Last week, Robert Faiella, the operator of a Bitcoin exchange connected with online black market bazaar Silk Road, received a four-year prison sentence after pleading guilty to operating an illegal money business.
Bloomberg reported that Faiella, a former plumber living in Florida, told US District Judge Jed Rakoff on January 20 that he exchanged Bitcoin under the name “BTCKing” for use in online drug deals in order to support his family after back troubles disabled him.
“At the time of the event, I saw no other away,” Faiella said at his sentence hearing in the Manhattan federal court. “It still doesn’t mitigate that I broke the law.”
The New York Times reported that Rakoff noted that Faiella had been convicted in a tax case before and his sentence needed to be long enough to deter him from committing other crimes.
“In his case, clearly he didn’t learn the lesson,” said Rakoff, who also ordered Faiella to forfeit $950,000.
Faiella was charged last spring with Charlie Shrem, a former Bitcoin Foundation vice chairman who received a two-year prison sentence in December. The case arose out of an investigation into Silk Road, where customers used Bitcoin to buy drugs and other illicit items anonymously.
The Times reported that Faiella and Shrem were accused of letting more than $1 million worth of Bitcoins reach Silk Road. Authorities have alleged that the website’s San Francisco operator generated more than $1 billion in illicit activity from 2011 until the site was shut down in 2013.
Prosecutors said Shrem failed to file even one suspicious-activity report with the US Department of Treasury with regard to Faiella.
The Times said Faiella must report to prison on March 3.
Ross Ulbricht, who says he founded Silk Road, is currently on trial on conspiracy and Internet drug trafficking charges.
Having denied the charges, Ulbricht claimed he launched Silk Road as an “economic experiment,” then left the website a few months later when it became too stressful for him, reported Bloomberg.
Ulbricht alleged he was set up as a “fall guy” by Mark Karpeles, who had operated the now-defunct Mt. Gox Bitcoin exchange. Jared Der-Yeghiayan, a Department of Homeland Security special agent, testified at Ulbricht’s trial that he believed in mid-2013 that Karpeles operated Silk Road. Bloomberg reported that Der-Yeghiayan told jurors that investigators later determined that Karpeles was not involved. Karpeles has denied having anything to do with Silk Road.
Last Wednesday, prosecutors in the Ulbricht case showed jurors excerpts from a digital journal found on a laptop seized when the FBI arrested Ulbricht, reported Reuters.
“Silk Road is going to become a phenomenon and at least one person will tell me about it, unknowingly that I was its creator,” said a 2010 entry on the laptop.
Prosecutors introduced the journal entries, along with chat logs found on the laptop, in an effort to demonstrate Ulbricht was Silk Road’s operator, using the alias “Dread Pirate Roberts.”
Reuters reported that a 2010 entry on Ulbricht’s laptop said Silk Road was initially going to be called “Underground Brokers,” and “the idea was to create a website where people could buy anything anonymously, with no trail whatsoever that could lead back to them.”
A 2011 entry detailed Silk Road’s launch, a “huge spike in signups” after getting media attention, and calls by two US senators for the site’s shutdown.
“I was mentally taxed, and now I felt extremely vulnerable and scared,” said the journal, as reported by Reuters. “The US govt, my main enemy was aware of me and some of its members were calling for my destruction.”
An entry dated December 29, 2011 included details of going out that day with a woman who knew “I worked in bitcoin” and telling her about having “secrets.”
“It felt wrong to lie completely so I tried to tell the truth without revealing the bad part, but now I am in a jam,” said the entry. “Everyone knows too much. Dammit.”
Silk Road thrived, and as Ulbricht made as much as $25,000 per month, he decided to take the site “to the next level,” said the journal, as reported by the New York Times.
The newspaper said the journal described the hiring of employees – prosecutors have said Ulbricht never met them but knew and supervised them “purely online” – one of whom had “helped me see a larger vision.”
“A brand that people can come to trust and rally behind,” read the journal. “Silk Road chat, Silk Road exchange, Silk Road credit union, Silk Road market, Silk Road everything!”
On Thursday, jurors heard testimony from Richard Bates, an eBay software engineer who was a college friend and one-time programming partner of Ulbricht’s.
