In February of 2014, Mt. Gox, then the largest Bitcoin exchange in the world, was shut down and $500 million worth of Bitcoin and fiat deposits was reported missing. The lost Bitcoins was attributed to a “transaction malleability” error exploited by hackers, but evidence is mounting that there was foul play by company insiders.
This weekend, Mark Karpeles, 30, the founder of Mt. Gox, was arrested by the Tokyo police on suspicion of having embezzled funds from Mt. Gox’s users. The former CEO of Mt. Gox, Ashley Barr, followed up with an Ask Me Anything (AMA) session on Reddit, detailing a history of negligence and corruption behind the scenes.
Barr was appointed by Karpeles as CEO in January of 2012, and immediately did a financial audit of the company. She discovered that the company was spending far more than what it was earning, and she made futile attempts to have Karpeles explain where the money came from.
“He was also asking employees other than myself to find investors,” Barr wrote. “Something impossible without knowing the financial status of the company.”
It’s likely that Karpeles was funding the company by “borrowing” money from its users, as Barr found out that Karpeles had placed customer deposits in his personal bank account, a flagrant breach of normal accounting practices. This would also explain the missing fiat currency from Mt. Gox.
Barr was fired in May of 2012 for failing to find outside investors for the company, and was forced to sign a non-disclosure agreement (NDA) that stopped her from discussing Karpeles’s unethical business practices.
Her severance was paid in Bitcoin, which she sold immediately afterwards. However the Bitcoin then appreciated astronomically in value and she was afraid she might have to pay the higher amount if she were sued for violating her NDA.
“[The NDA] is still enforceable, but I think Mark has other things to worry about at the moment,” Barr said, explaining why she choose to do the AMA now, as opposed to a few years ago.
History of Corruption
Karpeles had his first run in with the law before he was ever involved in trading Bitcoins. Barr recalled that the French-born Karpeles told her he ran away to Israel after the authorities went after him for credit card fraud in France as a teenager. He eventually relocated to Japan, where he founded Mt. Gox.
At the company, Karpeles maintained tight control over operations, keeping exclusive access to both the database that kept the exchange running and the cold wallets, where Bitcoins are kept offline and are more secure from theft. This makes it possible that Karpeles has the lost Bitcoins stowed away somewhere, commented participants in the AMA.
During a time when half the employees made less than $2,000 a month, Karpeles spent lavishly on himself, living in an exclusive high-rise apartment populated with gadgets like the $5,000 NAO robot and a Makerbot 3D printer.
“I remember just how unorganized he was, and how little he cared about dollars and cents,” Barr wrote. “I had to talk him down from buying a Lamborghini as his first car.”
In November of 2013, allegations arose that there was artificial price inflation on the Mt. Gox exchange to mislead investors and analysts. After the collapse, a report, The Willy Report, was furnished documenting bot-like price manipulation behavior in the buying patterns on the exchange, something corroborated by Barr.
“I was shown an account that seemed to be automated and it was buying bitcoin at a higher-than-market price,” Barr said. “When I saw The Willy report, it seemed to match that circumstance closely.”
Aside from criminal business behavior, the technical infrastructure of Mt. Gox was also poorly maintained. There was no pre-production for the code that ran the website, meaning that every time a change was made to the database, it was implemented “live” without any testing.
Barr said her statement and statements by other ex-employees helped lead to Karpeles’s recent arrest on charges of embezzlement and “illegal manipulation of accounting.”