Karpeles pleads innocent to embezzlement in MtGox case

Over three years after the failure and bankruptcy of the infamous bitcoin exchange MtGox, the first trial of its CEO, Mark Karpeles, took place at the Tokyo District Court on Tuesday, July 11.

Through an interpreter, Karpeles pleaded not guilty to “data manipulation and embezzling a total of 341 million yen in customers' money between September and December of 2013,” reported Japanese newspaper the Mainichi.

- Mark Karpeles

During the collapse of the first successful bitcoin exchange in February 2014, it was found that MtGox had lost 850,000 bitcoins, worth nearly half a billion US dollars at the time and worth well over a billion dollars today. From its bank account in Tokyo, another $27.4 million worth of yen was missing too, according to Wired. The following month, however, Karpeles found an offline wallet that contained 200,000 bitcoins, which was immediately turned over to law enforcement and remains in the MtGox estate for customer restitution.

As the price of Bitcoin has increased this year, surpassing US$2,000 each, the 200,000 bitcoins are now worth more than enough to pay back customers who lost their funds. MtGox is, in effect, solvent again. Unfortunately, a previous lawsuit between MtGox and US-based Coinlab has prevented customers from receiving their share of the funds.

The charges against the France-born ex-CEO were read out in court through an interpreter. The now much thinner Karpeles responded with a prepared statement translated into Japanese, that was presented to the three-judge panel hearing his case. Karpeles maintains his innocence and denies any wrongdoing.

There was an initial presentation of evidence which took approximately two hours to deliver, according to Kolin Burges, a MtGox creditor who runs the MtGoxProtest website and attended the Tuesday sessions. "Super tight security & small courtroom. Few ppl got in," he tweeted.

In the afternoon session, MtGox’s transaction details and company history were presented. After discussing the hack of his exchange, "Karpeles admits operating Willy bot,” now called an "obligation exchange,” according to Burges.

Willy bot was one of a pair of programs that are suspected of making fake trades on the exchange, in an effort to artificially inflate trading volumes and help drive up the price of bitcoin during 2013.

Although Karpeles has said in the past that Willy bot existed, Tuesday’s admission was the first time that he took credit for running the bot himself. Karpeles claims that running the bot was for the good of the company and was not illegal.

- Karpeles, translated by NHK News

Being the first bitcoin exchange to ever grow large enough to make use of such a program, there were no rules or regulations in place against running one on a cryptocurrency exchange. The first such regulation came in January of this year, when the People's Bank of China began aggressively restricting inflated bitcoin exchange volumes at exchanges in their country.

Of the missing $27.4 million worth of yen from MtGox, Karpeles made the case that the majority of it never existed, according to Nikkei. Money had been sent back and forth between accounts to inflate the balance for the sake of his trading bot system.

However, a single transfer of 340 million yen, currently worth $3 million, was sent to an external account towards the end of 2013, according to the indictment. The MtGox bank account that sent it also managed customers' funds, raising suspicions. While the defense counsel disputes the payment transfer, they have claimed that making the transfer would not equate to embezzlement.

According to Karpeles’ statement, the money was sent for the repayment of a business loan and was not made from customer funds. According to The Mainichi, Karpeles insisted that “what the prosecutors allege was data manipulation was part of his company's regular business operations and that the money he spent was not his clients’.”

The prosecution stated during their opening statement, according to Burges, that employees of MtGox expressed concern about not dividing client funds and business income. The bad practices went unheeded as Mt Gox continued to manage the company's assets and deposits from customers in the same account.

- Karpeles

The cause of the MtGox collapse was pure theft, "by external hacking," Karpeles said in his statement. He insists that the investigation “is being carried out in completely irrelevant places,” referring to himself, and he added that police should be out looking for the real culprit.

His statement did, however, indicate that the proper investigations are underway. “Thanks to the hands of a handful of excellent engineers around the world,” Karpeles announced to the court, “the main cause of the failure of MtGox… has been elucidated.” He went on to describe the transparency of Bitcoin’s blockchain and mentioned that by employing blockchain forensics, “you can find out the fraud to some extent.” However, he feels he still has to defend himself in the trial. "I would like to prove my innocence,” he announced.

Karpeles also apologize to the now-defunct exchange's stakeholders, telling the court that he is responsible for retrieving the stolen funds in his role as the exchange's manager. "However It was impossible to prevent the failure of Mount Gox,” he claimed.  

The trial is ongoing and the judgment is expected to be handed over next year, according to Nikkei.