Silk Road Trial Takes a Twist as Ross Ulbricht Says He Was Framed

The trial of alleged Silk Road mastermind Ross Ulbricht took an unexpected turn Thursday when his defense team laid the blockbuster claim that Ulbricht was framed by another shadowy bitcoin heavyweight, Mt. Gox founder Mark Karpeles.

In his opening statement Tuesday, defense attorney Joshua Dratel had posited Ulbricht, who is charged with conspiracy, money laundering, and narcotics trafficking, as a patsy who was "left holding the bag" by the real "Dread Pirate Roberts" — the pseudonymous user or users of the dark net site believed to have run it. Dratel argued that though Ulbricht founded the site in 2011 as an "economic experiment," he soon turned over control to other individuals, adding that there could be multiple people using the Dread Pirate Roberts name on the network.

The ambiguity underpinning the defense's claim ended Thursday afternoon, when under cross examination Department of Homeland Security Agent Jared Der-Yeghiayan admitted that up until August 2013 — less than two months before Ulbricht was apprehended — he suspected that French national Karpeles was behind the site.

Japan-based Mt. Gox, which at one point handled 80 percent of bitcoin exchanges, filed for bankruptcy in February 2014. Shortly afterwards the site admitted it had lost bitcoins worth more than $470 million, mostly from the personal accounts of customers.

Dratel went on to question Der-Yeghiayan about a meeting that took place between prosecutors in a separate Baltimore investigation into Karpeles, where his attorneys said their client would offer up the identity of Dread Pirate Roberts in exchange for the dropping of future charges.

Prosecutor Serrin Turner — who appeared to be unaware of the meeting, or that it would be raised — objected to the line of questioning on hearsay grounds. Judge Katherine Forrest ordered jurors out of the room while she heard arguments from both sides. The dispute was left unresolved when she adjourned the court at around 4pm.

"The defense has been building a picture all afternoon that Karpeles was Dread Pirate Roberts or a Dread Pirate Roberts — that has come out in spades," said Forrest.

The trial will resume Tuesday, following the Martin Luther King Day holiday.

What it's really like to be one of the Silk Road's biggest drug lords. Read more here.

Silk Road was started in early 2011 and was shut down in October 2013. The site could only be accessed by the anonymizing Tor-network, and payments made through the crypto-currency bitcoin, a combination that hid the identities of venders and their customers. Prosecutors allege over one million drug deals took place on the site before it was seized.

Der-Yeghiayan was intimately involved in federal Silk Road investigations from their inception. While working as an investigator at Chicago's O'Hare International Airport, Der-Yeghiayian first encountered shipments of drugs passing through the airport — some 3,600 of which he testified were eventually traced back to listings on Silk Road.

By July 2013, Der-Yeghiayan had taken over an administrative account on the site and was receiving bitcoin payments from the Dread Pirate Roberts for his work as a customer service representative.

On October 1, 2013, the day Ulbricht was apprehended in a San Francisco library, Der-Yeghiayan was chatting with the then-28 year-old from just across the road, sat on a bench with his laptop. FBI agents first seized Ulbricht's own laptop, which sat open to the encrypted chat between "dread" and "cirrus," the account used by Der-Yeghiayan.

Der-Yeghiayan first suspected Karpeles of being Dread Pirate Roberts as early as April 2012. It appeared his beliefs had changed little over the year that followed, as evidenced by a 2013 email read out by Dratel.

Silk Road "would be a device for leveraging the value of bitcoin, and if he could create a site independent of bitcoin, you could control the value of bitcoin," Der-Yeghiayan wrote. The agent further believed that because of Karpeles' limited grasp of English, it was his close associate, Canadian Ashley Barr, who was operating the Dread Pirate Roberts handle on the site.

"You thought you had probable cause that Mark Karpeles was intimately involved, as the head of Silk Road, correct?" Dratel asked Der-Yeghiayan.

Der-Yeghiayan said he did.

Der-Yeghiayan suspected the two sites — Mt. Gox and the Tor-network accessible Silk Road marketplace — were being run in tandem by Karpeles. His suspicions were backed by a simple search, which showed the site "silkroadmarket.org" had been registered to company owned by Karpeles.

Deryeghian went so far as to push for a search warrant for Karpeles' email in May 2013.

"Our position is that he set up Mr. Ulbricht," Dratel told judge Forrest.

Karpeles responded Thursday with the following statement:

"This is probably going to be disappointing for you, but I am not Dread Pirate Roberts. The investigation reached that conclusion already — this is why I am not the one sitting during the Silk Road trials, and I can only feel defense attorney Joshua Dratel trying everything he can to point the attention away from his client.

"I have nothing to do with Silk Road and do not condone what has been happening there. I believe bitcoin (and its underlying technology) is not meant to help people evade the law, but to improve everyone's way of life by offering never thought before possibilities."

Ross Ulbricht Admits to Founding Silk Road — but Claims He's Not 'Dread Pirate Roberts.' Read more here.

Follow Samuel Oakford on Twitter: @SamuelOakford

Nathalie-Kyoko Stucky contributed to this report.