Silk Road dealer found a hungry market for mail order drugs

The testimony of the dealer, Michael Duch, should help federal prosecutors show that the Silk Road was a major hub for selling illegal drugs online. That's a key element in their case against Ross Ulbricht, who's on trial at the U.S. District Court in Manhattan for narcotics and criminal enterprise charges.

According to prosecutors, Silk Road facilitated the exchange of $1.2 billion in illegal goods, mostly drugs, and generated $80 million in commissions between 2011 and October 2013, when it was closed by law enforcement agents. Like an eBay for unlawful goods, Silk Road matched sellers with buyers who used bitcoins to pay for goods that were delivered through the mail.

In court Wednesday, Duch testified that he got into selling drugs on Silk Road after his own heroin habit, which was costing him $2,000 per week, exhausted his savings and the income he made as an independent computer consultant, which paid $75,000 a year.

He was arrested outside of the post office in Monroe, New York, in October 2013, where he was attempting to mail packages with heroin inside. Duch, who pled guilty and is awaiting his own sentencing in jail, faces up to 40 years imprisonment. He is cooperating with authorities to get his sentence reduced.

Duch told jurors said he first came to Silk Road to buy drugs including pain killers, cocaine, ecstasy, hashish and heroin -- though he already had a local source for that. He became addicted to pain killers after a sporting accident in 2007, he said, and switched to heroin because it was a less expensive alternative.

Seeing the "relative ease" and "perceived level of safety" that Silk Road seemed to promise, he decided to become a dealer on the site as well, reselling heroin from a local street dealer.

One advantage Silk Road provided was that vendors could charge a large mark-up on goods, Duch testified. Duch would typically buy heroin in individual serving sized packets, known as "stamps" on the street, for $3 each. A stamp usually contains about .1 grams of the drug. He would resell them on Silk Road for $6 each, enjoying a markup of 100 percent. The bags were sold in lots of 10, or as a "brick" of 50. For shipping, the goods were packaged in moisture barrier bags that can conceal the odor of drugs from police.

He suspects he could charge such a high premium because many of the orders came from locations around the country without a local supply of the drug.

Using a spreadsheet that he kept to record his sales, Duch estimated that in his six months of operation he fulfilled over 2,414 orders through Silk Road, or about 31,827 bags. He sold about 3.18 kilograms (just over 7 pounds) of heroin in total through the site.

In their case against Ulbricht, federal prosecutors need to convince the jury a large amount of drugs flowed through Silk Road. As of October 2013, when law enforcement agencies closed the site, it contained offers for 13,000 different products, mostly drugs.

The prosecutors maintain Ulbricht was the mastermind behind the Silk Road. He is charged with narcotics conspiracy, engaging in a continuing criminal enterprise, conspiracy to commit computer hacking and money laundering. The narcotics and criminal enterprise charges carry maximum penalties of life in prison. Ulbricht has pled not guilty to all charges.

His defense lawyer, Joshua Dratel, has argued that Ulbricht handed off the site to other operators shortly after he started it, and that they lured back immediately before his arrest to serve as a fall guy.

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com