Silk Road is laughable. He is often portrayed as an incompetent businessman whose vast blunders led to the collapse of the world's largest bitcoin exchange, the loss of millions of dollars in his customers' investments, and a blow to the reputation of the nascent cryptocurrency. Karpeles filed for bankruptcy for Mt. Gox in Japan.

"I find the theory hard to believe," Ryan Selkis, author of the popular Two-Bit Idiot blog, who first broke the news of the Mt. Gox bankruptcy, told Motherboard by email. "If you look at how badly Karpeles mismanaged Mt Gox, and his bungled approach towards saving the company after the extent of its losses became clear last February, he doesn't appear to be much of a criminal mastermind."

Nicholas Weaver, a researcher at the International Computer Science Institute who has followed the case closely since its beginning, called the theory "impossible," saying Karpeles lacked the technology and finance skills to run the enterprise.

"Anyone in the field who knows what is going on thinks this is a ridiculous hypothesis."

"Anyone in the field who knows what is going on thinks this is a ridiculous hypothesis," he said.

Much of the (flimsy) evidence presented against Karpeles in the ongoing trial of Ulbricht has been struck from the record after the prosecution filed a complaint. The jury will be instructed to disregard them, as the judge found that "thoughts and beliefs" are off-limits as evidence. For example, statements related to the fact Der-Yeghiayan once believed Karpeles was the real Dread Pirate Roberts will be struck.

However, the alternative perpetrator theory remains at the heart of Ulbricht's defense, and it's unlikely the jury will forget Der-Yeghiayan's testimony. Because Ulbricht's is a criminal case, the burden of proof rests on the government. The defense does not have to prove Karpeles was the true Dread Pirate Roberts, it just has to raise reasonable doubt with the jury that Ulbricht was behind the site, and this, Weaver said, "might very well succeed."

"The defense is doing a brilliant job of introducing doubt for those who aren't familiar with the case—mainly, the jury," Weaver said. "What is reasonable for the jury versus what is reasonable for people who have been following the case are two different things."

The Karpeles theory isn't the only method the defense is using to raise doubt. One day in the trial, Dratel appeared to implicate a third potential Dread Pirate Roberts, but ultimately steered away from that line of questioning, perhaps in part due to the judge's previous ruling that the questioning must be based in hard evidence. Regardless, Weaver said, Karpeles is a perfect suspect to pin the guilt on, as he is out of the US and likely won't return any time soon.

Selkis also said Karpeles is the ideal candidate for the defense's alternative perpetrator theory, adding that he is a "popular guy to tar and feather in court" because he is so disliked by the Bitcoin community.

"People in this community hate Karpeles, as he is responsible for nearly $500mm of investor losses and a massive stain on Bitcoin's public image," Selkis said. "There's no shortage of people who'd want to throw him under the bus."

Karpeles has continued to vehemently deny any connection to Silk Road. He has even been purchasing and publishing the transcripts from each day of the trial in efforts to prove his innocence.

"I have nothing to do with Silk Road and do not condone what has been happening there," Karpeles previously said in a statement. "The investigation reached that conclusion already—this is why I am not the one sitting during the Silk Road trial."