Bullion and Bandits: The Improbable Rise and Fall of E-Gold

MELBOURNE, Florida — In a sparsely decorated office suite two floors above a neighborhood of strip malls and car dealerships, former oncologist Douglas Jackson is struggling to resuscitate a dying dream.

Jackson, 51, is the maverick founder of E-Gold, the first-of-its-kind digital currency that was once used by millions of people in more than a hundred countries. Today the currency is barely alive.

Despite the shackle, Jackson’s conviction isn’t black and white. In a twist still unacknowledged by prosecutors, Jackson turned E-Gold for a time into one of law enforcement’s most productive honey pots, providing information that helped lead to the arrest and conviction of some of the web’s most wanted credit card thieves and hackers. He’s now working with regulatory agencies to try to bring back E-Gold, steps he says he would have taken voluntarily years ago if authorities had given him a chance.

“There was no indication at all that anyone had a problem with what he was doing,” says Richard Timberlake, a former economics professor at the University of Georgia and author of several books on U.S. banking. Timberlake visited Jackson at his E-Gold office in 1997 and vouches for Jackson’s innocent intentions. “He was always very honest and very forthright in what he was trying to do as a business. Even the Federal Reserve believed it was legitimate.”

At E-Gold’s peak, the currency would be backed by 3.8 metric tons of gold, valued at more than $85 million.

The federal government began to take notice in 2003, when the Secret Service launched an undercover operation against a website called Shadowcrew — a legendary forum for “carders” who trafficked in stolen credit and debit card numbers. Cyber crooks in Eastern Europe were stealing millions of card numbers in phishing and skimming scams, then passing the data to accomplices around the world. The low-end cashers coded the numbers onto blank cards, then siphoned money from ATMs and transmitted the bulk of proceeds back to the former Soviet bloc.

When authorities monitored the criminals’ communications, they discovered that E-Gold was among the carders’ preferred money-transfer methods, because the system allowed users to open accounts and transfer funds anonymously anywhere in the world.

He concedes he knew that Ponzi schemers and other scammers sometimes used his system , but he’d always responded to government subpoenas for information about suspicious customer accounts. So he contacted the Secret Service to ask why the agency hadn’t sought his help to track the crooks in theTimes story. The agency, which was already secretly targeting E-Gold, ignored him. (The Secret Service didn’t respond to interview inquiries for this story.)

The hammer dropped on E-Gold around 5 p.m. on a mild day in mid-December 2005. A herd of Chevy Suburbans wheeled up to Jackson’s house and expelled more than a dozen FBI and Secret Service agents. Simultaneously across town, the Justice Department’s “Operation Goldwire” unfolded with more agents raiding the offices of Gold and Silver Reserve, the company that operates E-Gold. A third group descended on a co-location facility in Orlando where E-Gold Limited, a holding company for E-Gold’s assets, racked its database servers.

The feds carted away more than 100 boxes of electronic records and paper files, including birth certificates, photos and a deed to the Jackson family burial plot. The gold and silver reserves remained safe overseas, but the government froze the company’s domestic bank accounts. Jackson’s venture was dissolving around him.

Jackson wasn’t sure what the feds hoped to find in all those records; once E-Gold got its systems back online he turned to his database for answers.

He scoured the system for suspicious transactions using key words like “cvv,” dumps” and “cob,” and the names of carders he’d read in the Times. He quickly discovered the disturbing truth about what his libertarian dream had become. “I found out there was quite a bit of stuff going on which law enforcement knew about, but wasn’t asking us about,” he says. “I found, holy smokes, there is a continuing pattern of these so-called carders. There’s, like, a ring that I can distinguish.”

One user named “Segvec” received more than half a million dollars from four others, including a Ukrainian named “Maksik” who sent a rapid stream of cash totaling $300,000. In the “memo” field of the transactions — where the sender can state a reason for the payment — Maksik noted that $17,000 was “for beer.” Another three transactions totaling $89,000 sent over a week’s time were supposedly for Sony Vaio computers.

A New York account-holder named “Potluck” had a pattern of buying $6,000 in postal money orders twice a month, then exchanging them for e-Gold to send to Ukraine. Over a year, he’d transmitted about $150,000.

Jackson had uncovered a constellation of shady accounts doing business with one another. He watched in amazement as the criminal activity expanded before his eyes, and balances in several accounts ballooned, with no sign that the account holder intended to move it out. Segvec alone amassed more than $700,000 in digital gold.

“They weren’t just using us as a good vehicle to trade their data, they were parking value in our system,” Jackson says. E-Gold had unwittingly become banker to the underworld.

