Fraud charges taint ‘Silk Road’ investigators

Two federal investigators have been charged in U.S. District Court in San Francisco with fraudulently obtaining hundreds of thousands of dollars in bitcoin during the course of their investigation into the “Silk Road” online black market, federal prosecutors announced Monday.

Carl Force, 46, of Baltimore, a former special agent with the Drug Enforcement Administration, and Shaun Bridges, 32, of Laurel, Maryland, a former special agent with the Secret Service, were each charged with wire fraud and money laundering. Force was also charged with theft of government property and conflict of interest in a federal criminal complaint filed last week and unsealed today.

Force, a DEA agent of 15 years, was the lead undercover agent in communication with “Dread Pirate Roberts,” the suspect who founded the Silk Road website in 2011, later identified as 30-year-old Ross Ulbricht. Bridges was a computer forensic expert with the Secret Service assigned to the case.

Ulbricht was arrested in a San Francisco public library in October 2013 and accused of founding and running the Silk Road website, an online marketplace that facilitated hundreds of millions of dollars worth of drug sales. Transactions on the site were conducted in bitcoin, a virtual peer-to-peer online payment system.

A federal jury in New York convicted Ulbricht of drug conspiracy charges in February. Further federal charges against Ulbricht, stemming from a separate investigation in Maryland, including involving an alleged murder-for-hire plot, are still pending in Maryland. Force and Bridges worked on the Maryland investigation.

Joshua Dratel, Ulbricht’s attorney, said in a statement today he learned of the corruption allegations only five weeks before Ulbricht’s trial started. But even then, since formal charges had not been filed, the details of the investigation, including that two agents were involved, remained secret and he could not use that information in Ulbricht’s defense, Dratel said.

Dratel said the government’s failure to disclose the investigation until after Ulbricht was tried and convicted denied him due process and a fair trial:

“The government’s considerable efforts at keeping this monumental scandal from being aired at Ross Ulbricht’s trial is itself scandalous.”

Dratel at one point moved to adjourn the trial until the investigation was complete, but was denied, he said, despite it being “apparent that the investigation was nearing a conclusion.” The investigation into Force revealed that he procured hundreds of thousands of dollars in bitcoin through fraud, blackmail and extortion; he deposited $757,000 into bank accounts between April 2013 and May 2014, well beyond his annual salary of $150,000, according to the complaint unsealed today.

During that time, he paid off his mortgage, paid off a government loan and made numerous investments, Internal Revenue Service Special Agent Tigran Gambaryan wrote in an affidavit.

As the lead undercover investigator, Force was in frequent communication with Ulbricht through the Silk Road website, where Ulbricht went by “Dread Pirate Roberts” and Force went by the alias “Nob,” claiming to be a drug smuggler located outside the U.S. Force, as Nob, told Ulbricht he had access to a corrupt government investigator named Kevin and was paying him for information about Silk Road.

He claimed he had access to information about the investigation and offered to sell it to Ulbricht, according to Gambaryan. During that time, Force kept encryption keys and passwords he used to securely communicate with Ulbricht secret from federal prosecutors, despite their insistence they needed copies of all communications. At one point Ulbricht even sent Nob unencrypted communications regarding a payment, and Force responded to instruct Ulbricht to always use encryption, a response Gambaryan said had no legitimate purpose in the investigation.

Force also approached Ulbricht as another user, “French Maid,” who claimed to have further information about the investigation into Silk Road. Force allegedly sold him the information for about $100,000, investigators learned from documents seized on Ulbricht’s computer. Later, Force unsuccessfully tried to extort Ulbricht for $250,000 to purportedly withhold information from federal investigators, including the true identity of Dread Pirate Roberts, according to the complaint.

Going by the name “Death From Above,” Force told Ulbricht he had learned his true name and knew of his involvement in an alleged murder plot. However, documents seized from Ulbricht’s computer indicate he never believed this story and refused to pay “Death From Above,” according to the complaint.

Logs of Force’s computer showed him posting under the “Death From Above” pseudonym. Force made complex bitcoin transactions in an attempt to launder the money, including transferring $235,000 to an account he controlled in Panama, according to the complaint.

Meanwhile, he invested $110,000 in a bitcoin exchange company, CoinMKT, and worked running criminal background checks and as their de facto chief compliance officer, according to the complaint. He used his authority in that position to steal $297,000 from a California resident by claiming he was under federal investigation, the investigation revealed.

Force worked alongside Bridges, a computer forensic expert assigned to the investigation, and the two collaborated on money laundering techniques and closely watched the price of bitcoin to maximize their profits, according to the complaint. Bridges allegedly orchestrated the theft of more than $820,000 worth of bitcoin from the Silk Road website after obtaining administration credentials from the investigation.

A drug dealer and Silk Road employee, who went by the name “Flush” on the service, was arrested and agreed to provide investigators with inside information on the website. He turned over the “Flush” account and showed investigators, including Bridges, how to reset passwords on site.

The day after Bridges was debriefed on Jan. 25, 2013, there was a series of sizeable thefts across the Silk Road website accomplished through resetting vendor passwords. Ulbricht told Nob, Force’s undercover account, that their internal investigation indicated the thefts were linked to Flush’s account. Ulbricht allegedly asked Nob to hire a hit man to kill Flush, according to the complaint.

Bridges allegedly collected the stolen money in a separate account he created and sought assistance from Force in laundering the money. He eventually moved the money into a now-defunct bitcoin exchange from Japan and then a dummy corporation he created. Bridges transferred $820,000 to the company in nine wire transfers between March 6, 2013 and May 7, 2013. He later started moving the money into his personal accounts.

The final transfer Bridges made came a day before the Japanese bitcoin exchange firm, Mt. Gox, was served a federal seizure warrant for $2.1 million. Bridges was the affiant for that warrant, according to the complaint.

The investigation into the two began in early May 2014. Force resigned shortly after the investigation was opened, while Bridges remained with the agency until March 18 of this year. He resigned abruptly upon learning he was being suspended, and allegedly attempted to hide and wipe an Apple laptop when investigators instructed him to check it into evidence.

The alleged actions by the two agents appears to have compromised numerous aspects of the federal investigation, including alerting Ulbricht and others that they were being investigated and its progress. Ulbricht’s attorney said today that much of the government’s evidence is inextricable from the corruption.

Dratel said:

“It is clear from this Complaint that fundamentally the government’s investigation of Mr. Ulbricht lacked any integrity, and was wholly and fatally compromised from the inside. ..¬†At Mr. Ulbricht’s trial, knowing full well the corruption alleged in the Complaint made public today, the government still aggressively precluded much of that evidence, and kept it from the jury.”