Two federal agents who took part in the US government's efforts to take down illicit online black market Silk Road have been charged with fraud for allegedly misusing funds denominated in bitcoin while on assignment.
Perhaps most notably, the Department of Justice (DOJ) alleges special agent with the US Secret Service (USSS) Shaun Bridges "diverted" more than $800,000 in digital currency to his personal accounts without authorization during the investigation.
Likewise, Drug Enforcement Administration (DEA) agent Carl Mark Force IV is purported to have "solicited and received" digital currency as part of the investigation into Silk Road, using "fake online personas" to "steal from the government and targets of the investigation".
Both Bridges and Force are being charged with money laundering and wire fraud. Force has also been separately charged with the theft of government property.
The full complaint includes the testimony of Tigran Gambaryan, special agent with the criminal investigation division of the Internal Revenue Service's (IRS) Cyber Crimes Unit Liason.
"Force and Bridges abused their positions as federal agents and engaged in a scheme to defraud a variety of third-parties, the public and the government, all for their own financial enrichment."
The accusations are detailed in a federal complaint submitted in the Northern District of California on 25th March and unsealed today. The investigation of the agents was overseen by the city's US attorney’s office in San Francisco and the Justice Department.
The DOJ goes on to state that Force may have committed a number of potentially troubling actions during his tenure on the Silk Road case, including selling sensitive information.
"In one such transaction, Force allegedly sold information about the government’s investigation to the target of the investigation," the release reads.
During his tenure, Force corresponded with the Dread Pirate Roberts, the site's operator, through an alias 'Nob', though not all communications, the filing said, have been saved.
The 46-year-old agent is alleged to have "invested in" and "worked for" digital currency exchange company CoinMKT while with the DEA. The DOJ alleges he authorized this company to freeze customer accounts without direction, then transferred these funds to a personal account.
The DOJ contends the alleged misconduct extended to Force making unapproved declarations to industry companies, adding:
"Force allegedly sent an unauthorized Justice Department subpoena to an online payment service directing that it unfreeze his personal account."
Bridges' activity was equally scrutinized in the release, with the DOJ stating that he placed assets into accounts at failed bitcoin exchange Mt Gox days before seeking a warrant against the exchange.
Gambaryan's testimony further illuminates the formal relationships in which Force sought to use his government position for gain.
For example, Gambaryan suggested Force invested $110,000 worth of bitcoin into CoinMKT, an exchange that has since been purchased by competitor ANX.
The full filing alleges:
"Force functioned as the de facto chief compliance officer for CoinMKT all while employed as a DEA agent, even allowing himself to be featured in CoinMKT's 'pitch decks' to venture capital investors and allowing himself to be listed as CoinMKT's anti-money laundering and/or compliance officer in order to benefit CoinMKT."
Conversations with CoinMKT included in the formal documents suggest Force implied he may be looking to leave the DEA to work with the company.
Gambaryan alleges that Force sent the unauthorized subpoena to digital payments startup Venmo to unfreeze his account, even directing the company not to contact the DOJ and "attempting to destroy" copies of the subpoena.
Relationship with DPR
Statements by Gambaryan suggest that Force and DPR had a relationship that perhaps evolved outside the boundaries of Force's mandate.
"At some point, Nob (Force) and DPR began ecrypting certain of these communications using what is known as PGP encryption," the investigator explained, adding that the tools necessary to access these files have not been made available to law enforcement by Force.
Gambaryan goes on to argue that, based on dialogue with other case experts, this practice "makes little sense" in the context of the investigation, in which statements made by DPR could have provided value to subsequent proceedings.
Further, the testimony seeks to draw conclusions based on the lack of information made available by Force, with Gambaryan alleging that the officer became increasingly unwilling to share the means to decrypt his communications as he began to communicate more frequently with DPR.
"I believe that FORCE, acting as Nob, instructed DPR to use PGP encryption in part to conceal the fact that DPR had made a 525 BTC payment to Nob (FORCE) that FORCE was not detailing in his official law enforcement reports," he said.
As supporting evidence, Gambaryan pointed to statements made by Force that suggested DPR never made the payment, as well as the unusual timing of a 525 BTC deposit in accounts controlled by Force on digital currency exchange CampBX.
'French maid' suspicions
In conducting the investigation, Gambaryan indicates that a file kept by DPR was found, in which the black market operator detailed the information he was collecting on government attempts to close Silk Road.
One name found in the log was 'French Maid' an alias that Gambaryan alleges was used by Force to further extort funds from DRP.
As a key point of evidence, Gambaryan suggests that French Maid was able to provide DPR with information that he was told that then CEO of Mt Gox Mark Karpeles had provided to law enforcement in connection with the investigation.
DPR offered French Maid $100,000 in bitcoin for the name, and though it was not clear any funds were paid, Gambaryan cited the fact that it was not widely known that Karpeles was being questioned as part of investigation as evidence such information had to have come from someone such as Force.
"Based on the emails I have reviewed, Force was one of a small group of individuals that knew of these discussion," the IRS agent stated.
Factors such as the type of encryption used by both the Nob and French Maid accounts are cited in the formal document.
In addition, Gambaryan said he was able to trace $98,000 in funds paid to French Maid back to accounts controlled by Force.
Yet another aspect of the alleged fraud involves major digital currency exchange, Bitstamp, which Gambaryan suggests blocked Force's accounts on multiple occasions on suspicions that he feels are likely to be validated.
For example, the filing suggests that Bitstamp at first rejected an application submitted by Force containing the fake identity documents he used in conjunction with the undercover investigation of Silk Road.
Force's activities soon drew the suspicions of Bitstamp, which requested more information of Force, including why he accessed the site via the anonymous web broswer Tor.
Unsatisfied with his answers, Gambaryan said Bitstamp froze and unfroze Force's account on multiple occasions.
"On or about May 2nd, 2014, Force emailed Bitstamp to request that they delete all transaction history associated with his account. I believe, based on my investigation and the timing of Force's request, this was an attempt by Force to conceal this activity," the filing reads.
The full complaint also elaborated on Bridges' alleged misconduct, suggesting that the $800,000 in bitcoin he used improperly was used to fund a personal investment account at online trading brokerage Fidelity.
His activities on the service were conducted through a personal limited liability company, Quantum International Investments, LLC.
The filing explains:
"Between March 6, 2013 through May 7, 2013, Bridges' Quantum Fidelity account in the United States received nine wire transfers from Mt Gox totaling approximately $820,000."
The DOJ reports Bridges "self-surrendered" on the charges today and will now appear before a magistrate. Force, the release states, was arrested on 27th March in Baltimore, and will also appear before a magistrate today. He resigned from his post on 4th of May at the start of the investigation.
Members of the DOJ, Federal Bureau of Investigation (FBI), Internal Revenue Service (IRS) and Department of Homeland Security (DHS) made the formal announcement regarding the charges.
Bridges and Force were Maryland natives, with Force hailing from Baltimore, while Bridges lived in Laurel, Maryland. Both were assigned to the Baltimore Silk Road Task Force, one of multiple investigations into the market and its activities.
The news marks the latest turn in the Silk Road case, which saw the conviction of website operator Ross Ulbricht on 4th February after a shorter-than-expected New York trial.
Ulbricht still faces separate murder-for-hire charges in Maryland.
CoinDesk has contacted the Department of Justice for further comment.