Because users could sign up for E-Gold with aliases, there was no easy way for Jackson to determine the real identity of many of his suspects. But the criminals became vulnerable the moment they converted their virtual currency to local cash. This required them to do business with an E-Gold money exchanger — the online equivalent of currency exchangers at international airports — who’d ask for valid ID and contact information. Sometimes the criminals wanted their cash loaded to a debit card and mailed to a drop address, or wired to a traditional bank account; exchangers would have this data, too.

Jackson reached out to about a dozen exchangers in Europe and elsewhere with the account names he was tracking. Some criminals had provided the exchangers with fake credentials, but a surprising number had given their real names or addresses. Jackson soon had the identities of some of the most wanted figures in the underground.

One money exchanger in Northern Ireland revealed that “Segvec” routinely had packages sent to a Tokyo remailer, who forwarded them to a “Stephen Ceres” in Miami. The same exchanger also sold “Stephen Ceres” a Card One debit card with a daily load limit of $9,500. Jackson obtained a list of transactions on the card that linked it to a slew of ATM withdrawals in Miami suburbs. A storm of withdrawals during one five-minute period yielded the cardholder $8,000 in cash.

Jackson, who had been snubbed by the Secret Service and FBI, took the information he uncovered to the U.S. Postal Inspector Service, providing investigators with names, addresses and transaction histories. The postal inspectors passed the information to overseas allies, the FBI, and eventually to the Secret Service as well.

It was a devil’s bargain. Once the feds got a taste of what Jackson could provide, the postal agents began peppering him with requests for more data on other accounts, promising Jackson they’d follow up with a formal court order or subpoena later. He cooperated fully, despite the fact that it violated his user agreement with customers. “We never did get any legal cover whatsoever,” he says ruefully. “We never got our trap-and-trace. We never got our pen register.”

In March 2006, inspectors asked him for information on a carder named “Jilsi,” whom Jackson traced to a money exchanger in the United Kingdom. The exchanger gave him a real name — Renu Subramaniam — a 2-year-old confirmed phone number and the time and location of deposits Subramaniam had made to two London banks. Jackson passed the information to inspectors who told him that the phone number, if correct, would be “the break in the case we have been waiting for, for quite a long time.”

It wasn’t long before carders were being taken down. In May 2007, Markus Kellerer, aka Matrix 001, was arrested in Germany. In July 2007, Subramaniam, who had been an administrator on a carding site called DarkMarket, was arrested in Britain. That same month, authorities in Florida arrested Julio Lopez, aka Blinky, who was connected to a ring of Cuban carders. And last year in Miami, authorities arrested Albert Gonzalez, aka Segvec, allegedly one of the masterminds behind the hack of TJX and other businesses. Jackson had provided authorities with information on all of them.

An FBI agent who was involved in the arrest of a number of carders, but asked not to be identified because he wasn’t authorized to speak, acknowledged that information Jackson provided was “instrumental in helping track people down.”

A year after he began his probe, Jackson began blocking the accounts responsible for the suspicious activity, preventing suspected crooks from getting their loot. E-Gold was on its way to becoming clean, relatively speaking.

As far as the feds were concerned, however, it was too late. A few months later, in April 2007, the Justice Department wrapped up its four-year-long investigation by indicting Jackson and his colleagues on federal charges of money laundering, conspiracy and operating an unlicensed money transmitting business.

“Douglas Jackson and his associates operated a sophisticated and widespread international money remitting business, unsupervised and unregulated by any entity in the world, which allowed for anonymous transfers of value at a click of a mouse,” said U.S. Attorney Jeffrey A. Taylor for the District of Columbia in a press release. “Not surprisingly, criminals of every stripe gravitated to E-Gold as a place to move their money with impunity. As alleged in the indictment, the defendants in this case knowingly allowed them to do so and profited from their crimes.”

Clement, the attorney, disputes the government’s depiction of Jackson. “They automatically assume that E-Gold somehow made it easy for these people involved in money laundering, or [sought criminals] as clients,” says Clement. “But that’s completely the opposite of Doug’s attitude toward any kind of illegal behavior. It would be crazy for somebody to seek out that kind of business.”

Jackson, who’d hocked his future to start E-Gold, now faced the potential of a federal prison term. He was frustrated and confused.

“It never crossed my mind that anyone could seriously want people like us in prison,” he says. “But I guess my bigger fear was that we would go bankrupt, and there would be a train wreck of people that had trusted value to us who couldn’t get their money.”

SOURCED FROM WIRED:

Cybercrime Supersite ‘DarkMarket’ Was FBI Sting, Documents Confirm

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He helped bust one of the biggest carder forums ever, and then the FEDS bust him.

Feels kinda like Feds EAT their young.

"Nullum Beneficium Est Impunitum"

Will the Feds eat me?

Gerald

Internet Anthropologist

Labels: This scares me. terrorist don't scare me.