Federal agent identifies bitcoin trader as initial culprit at trial of Silk Road website founder

The Manhattan federal trial of Californian Ross Ulbricht for allegedly running the Silk Road underground drug website took a twist Thursday when a government agent admitted that just six weeks before Ulbricht's arrest investigators targeted a prominent bitcoin trader as the culprit.

The testimony about a search warrant affidavit accusing Mark Karpeles -- head of Mt. Gox, once the largest bitcoin exchange in the world -- of being the likely mastermind behind Silk Road bolstered defense claims that Ulbricht was a fall guy.

"They had this guy in their sights and he has never been charged," defense lawyer Josh Dratel told the judge after federal homeland security agent Jared Der-Yeghiayan acknowledged his suspicion of Karpeles during cross-examination. "Our position is he set up Mr. Ulbricht."

Ulbricht, 30, faces up to life in prison on charges that under the online name "Dread Pirate Roberts" he set up Silk Road and from 2011 to 2013 used encryption technology and untraceable bitcoin currency to host millions of dollars in drug sales cloaked from law enforcement.

Supporters of the ex-Eagle Scout say the case raises important questions about Internet freedom and the liability of websites for customers' behavior, but it is also seen as a test of government's ability to penetrate, trace and successfully prosecute sophisticated cybercrime.

Prosecutors said that, after a two-year probe, they infiltrated Silk Road and caught Ulbricht red-handed, arresting him on Oct. 1, 2013, chatting with an undercover agent on his laptop while logged in as "Dread Pirate Roberts."

In Thursday's testimony, however, Der-Yeghiayan said that in mid-August, just six weeks earlier, he identified Karpeles -- a well-known French bitcoin entrepreneur residing in Japan -- as the probable culprit in an application for a warrant to secretly examine Karpeles' Gmail account.

Among other factors, the agent said, he believed Karpeles had the programming and e-commerce background to set up Silk Road, identified an unusual software used on Silk Road that Karpeles used on his websites, and thought Karpeles' motive was to create demand for bitcoins that would "drive the price up" on his enormous holdings.

After prosecutors objected to the cross-examination, U.S. District Judge Katherine Forrest released the jury until next week to give her time to sort out legal issues relating to the Karpeles testimony.

The defense contends Karpeles lured Ulbricht to take over the "Dread Pirate Roberts" identity and get the blame when investigators closed in. The agent and prosecutors have not yet explained why their focus suddenly shifted from Karpeles to Ulbricht.

Mt. Gox collapsed last year. Eric Macey, a lawyer for Karpeles, called the effort to shift blame to his client "preposterous, or perhaps hysterical."