FBI Snags Silk Road Boss With Own Methods

Photographer: Chih Hsueh Tseng/Getty Images

For two years, cybercrime experts from the FBI pored over the secretive online drug bazaar known as Silk Road -- an underground operation that had become, by the time the FBI shut it down this week, the venue for $1 billion worth of illegal transactions, according to prosecutors. Close

For two years, cybercrime experts from the FBI pored over the secretive online drug... Read More

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Photographer: Chih Hsueh Tseng/Getty Images

For two years, cybercrime experts from the FBI pored over the secretive online drug bazaar known as Silk Road -- an underground operation that had become, by the time the FBI shut it down this week, the venue for $1 billion worth of illegal transactions, according to prosecutors.

From an Internet café in San Francisco, a 29-year-old free-market evangelist who called himself “Dread Pirate Roberts” allegedly used untraceable web services, an international network of servers and anonymous digital currency to run a global online exchange of cocaine and heroin.

For two years, cybercrime experts from the FBI pored over the secretive online drug bazaar, known as Silk Road -- an operation that prosecutors say had become, by the time they shut it down this week, the venue for as much as $1 billion worth of illegal transactions.

Seeking the mastermind behind it, investigators began picking up clues: an anonymous posting to a website devoted to hallucinogenic mushrooms, recurring references to libertarian economics and early hints left on public sites including Google and LinkedIn.

A big break came in July, when a routine inspection of inbound mail from Canada turned up a parcel containing several counterfeit IDs -- each with a different name and all featuring the photograph of the same man.

According to a 33-page criminal complaint unsealed Oct. 2 in Manhattan federal court, the man in the ID photos was Ross Ulbricht, Silk Road’s alleged mastermind. FBI agents arrested Ulbricht on Tuesday at the Glen Park library in San Francisco, where he had gone to log onto a computer, according to a person briefed on the matter.

Court Appearance

Ulbricht made an initial appearance Oct. 2 in federal court in San Francisco, where he listened to charges against him of narcotics trafficking, money laundering and computer-hacking conspiracy. He faces separate charges of attempted murder in Maryland, from an indictment unsealed there Oct 2.

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The criminal complaint against Ulbricht depicts the dark side of Internet commerce. In it, special agent Christopher Tarbell of the FBI’s New York office described Silk Road as “the most sophisticated and extensive criminal marketplace on the Internet today” -- a virtual bazaar where buyers could find everything from heroin and hacking software to contact information for hit men in more than 10 different countries.

The genius of Silk Road’s design and the reason it eluded the FBI’s grasp for so long, according to the complaint, was its impenetrability. The site was accessible only on a so-called Tor network, which is designed to conceal the true Internet addresses of computers using it. Its exclusive reliance on Bitcoin, an anonymous digital currency, added another layer of protection for its buyers and sellers.

Web Phenomenon

Meanwhile, the site’s master, operating as Dread Pirate Roberts, or DPR, became something of a phenomenon. As the site’s founder and curator, DPR resolved disputes between parties and dictated the terms on which buyers and sellers could transact. Word of the site spread thanks in part to a profile on Gawker website in June 2011.

What in the World Is Bitcoin?

That same month, two U.S. Senators, Chuck Schumer of New York and Joe Manchin of West Virginia, wrote to Attorney General Eric Holder and Drug Enforcement Agency chief Michele Leonhart, urging them to investigate Silk Road and shut down Bitcoin.

Starting in November 2011, Tarbell’s undercover team made more than 100 purchases of drugs from Silk Road vendors, accepting shipments of ecstasy, cocaine, heroin, LSD and other drugs posted from 10 different countries, including the U.S., according to the complaint.

Magic Mushrooms

An agent on Tarbell’s team also combed through Internet postings and discovered that the earliest mention of Silk Road had appeared on shroomery.org, an informational website for consumers of “magic mushrooms,” in January 2011.

The posting, from someone with the username altoid, alerted the site’s visitors to Silk Road and asked if anyone had tried it. Two days later, someone using the same username posted a similar message on “bitcointalk.org,” a discussion forum for the virtual currency.

“The two postings created by ‘altoid’ on Shroomery and Bitcoin Talk appear to be attempts to generate interest in the site,” Tarbell wrote. “The fact that ‘altoid’ posted similar messages about the site on two very different discussion forums, two days apart, indicates that ‘altoid’ was…seeking to publicize the site among the forum users -- which, based on my training and experience, is a common online marketing tactic for new websites.”

Austrian Connection

In October 2011, altoid surfaced again on the Bitcoin forum, seeking an “IT pro” to help build a Bitcoin startup company and directing potential job candidates to the Gmail account of someone named Ross Ulbricht. From a Google profile associated with the account, the FBI learned that Ulbricht had an interest in the Austrian school of economics and the Ludwig von Mises Institute -- an Auburn, Alabama-based group that functions as a center of Libertarian political and social theory, according to its website.

