Former Mt. Gox Chief Executive to Face Class Action in Philadelphia

Neil Dennis

The former chief executive of the now defunct cryptocurrency exchange Mt. Gox will face a class action lawsuit brought in Philadelphia over the company's collapse in 2014.

Representing himself and "others similarly situated" former Mt. Gox customer Gregory Pearce is claiming one count of negligence and one count of fraud against Mark Karpeles, who operated the exchange after buying it from developer Jed McCaleb in 2011.

Karpeles, a French citizen living in Japan at the time, was owner and CEO of Mt. Gox in 2014 when the exchange reported 850,000 bitcoins belonging to customers had been stolen - worth around $450 million at the time.

Allegations and Jurisdiction Complaint

A court document describes Pearce's allegation that even though the Mt. Gox claimed to be the world's most established bitcoin exchange, as the sole controlling force designer of its software, Karpeles was aware there were security bugs in the system "but did not make these defects known to the public".

Karpeles has argued that the Philadelphia court has no jurisdiction over the case as the exchange was based and operated out of Japan. However, district judge Robert Kelly rejected this argument.

A similar class action in Canada in 2016 was dismissed, and more recently Karpeles was found innocent of embezzlement and breach of trust in a Tokyo criminal trial, but was found guilty of data manipulation - all relating to the Mt. Gox failure - and served a two-year suspended sentence.

Mt. Gox Timeline

Mt. Gox had been implicated in a security breach three years before the catastrophic events of 2014. Indeed, after a hacker gained credentials from a company auditor's compromised computer to transfer bitcoins illegally, the nominal price of the cryptocurrency dropped to just 1 cent on the exchange before correcting.

By the second half of 2013 the exchange was responsible for handling more than two-thirds of the world's bitcoin trades - it was by far the world's largest bitcoin intermediary and leading bitcoin exchange.

The exchange soon began to buckle under the growing strain, however, and in February 2014 it halted all bitcoin withdrawals and later the same month suspended all trading. Hours later the company's website went offline.

On February 24, 2014 a leaked internal document revealed the company was insolvent after losing, undetected and over a number of years, around 744,000 bitcoins. Although nearly 200,000 were retrieved, it was concluded that most of the missing bitcoins were stolen out of the Mt. Gox hot wallet over time beginning in late 2011.