Mark Karpeles, former CEO of now defunct bitcoin exchange Mt. Gox, has been found guilty and given a suspended sentence of 2.6 years.
The Mt. Gox case could be close to concluding one of the most significant stages of a 5-year odyssey. According to Channel News Asia, the Japanese court in charge of the trial is expected to issue a verdict on Karpeles’ innocence or guilt this Friday.
Karpeles faces up to 10 years on charges of faking digital data and embezzling millions of dollars. In case of being found guilty, it is very probable that this Friday we all learn about the penalty that awaits him. The Court should subtract the five years him has already served in a Japanese prison while awaiting sentencing from his sentence.
During the entire trial Mark Karpeles, 33, has pleaded not guilty. Statements collected by the media during the trial portray a Karpeles convinced of his innocence but aware of the difficulty of proving it.
“I swear to God that I am innocent … Most people will not believe what I say. The only solution I have is to actually find the real culprits.”
MtGox and The Bitcoin (BTC) Tragedy: From “Hack” to “Embezzlement”
Mark Karpeles was CEO of MtGox, the most important crypto exchange during 2014, handling over 70% of the total Bitcoin trading volume by the time. In February 2014 the firm lost 850000 Bitcoin (BTC) in strange circumstances.
Shortly after, Karpeles published a post on the Exchange website saying he “found” 200000 Bitcoin (BTC) in an “old-format” cold wallet.
In 2015, an investigation by the Japanese cybersecurity firm WizSec concluded that “most or all of the missing bitcoins were stolen straight out of the Mt. Gox hot wallet over time, beginning in late 2011.
The evolution of the events led the authorities to accuse Karpeles of playing a direct part in the loss of the Bitcoins. In statements for Asian media, Satoshi Mihira, chief attorney at Mizuho Chuo law firm explained that a hack directs investigations to find the perpetrator of the crime while embezzlement directs investigations towards Karpeles as the main suspect.
“If it was an outside hacker who stole the currency, it’s a problem. But if he stole even part of the money, it would be embezzlement …
His defense counsel needs a high level of evidence to win an innocent verdict,”
The situation is quite complex for Karpeles: Not only was it virtually impossible for him to present the evidence necessary to clean his image of any doubt, but there is also a “tradition” in the Japanese courts of having a high conviction rate (some speak of a 99% chance of being found guilty).
This being the most likely scenario, the defense is expected to appeal the verdict.
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The former CEO of collapsed bitcoin exchange Mt. Gox has been refused a motion to stay a U.S. court case brought by former investors.
The former CEO of now-defunct cryptocurrency exchange Mt. Gox, Mark Karpeles, claimed his innocence as the trial nears its end.
In court in Tokyo on Thursday, Karpeles apologized for not being able to avoid his exchange being hacked, but also reiterated the idea that he is innocent. As Cointelegraph Japan reported, in July, he declared that he treated the subtracted money “as a loan from the company,” and that he was going to settle later.
Mark Karpeles has been charged with embezzlement of approximately 340 million yen (about $3 million) from the exchange and manipulating its data to inflate its cash balance. Karpeles allegedly transferred 340 million yen belonging to customers from a Mt. Gox account to his personal account between September and December 2013.
As Cointelegraph recently reported, prosecutors asked for a ten-year prison sentence for Karpeles, who is currently facing the charges in Japan. During his trial, Karpeles has repeatedly denied having stolen money or manipulated Mt. Gox ledgers.
According to today’s report, the ruling for Karpeles’ trial is set to be delivered on March 15, 2019.
Nobuaki Kobayashi, the trustee of Mt.Gox, released a statement in September in which he claims to have liquidated almost 26 billion yen (about $230 million) in Bitcoin (BTC) and Bitcoin Cash (BCH) in around four months.
In the document, he informed the public that since the third quarter of 2017 he sold 24,658 BTC and 25,331 BCH.
In his closing arguments in a Tokyo court, Mark Karpeles, former CEO of collapsed bitcoin exchange Mt. Gox, said he did not embezzle funds.
Japanese Prosecutors are clamoring a 10-year jail term for former CEO of defunct Japanese Bitcoin exchange, Mark Karpelès. This comes in the midst of the extension announced for civil rehabilitation claims.
More Trouble for Former Mt. Gox Chief
The nightmare does not seem to end for Mark Karpelès, as the Nikkei Asian Review today (December 12) reported that Japanese prosecutors at the Tokyo District Court, called for a 10-year jail term for the Mt. Gox CEO for embezzlement. According to the prosecutors, Karpelès embezzled 340 million yen from accounts belonging to customers in the last quarter of 2013.