Agents made a connection between Ulbricht and Silk Road: In justifying the site’s existence, its webmaster made regular references to Austrian economic theory and the teachings of Mises.

The New York FBI agents weren’t the only lawmen gunning for Silk Road. In April 2012, a federal agent in Maryland began communicating with Dread Pirate Roberts in an undercover capacity, posing as a drug dealer.

In January, the undercover agent completed the sale of cocaine to a Silk Road employee and was paid the equivalent of $27,000 in Bitcoin currency.

Ordered Hit

According to the Maryland indictment, DPR soon learned that the employee who received the cocaine had been arrested. The Silk Road founder expressed outrage, claiming the employee had stolen money from him.

Then, by e-mail, DPR asked the undercover agent to “beat up” the employee to recover the stolen funds, and later asked the agent to murder the employee, prosecutors allege.

According to the indictment, the undercover agent led DPR to believe that the employee had been executed. DPR’s response, via e-mail, was “I’m pissed I had to kill him…but what’s done is done... I just wish more people had some integrity.”

Meanwhile, on July 10 of this year, customs officials intercepted the package from Canada as part of what the complaint characterized as a routine inspection. The package, addressed to an apartment on 15th Street in San Francisco, contained nine counterfeit IDs, each in a different name, but all featuring a photo of the same person.

Fake IDs

On July 23, 2013, with the cooperation of a foreign country not identified in the complaint, the FBI succeeded in getting a scan of the Silk Road web server. Tarbell’s team in New York tracked the Silk Road webmaster’s online logins to an Internet café on Laguna Street in San Francisco, near an apartment where Ulbricht had moved.

On July 26, agents from Homeland Security Investigations arrived at the 15th Street address. There, according to the complaint, they encountered Ulbricht, whose photo matched those on all nine fake IDs.

Confronted with a fake California driver’s license bearing his photo and birthdate but a different name, Ulbricht avoided answering questions about the purchase of false IDs, according to the complaint. Instead, he volunteered that “hypothetically” anyone could go onto a website named Silk Road and purchase any drugs or counterfeit IDs they wanted.

The Homeland Security agents didn’t make an arrest.

‘Hunting Me’

Following the confrontation, Tarbell and his team learned that in the weeks leading up to the discovery of the counterfeit identity papers, Dread Pirate Roberts had sent a series of private e-mails suggesting that he “needed a fake ID,” according to the complaint.

In August, Forbes.com posted an interview with Dread Pirate Roberts that it said was conducted via encrypted messages sent through the site over the course of months. “The highest levels of government are hunting me,” the cyber entrepreneur said, adding: “I can’t take any chances.”

Tuesday afternoon, Ulbricht surfaced at San Francisco’s Glen Park library, a small branch facility. There, according to the person familiar with the matter, he was arrested by the FBI.

In federal court in San Francisco Oct. 2, Magistrate Judge Joseph Spero read the charges against him: The drug conspiracy charge carries a potential life sentence and $10 million fine, while the computer hacking conspiracy and money laundering charges carry 10 year and 20 year sentences, respectively, and $250,000 fines, Spero said.

‘Don’t Understand’

Asked if he had any questions, Ulbricht referred not to the magnitude of the charges, but to a detail of the administration of justice.

“I don’t understand what a special assessment is,” Ulbricht said. Spero explained that each charge carries a $100 assessment fee.

Ulbricht said he couldn’t afford an attorney in San Francisco and was appointed a federal public defender. Ulbricht didn’t enter a plea and was remanded back to the U.S. marshals after the five-minute hearing.

Within 24 hours of Ulbricht’s court appearance, information about him was pulled down from the Internet, including a 2012 video in that shows Ulbricht and a friend discussing his move that year to San Francisco.

Suspects UN

In the video, viewed Oct. 2 on YouTube, Ulbricht and a longtime friend, Rene Pinnell, talked about why they moved to San Francisco. The two kid each other about their adolescent behavior in middle school and share intimate details about their relationships with girlfriends. Ulbricht also expressed concern that the United Nations was trying “to create global rules and global governance” of the Internet. He also said he might want to start a family.

Pinnell could not be reached by phone and did not respond to an e-mail yesterday.

A Facebook page bearing Ulbricht’s name featured a roster of his favorite bands, movies “The Matrix,” “Lord of the Rings”) and books (“Hyperion,” “Shogun” and “The Power of Now.”).

The page also contained an essay on independence from July 5, 2010, in which its author ruminated about the meaning of freedom.

“We live in a most unique time” and enjoy more freedom than any generation before us, reads the essay attributed to Ulbricht. “Let us be thankful for our freedom, and build a world where we, and the generations that follow us, will be freer than any that have come before!”

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S. District Court, Southern District of New York (Manhattan). The Maryland case is U.S. v. Ulbricht, 13-00222, U.S. District Court, District of Maryland (Baltimore).

To contact the reporters on this story: Greg Farrell in New York at gregfarrell@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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