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Specter of 2nd Suspect in Silk Road Trial

MANHATTAN (CN) - When the trial of alleged Silk Road founder Ross Ulbricht's trial began, his lawyers promised to show that their client was a fall guy for the "real" "Dread Pirate Roberts," the online moniker for the website's boss.

In a blockbuster end of the first week of trial, Ulbricht's lawyer, Joshua Dratel, started naming names for the first time by accusing Mark Karpeles - the ex-owner of the Bitcoin exchange company Mt. Gox - as the man who "set up" his client.

Karpeles made widespread headlines in Wired and other tech publications earlier this year by reportedly losing $400 million of his clients' funds before surfacing in Japan, but he never emerged as a figure in the Ulbricht case until Thursday afternoon.

Dratel made the allegation at the end of the third day of testimony by Department of Homeland Security agent Jared DerYeghiayan, who has spent most of the week linking Ulbricht to a website where tens of thousands of narcotics sellers sold their wares anonymously.

The Silk Road website takes its name from the fabled road connecting Asia to the Middle East, and its leader Dread Pirate Roberts cribbed his name from a character in the William Goldman book-turned-beloved-1987-movie "The Princess Bride."

The Dread Pirate Roberts of fiction is actually multiple individuals assuming a shared identity, and Ulbricht's lawyers contend the same is true of Silk Road's leader, who is also known by the initials DPR.

Earlier on Thursday, DerYeghiayan linked DPR to the defendant through a blow-by-blow account of Ulbricht's arrest on Oct. 1, 2013, inside San Francisco's Glen Park library.

Moments before his FBI colleague Tom Kiernan effected the arrest, DerYeghiayan said that he drew Ulbricht onto the "dread" account though a ruse he pulled at a nearby Cafe Bello just down the street from the library.

A "few moments" after Kiernan entered the library, DerYeghiayan said that he signed onto a staff chat through the account of a former administrator named "Cirrus." DerYeghiayan had posed as "Cirrus" for months before the arrest and even collected a Bitcoin salary of roughly $1,000 per week.

In the initial moments of their chat, Dread asked Cirrus whether the latter still sold and exchanged Bitcoins online, and Cirrus said that he stopped because of "reporting requirements," a transcript of that chat shows.

"Damn regulators, eh?" Dread quipped.

After some more small talk, Cirrus told dread to look at a flagged message on Silk Road, which was spam by a competitor "Atlantis."

Kiernan, the FBI agent, took pictures of this chat on Ulbricht's screen in the library, as well as the flagged Atlantis message, evidence showed on Thursday.

When clicking backing on Ulbricht's Tor browser, DerYeghiayan said that he found an administrative screen of Silk Road with "mastermind" on the URL. DerYeghiayan did not previously know that the page existed, he said.

After Ulbricht's arrest, Dread never responded to Cirrus, he added.

Agents uncovered another connection after obtaining a search warrant for Ulbricht's house, where they found handwritten messages on two crumpled, yellow leafs of paper. Neither of the papers had the words "Silk Road" on them, but both contained language identical to that which appeared in Dread Pirate Robert's postings about the website's new buyer's rating system.

Under the new language, a four-star rating meant "Solid, would recommend," Dread Pirate Roberts announced on Aug. 11, 2013.

One of the crumpled papers in Ulbricht's home described a four-star rating the same way, the agent testified.

On the surface, the connections appeared to be airtight. But Dratel derided the idea that the leader of a sophisticated website that trades on cryptography would left himself vulnerable on an unsecured connection of a public library.

"Are [Silk Road's leaders] the type of people who would leave handwritten notes in a wastebasket?" Dratel asked DerYeghiayan at one point.

"I don't know," the agent replied.

DerYeghiayan acknowledged that he once believed that DPR's account changed hands, and that he wrote an email in June 2013 that keeping track of suspects could be like an Abbott & Costello skit.

"Sheesh, who's on first again?" he wrote.

Dratel later turned his questioning toward Karpeles, the man whom he hinted earlier is the "real" DPR.

On the hot seat, DerYeghiayan acknowledged that he believed as of July 2013 that he Karpeles ran the Silk Road website as a platform to increase the value of Bitcoin currency.

Evidence has shown that Bitcoin's value spiked astronomically - from more than $100 per coin to $1,200 - on the day of Ulbricht's arrest.

Before turning his attention toward Ulbricht, DerYeghiayan had been confident enough that Karpeles was his suspect to swear to probable cause in his search warrant. But DerYeghiayan said the Baltimore bureau's concurrent Homeland Security investigation of Karpeles complicated his investigation.

On May 10, 2013, the Baltimore office seized more than $3 million from Karpeles' company Mutum Sigillum LLC, a move that DerYeghiayan acknowledged upset him.

"You thought HSI Baltimore should have deferred its seizure because of your investigation?" Dratel asked.

"At the time, yes," DerYeghiayan said.

Dratel contends that this move tipped off Karpeles about the federal investigation, and prompted him to seek to avoid prosecution by offering to name the Silk Road leader at a July 13, 2013, meeting between his lawyers and Baltimore U.S. attorneys.

When Dratel pressed DerYeghian about the Baltimore meeting with Karpeles' lawyer, prosecutors adamantly objected on hearsay grounds, grinding proceedings to a halt for the rest of the day.

It was only months after this meeting, in September, that an Internal Revenue Service agent told DerYeghiayan that Ulbricht was a "pretty good match, potentially," for DPR, prior testimony showed.

After the jury had left the room, Dratel cut to the chase.

"Our position is that [Karpeles] set up Mr. Ulbricht," he said.

Prosecutors failed to persuade presiding U.S. District Judge Katherine Forrest that the issue is irrelevant hearsay.

She ordered both parties to submit letters arguing what line of questioning should be admissible when the agent's testimony continues on Tuesday morning.

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