Furthermore, the Japanese prosecutors claim that Karpelès used the embezzled funds for personal purposes, such as rent and business acquisitions. The prosecutors are also accusing the Mt. Gox Chief of forging the company’s data, thereby manipulating accounts illegally.
However, during the court proceedings, the defendant, Mark Karpelès, denied the accusations leveled against him. Karpelès responding to the embezzlement accusations stated that the funds acted as a temporary loan.
In response to the former CEO’s statement, the prosecutors at the court said:
There was no documentation of loans, and there was no intention of paying back the money.
The prosecutors went further to demand a harsh sentence for Karpelès. According to the Japanese prosecutors, the Mt. Gox Chief betrayed his clients’ confidence and misused most of their funds.
Former French CEO of defunct Japanese exchange, Mt. Gox, was initially arrested in 2015 for forging the exchange’s system to inflate its account. The Mt. Gox Chief stood trial two years later in July 2017 for the collapse of the company and embezzling funds. Karpelès in a later interview likened the experience of the company’s hack to falling from a building.
Mt. Gox’s Attempts to Pay its Debts
The collapsed Japanese Bitcoin exchange, Mt. Gox, has made moves to compensate its victims following the massive hack in 2014. Former clients of the defunct company called for civil rehabilitation proceedings in 2017, with the courts granting their claims in 2018.
Rehabilitation trustee for the defunct Japanese exchange, Nobuaki Kobayashi, announced the commencement of the civil rehabilitation proceedings. Initially meant for individual creditors, the rehabilitation process later extended to corporate creditors. The deadline for filing claims was October 22, 2018.
However, Kobayashi announced an extension for filing claims to December 2018 for creditors who were yet to file claims. Although, the rehabilitation officer emphasized that only the court had the power to accept further claims after the initial deadline.
Image courtesy of Shutterstock.
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Mark Karpeles has repeatedly denied criminal activity related to either the Mt. Gox hack or the alleged embezzlement of funds.
Karpeles, who presided over the major hack of Mt. Gox in 2014 that resulted in the loss of 850,000 BTC ($2.87 billion), has repeated denied any wrongdoing.
In a Tokyo court on Wednesday, prosecutors read out an indictment against the embattled executive, who is currently confined to Japan as a condition of his bail, claiming he stole funds worth 340 million yen ($3 million). The prosecution has asked for a ten-year prison sentence for Karpeles’ alleged embezzlement.
While not connected to the hack itself, Karpeles has attracted the attention of authorities as part of the investigation into how Mt. Gox lost so much money.
He has often protested his innocence and publicly appealed to affected traders, speaking to his regret at the events.
The exchange continues to conduct civil rehabilitation proceedings, which should see victims compensated for their losses.
According to Nikkei, Karpeles today denied he “hacked and stole” money on his own, as well as manipulated Mt. Gox ledgers and used the embezzled funds to pay for property rent, furniture and business acquisitions.
It remains unknown when the trail will conclude, the publication added.
Japanese prosecutors are seeking a 10-year sentence for former Mt. Gox CEO Mark Karpeles over embezzlement of user funds.
The story of the infamous cryptocurrency exchange Mt. Gox seems to be taking a twist that could bring a relatively happy resolution to one of the most dramatic episodes in the short history of digital money. As the gates are now open for the Japan-based exchange’s creditors to file rehabilitation claims, chances are that most of the roughly 24,000 bereft patrons will eventually get their funds back and even see some returns on their involuntary, four-year long investment.
The development came along thanks to a group of Mt. Gox creditors successfully mounting an effort to pull the exchange out of bankruptcy proceedings and thrust it into an alternative legal process, known as civil rehabilitation. While some of the defrauded customers still keep pressing for criminal charges against the exchange’s former CEO Mark Karpelès personally, the bankruptcy estate funds are now managed by an independent trustee — Japanese lawyer Nobuaki Kobayashi — who oversees the civil reimbursement process.
The logic of the move is that the latter mode, according to Japanese law, would allow for distributing the exchange’s outstanding assets (worth more than $1.3 billion as of press time) among those who had lost their funds amid Mt. Gox’s collapse in 2014. Had it remained in the bankruptcy process, upon its conclusion, the bulk of the money would have accrued to the exchange’s shareholders, most notably the firm’s ex-CEO Mark Karpelès, who, at the time of the collapse, owned 88 percent of Mt. Gox.
