Last year, Ulbricht was indicted on charges of conspiracy to distribute narcotics, operating a continuing criminal enterprise, conspiracy to commit computer hacking, and money laundering, all based on his alleged position as owner and operator of the deep web’s Silk Road drug marketplace. Last month, Ulbricht and his attorney, Joshua Dratel, filed a motion to dismiss all charges based on the argument that Ulbricht operated as a “digital landlord” who is not liable for what was happening in his digital house—in this case, Silk Road.
This is what Silk Road looked like back when Ross Ulbricht allegedly managed it. Image: Silk Road Screengrab
Dratel also argued that Ulbricht cannot be charged with money laundering, because bitcoins aren’t “funds,” and suggested that, because the whole thing took place on the internet, Ulbricht was afforded additional protections, and even suggested that convicting Ulbricht would have a “chilling” effect on free speech.
Well, US District Attorney Preet Bharara just filed his opposition to the motion to dismiss, and Ulbricht's defense does not look sturdy, provided the government actually has the evidence it alleges.
In the 45-page document, Bharara suggests that “the arm of the law, however, is far longer than Ulbricht imagines it to be,” and says that Ulbricht is “hardly in a position to claim ignorance of any wrongdoing” and that "it hardly matters that Ulbricht's conduct took place on the Internet. The federal criminal laws are expansive and adaptable, and readily reach his conduct online to the same extent as if it occurred on the street."
“Anyone with an ounce of common sense in Ulbricht’s position would have known that what he was doing—running an enormous black market for illegal drugs, malicious software, and other illicit goods and services—was against the law,” he wrote.
The whole document, embedded below, is worth at least skimming through, as it’s pretty instrumental in looking at how the government is going to argue these sorts of cases moving forward. Ulbricht’s attorney says he was an ignorant landlord who had no idea what was happening on Silk Road, while the government points to the fact that Ulbricht allegedly took a cut of every transaction that happened on the site, claimed he was “captain of [the] ship” and was deeply involved in the operation of the site, regardless of whether he actually ever touched a drug or not.
“Ulbricht was not merely a ‘digital landlord.’ A mere landlord does not recruit drug dealers to sell on his premises, or control the terms on which they conduct business, or take a cut from their sales, or protect their activities from law enforcement,” Bharara wrote. “Nor were the drug dealers on Silk Road mere ‘tenants,’ whose criminal conduct Ulbricht unknowingly allowed or even knowingly tolerated. They were Ulbricht’s partners. They did business with his encouragement and approval, paid a commission to him on each sale, and relied on the protection of the anonymous marketplace he designed for this specific purpose. That is the stuff of conspiracy, not a mere landlord-tenant relationship.”
Bharara goes on to cite two court cases—United States v. Gatien, in which the owner of a nightclub was convicted for allowing and encouraging drug dealers to sell inside the club, and United States v. Willems, in which eight people were charged and convicted of conspiracy for operating an online drug ring in 2011.
Ulbricht’s attorney also suggests that the hacking conspiracy charge should be dropped because, although malware was sold on Silk Road, Ulbricht had no idea how it would be used. To that, the government suggests that they have enough evidence up their sleeves to prove the charges at trial, but that even a cursory glance at the facts—Silk Road’s very nature was anonymous, there were software listings such as “Hack ANY Facebook Account,” “Email Account Cracker,” and “USB Password/File Stealer Pack—suggests the charges won't be dropped before trial.
At the same time, charging Ulbricht for the advertised (or purported, if you prefer) utility of vendors' hacking tools seems to be a stretch, and perhaps a concerning one. Convicting Ulbricht based on evidence that vendors were merely advertising illegal goods would be a more tenuous argument than if there was actual proof that Silk Road hacking vendors were delivering tools used for actual hacks, and it will be interesting to see how the court rules if the case does indeed go to trial.
Finally, Bharara says that Ulbricht and Dratel’s argument that bitcoins aren’t “funds” in the traditional sense and thus can’t be used for money laundering is off base. In the motion to dismiss, Dratel argues that the IRS doesn’t consider bitcoins to be “currency,” and so are exempt from money laundering statutes. Bharara says that’s not the case.
In United States v. Day, the defendant similarly argued that gold should not classified as “funds,” an argument the court threw out because it would “turn the transportation money laundering statute on its head, creating an odd safe harbor for criminals to transport and conceal their criminal proceeds where they engage in more deceit and concealment, not less.”
The statute used to charge Ulbricht, Bharara wrote, defines the words “funds” and “financial transaction” very broadly and a bitcoin transaction falls well within the definition of a financial transaction, which is “a transaction which in any way or degree affects interstate or foreign commerce involving the movement of funds by wire or other means.”
“The IRS Guidance addresses ‘only the US federal tax consequences’ of virtual currency transactions,” Bharara wrote, not the legal implications of them. “In short, bitcoins are not exempt from the money laundering laws.”
Sometime in the next couple weeks, a judge will decide on whether Ulbricht will get off the hook without a trial or accepting a plea deal, but given this latest document, I wouldn’t count on that happening.