Mt. Gox Allegedly Used Customers’ Money Long Before Crisis

Bitcoin exchange Mt. Gox allegedly spent money from its clients’ deposits on operating expenses including extravagances as early as 2 years before it went bankrupt, according to three people who participated in the discussion.

By early 2012, a small group of Mt. Gox employees, all of whom worked on 1-year contracts, began to worry that customer funds had been diverted to cover Mt Gox's operating costs that they estimated to be rising. Photo: Zach Copley/Flickr

By early 2012, a small group of Mt. Gox employees, all of whom worked on 1-year contracts, began to worry that customer funds had been diverted to cover Mt Gox's operating costs that they estimated to be rising. Photo: Zach Copley/Flickr

The Tokyo-based Mt. Gox, once the world’s biggest Bitcoin exchange, reportedly used money from its clients’ deposits on operating expenses including extravagances as early as two years before it went bankrupt, according to new claims by employees.

Several current and former employees at Mt. Gox in a series of interview with Reuters News Agency, claim to have challenged CEO Mark Karpeles over whether client money was being used to cover costs in early 2012, but their requests to view the company’s financial records were rebuffed.

According to the Reuters report, those costs included rent in a Tokyo high-rise that also housed offices for Hulu and Google, high-tech gadgets such as a robot and a 3-D printer and a souped-up, racing version of the Honda Civic imported from Britain for Karpeles, people who have reviewed expenses said. This occurred just as the company, and bitcoin itself, were beginning to expand and gain interest from investors.

However, the employees had no access to the financial records of the Mt. Gox’s clients deposits, and worries whether their customer deposits were safe and protected. Thus, in the early 2012, a group of employeesasked for a formal meeting with  Karpeles , and asked him to respond to their estimate that Mt. Gox was spending more than it was taking in.

After a one-hour meeting, Karpeles assured them customer money was not being used improperly but would provide any evidence, leaving them dissatisfied.

It is unclear how Japanese law would treat any such diversion of customer funds as Mt. Gox was not regulated as a financial institution. Legally, Mt. Gox was under no obligation to release any financial details in the time it operated, since it was a privately-held company 88% owned by Karpeles.

A court-appointed bankruptcy administrator on Friday said that a deadline for a court-mandated investigation into why bitcoin exchange Mt. Gox failed and whether its users will be able to recover some of what they had on deposit with the exchange has been extended to May 9,citing the involvement of authorities in the case.

Mt. Gox filed for bankruptcy protection in Tokyo on February 28, saying 750,000 Bitcoins belonging to its customers and 100,000 of its own Bitcoins were stolen by hackers who exploited a security flaw in its software. It also said around $27 million were “missing” from its Japanese bank accounts.

“There is a high possibility that the Bitcoins were stolen,” Mt. Gox said in a statement when it filed for bankruptcy. “It is considering filing a criminal complaint.”

It has since said it ‘found’ 200,000 Bitcoins in an old-format online wallet which it had thought was empty, raising creditors’ hopes of recovering some of their lost digital wealth. But getting those coins back into customers’ hands won’t be easy because bankruptcy courts don’t have clear rules for virtual currencies.

The suit names as defendants Tokyo-based Tibanne KK and its units Mt. Gox KK and Mt. Gox Inc., a U.S.-incorporated company, and Mark Karpeles, chief executive officer of all three, according to the complaint. Reflecting it’s start as a trading card marketplace, the company’s name is an acronym for Magic: The Gathering Online Exchange.

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