Mt. Gox Bitcoin Exchange Sued for ‘Misappropriation’

Mt. Gox, once the world’s biggest Bitcoin exchange, was sued for fraud by a U.S. customer within hours of filing bankruptcy.

Mt. Gox, which started as a marketplace for illustrated trading cards used to play the game Magic: The Gathering, is under investigation by prosecutors and regulators examining the use of the digital currency.

The exchange said Feb. 24 it had lost 750,000 Bitcoins belonging to users and 100,000 more of its own. The exchange filed for bankruptcy yesterday in Tokyo. It said in a statement that its debt exceeded its assets by 2.7 billion yen ($26.4 million).

“This catastrophic loss has not only revealed the instability of a burgeoning new industry, it has also uncovered a massive scheme to defraud millions of consumers into providing a private company with real, paper money in exchange for virtual currency,” Illinois resident Gregory Greene said in a Feb. 27 complaint in federal court in Chicago that may be the first lawsuit against Mt. Gox.

Bitcoin was introduced in 2008 by one or more programmers under the name Satoshi Nakamoto and has since gained traction with merchants around the world. The virtual coin has no central issuing authority and uses a public ledger to verify transactions while preserving users’ anonymity.

After Mt. Gox went off-line this month, U.S. and Japanese prosecutors opened investigations into the company while U.S. regulators explore ways to increase oversight of virtual currencies. The European Banking Authority said yesterday it would create a task force to review ways to regulate Bitcoin and its derivatives.

Bitcoin fell 5.6 percent yesterday and was valued at $551.67 at 10:40 p.m. New York time yesterday, according to the CoinDesk Bitcoin Price Index.

Bitcoins Stolen?

“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.”

In Florida, lawyers for two men accused of using Bitcoins in an alleged money-laundering scheme told a judge on Feb. 27 that they did nothing illegal because the state’s law covers only currency issued by the U.S. or another country.

“No one ever anticipated there would be a non-government form of currency, but there is,” a defense lawyer, Ron Lowy, said after the hearing.

In Chicago, Greene’s lawsuit seeks class-action, or group, status on behalf of all people in the U.S. who paid Mt. Gox to buy, sell or trade in Bitcoins as well as those who had currency stored with the Japanese entity on Feb. 7.

Along with damages, Greene is seeking a court order creating a trust to oversee the company’s business.

‘Going Dark’

“As a result of Mt. Gox ‘going dark’ and shutting down its entire operation, users’ fiat currency” -- that is, money issued by national governments -- “and Bitcoins previously stored by Mt. Gox are now unavailable to them, and by all accounts, have been converted and captured by Mt. Gox,” according to the complaint.

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.

Karpeles didn’t respond yesterday to an e-mail seeking comment on the lawsuit. This week, he resigned from the board of the Bitcoin Foundation, an advocacy group for the currency. The foundation is aiding the U.S. probe.

Greene’s attorney, Jay Edelson of Chicago, said in a phone interview yesterday he was aware that a foreign company in bankruptcy may ask a U.S. court to block litigation during its reorganization.

Many Claimants

“Obviously it’s going to be a big issue,” he said, adding that Mt. Gox Inc. and Karpeles aren’t in bankruptcy and that the Japanese entity’s filing wouldn’t shield them.

Edelson said his client’s fraud claims may be “separated from the bankruptcy proceeding and we’ll be able to pursue them.” He said there could be hundreds of thousands of claimants.

Chapter 15 of the U.S. bankruptcy allows companies to seek protection from creditors in the U.S. while the primary case proceeds in another country.

Edelson said he plans to file papers next week seeking to force Mt. Gox to say whether it has client money and how much, and to release it. He said his client was seeking recovery in U.S. dollars, which is “the traditional currency of the U.S. courts,” and not in Bitcoins.

The case is Greene v. Mt. Gox Inc., 14-cv-01437, U.S. District Court, Northern District of Illinois (Chicago).