Wired reported that from late 2010 until at least 2011, Bates said he gave Ulbricht coding advice on project Ulbricht called “top secret.” When Bates ultimately refused to offer Ulbricht any more help unless he disclosed project details, Bates said that Ulbricht showed him Silk Road for the first time on a laptop in Bates’ home.
“I told him, tell me about this or leave me out of it,” Bates said, as reported by Wired. “He told me about it.”
Bates testified that by November 2011, Ulbricht would tell him that he had sold Silk Road and was no longer involved in the website. But the prosecution showed a chat log from the following month pulled from Ulbricht’s computer in which Ulbricht appeared to tell an associate involved with Silk Road that he lied to two people about selling the site and in fact still maintained control of it.
Bates testified that Ulbricht’s initial confession in early 2011 revealed that he was working on a “website where people can buy drugs,” reported Wired. Using a neighbor’s open Wi-Fi to assuage Bates’ worries about surveillance, Ulbricht showed him the website. “I remember seeing the home page, the green camel [of the Silk Road logo] for the first time, and pictures of drugs,” said Bates in response to questions from prosecutor Timothy Howard. “I was shocked and very intrigued. I didn’t know how something like this could be possible.”
Bates told the court he wasn’t the only one of Ulbricht’s contacts who was aware of his involvement in Silk Road, naming Ulbricht’s girlfriend, Julia, and a third individual Julia had told. Wired reported that Bates himself said he also “tried” to tell a friend about his involvement with Silk Road, but was not sure if she had gotten the message. “I tried to confide in a friend of mine,” said Bates. “I don’t think it was communicated across. We were both drunk.”
Despite his initial shock after Ulbricht revealed his project, Bates said he continued to advise Ulbricht on Silk Road programming issues. The pair would later collaborate on plans for a Bitcoin exchange, Bates testified. Wired reported that Bates also used Silk Road to purchase drugs using the alias “melee.” He told jurors that Ulbricht had personally given him a bag of psychedelic mushrooms he’d grown and stored in a large trash bag, offering further evidence that Ulbricht had sold his own homemade mushrooms as the first product on Silk Road.
Bates said that at one point in 2011, Ulbricht offered him a position as a Silk Road administrator, but Bates turned him down, telling him he already had a job. The pair planned to launch a Bitcoin exchange that could potentially be used “to launder money,” splitting the profits 60/40 in Ulbricht’s favor. However, Bates said he was busy with his job and never signed that contract that Ulbricht drew to seal the partnership. Asked how much Ulbricht compensated him for his help on Silk Road, Bates replied, “Nothing but his friendship.”
Wired reported that according to Bates, Ulbricht appeared to have become increasingly concerned that Bates might reveal him. The prosecution showed jurors a chat between the two men that took place in June 2011, in which Ulbricht told Bates, “You gotta keep my secret, buddy.” Bates said, “I haven’t told anyone and I don’t intend to,” to which Ulbricht replied, “I know I can trust you.”
Bates testified that in November 2011, Ulbricht came to his home in a panic. Someone had posted on his Facebook page, “I’m sure the authorities would be very interested in your drug-running site.” Ulbricht had quickly removed the post and unfriended the individual who wrote it.
Bates said that at the time, he warned Ulbricht to shut down Silk Road, but Ulbricht said he couldn’t because he’d already sold the site to someone else. When asked by the prosecution if he believed Ulbricht, Bates said he did.
Following Ulbricht’s arrest in October 2013, Bates said FBI agents paid him a visit. He testified that he initially lied to them about his involvement with Silk Road, the abandoned Bitcoin exchange, and his drug purchases before confessing. Bates eventually agreed to serve as a witness against Ulbricht to avoid prosecution.
Wired reported that in cross examination, Ulbricht’s attorney, Joshua Dratel, stressed to the jury that Bates had agreed to testify against his client to avoid facing his own legal consequences. Bates admitted that “I knew I could go to prison for a very long time.”
“You chose to be there, on the witness stand, rather than there, as a defendant?” asked Dratel, pointing to Ulbricht.
At that point, the prosecution objected and the judge sustained the objection. Bates did not respond to the question, said Wired.