Not only this would be a disgrace for the creditors — who had cumulatively lost 650,000 BTC due to Mt. Gox’s going bust — but also something that Karpelès himself would prefer to avoid.
In his 2017 interview to Reuters, the deposed Bitcoin King admitted that he would rather do his best to help creditors move the case from bankruptcy to rehabilitation than deal with a tidal wave of civil lawsuits and death threats that would inevitably descend upon him should he end up with a billion dollars he never earned.
Yet, before all the controversy, lawsuits and universal ignominy, there was a fascinating story of Mt. Gox’s success and downfall that, at various points, touched upon many titans of the cryptocurrency pantheon, and which like no other illustrates the spirit of the industry’s early years.
How it all started
Newcomers sometimes read Mt. Gox as “Mount Gox,” which is not quite correct — there is no topographical connotation to “Mt.” The domain name mtgox.com is short for “Magic: The Gathering Online eXchange,” and reflects the initial idea with which the service’s founder, Jed McCaleb, had registered the website. McCaleb — right, the one who would later go on to create the Ripple protocol — conceived of a platform where the fans of then-popular fantasy game “Magic: The Gathering” could trade the game’s cards like stocks. He quickly grew bored with the idea and moved on to other projects — it wasn’t until July 2010 that McCaleb, now fascinated with the newly found concept of cryptocurrency, reused the domain to create one of the first Bitcoin exchanges.
Always in pursuit of something bigger and newer, McCaleb lasted for less than a year at the helm of Mt. Gox before selling it to Karpelès, a French developer who was looking for a place to start his big journey in the crypto world.
According to an email that would later surface in court, Karpelès learned shortly after the purchase that the exchange has already been hacked at least once, leaving a hole of 80,000 BTC on the balance sheet. Worth around $60,000 at that time, the loss didn’t seem dreadful to the new majority stakeholder and CEO — yet, over time, as Bitcoin prices caught wind, the void became ever harder to fill.
Mt. Gox sustained another major hack in June 2011, when criminals broke into the system via a compromised computer that allegedly belonged to an auditor. For a short period of time, the hackers managed to artificially set the price of Bitcoin on Mt. Gox trading platform at one cent, walking away with some 2,000 very ‘cheap’ coins. These events made Karpelès somewhat paranoid over the hacking menace and also contributed to his decision to move the bulk of Bitcoin in the exchange’s possession to cold storage.
These were serious woes, but at least they were known to Mark Karpelès. What he most likely did not realize — until some point in 2013 — was the fact that the Mt. Gox’s online deposit addresses had been compromised as early as in September 2011, when someone had stolen — probably with the help of an insider — the private keys associated with them. Having latched on the platform’s hot wallets, the hackers would go on to gradually drain the exchange’s depository, remaining unnoticed for almost two years.
Meanwhile, Bitcoin began to gain traction. Mt. Gox, powered by changes in back-end software implemented by Karpelès, won the sympathies of the exponentially growing community, which helped add thousands of new customers daily. The number of active accounts grew from 3,000 at the start of Karpelès’ term to almost 1.1 million in early 2013, propelling Mt. Gox to the status of the world’s largest cryptocurrency exchange, responsible at its peak for almost 90 percent of global Bitcoin trading.
A profile put together by Wired in the wake of Mt. Gox’s great meltdown of 2014 paints Karpelès as someone far removed from a crafty financial executive’s stereotypical image. At a time when the share of institutional money in the crypto industry and mainstream media attention afforded to it were both quite modest, it appears that it was still possible for Karpelès to run the world’s largest Bitcoin exchange in an almost makeshift manner, remaining more of a geeky developer than an organized CEO.
Many former-employee accounts highlighted inefficiencies and loopholes in the company’s organizational processes, such as a lack of any version of control software, as well as the fact that every change in source code required Karpelès’ personal approval — which was severely impeding the work of the development team.
An incident indicative of the CEO’s attitude occurred in the wake of the June 2011 hack, when prominent crypto entrepreneurs Jesse Powell, who would later become a co-founder of crypto exchange Kraken, and Bitcoin evangelist Roger Ver were summoned to Tokyo to help get Mt. Gox back online.
After several hectic days of troubleshooting, the platform was still down; yet, going into the weekend, both Powell and Ver were eager to keep on digging into the problem. Both were considerably puzzled when Karpelès failed to show up at the office on Saturday morning, telling them that he wanted to take a break.
‘Crypto heist of the century’
In this light, it doesn’t sound so incredible that Karpelès’ and his team were able to remain oblivious to the money being slowly drained from their accounts for two years. By mid-2013, Mt. Gox was stripped of almost all of its Bitcoin reserves. The Frenchman had most likely realized that there was a hole in the bottom at some point in 2013, but it wasn’t until late February 2014 that the company admitted to having lost 850,000 Bitcoin — worth around $460 million at the time and making up around seven percent of all Bitcoin in circulation.
For some time, the main puzzle around the ‘crypto heist of the century’ remained the question of where the money actually went.
A Swedish software engineer named Kim Nilsson, along with a handful of security experts — with whom he teamed up to form the company WizSec — have been subsequently credited with tracking most of the stolen coins down to the cryptocurrency exchange BTC-E. Allegedly, Alexander Vinnik, a Russian national who owned and operated BTC-E, was directly involved in laundering billions of dollars in Bitcoin — according not only to WizSec, but also a United States Department of Justice investigation. Yet, some observers were not completely convinced by the evidence presented in both reports, suggesting that some things do not seem to add up. Vinnik was arrested in Greece in 2017 and currently awaits extradition to either France (and then, possibly, to the U.S.) or Russia.
In March 2014, Mt. Gox reported that 200,000 of the lost Bitcoin have been “discovered” in the old-format digital storage used before the June 2011 hack. Effectively frozen in the bankruptcy estate for the time of litigation, the assets were steadily climbing in value — on top of the manifold increase in Bitcoin valuation since 2014, the future owners of these coins will be entitled for equal amount of the fork offshoot Bitcoin Cash (BCH) — which has now far exceeded the value of the possible victims’ claims.
But here’s the catch: According to Japanese bankruptcy rules, the claims are to be valued at the April 2014 Bitcoin market price, something around $400 million total. In order for Mt. Gox’s creditors and debtors to benefit from the rest, it was essential to start civil rehabilitation — which was approved earlier this summer.
While certainly great news for thousands of the exchange’s creditors, the development might leave some critics concerned about its potential effects on the Bitcoin market in general. As Mt. Gox’s bankruptcy trustee has already been selling sizeable chunks of cryptocurrency over the last few months, speculations surfaced that the move might have been driving Bitcoin prices down.
Mark Karpelès has spent most of his time since 2014 dealing with the fallout from the Mt. Gox’s demise — including having to move every once in a while due to death threats, serving some time in a Tokyo jail before getting out on bail (he still cannot leave Japan) and facing numerous lawsuits in multiple jurisdictions, the latest being fraud allegations brought in front of a U.S. federal judge in Illinois, which Karpelès’ defendants have moved to dismiss.
As for Mt. Gox, the eventual payouts to the victims of its collapse could mark the end of its thorny path. It will certainly remain in history textbooks as a synonym for ‘dangers of cryptocurrency trading,’ engraved in the collective memory of the whole generation of early crypto adopters. Even though Mark Karpelès once mentioned that he was considering reinstating Mt. Gox under new management, perhaps a better way for it to reincarnate was expressed by one Twitter user:
Maybe Mt Gox will come full circle, exit rehabilitation and relaunch as an NFT marketplace for Magic cards.
— Ryan Selkis (@twobitidiot) August 19, 2018
As part of a Reddit Ask Me Anything (AMA) session Wednesday, Mark Karpeles said that he found the billion dollar windfall, which will come about as a result of Japanese bankruptcy procedures, to be “distasteful”.
“The way bankruptcy law works [in Japan] is that if there are any assets remaining after the creditors have been paid in full, then those assets are distributed to shareholders as part of the liquidation,” he explained in introductory comments.
“That’s the only way any bankruptcy law can reasonably work. And yet, in this case, it produces an egregiously distasteful outcome in that the shareholders of MtGox would walk away with the value of over 160,000 bitcoin as a result of what happened.
I don’t want this. I don’t want this billion dollars.”
Karpeles has presided over the long process of refunding users who lost funds during Mt. Gox’s infamous hack in 2014.
After being released on bail, the Frenchman has periodically appeared in the press and online to answer queries from the cryptocurrency community.
Criticism of both Karpeles and the refund process intensified in recent months after it came to light a board trustee was selling vast amounts of Bitcoin on mainstream exchanges. The volumes were so large that suspicions remain the sales unfairly influenced Bitcoin prices across the globe.
Wednesday’s AMA similarly saw its share of Karpeles detractors, some levelling criticism due to their questions remaining answered for long periods.