Mt. Gox Receives Subpoena From Federal Prosecutor: Source

http://online.wsj.com/news/articles/SB10001424052702303880604579405852448992982

by antonID • 12 years ago

127 100 12 years ago

online.wsj.com

MWil• 12 years ago

nonpaywall?

SDGT• 12 years ago

<strike>Seems to be unpaywalled now?</strike>

edit sry, heres a screenie: I got some "one time pass" http://imgur.com/6IrmmLo

edit: text from article. Sorry I just hit print screen and auto uploaded by reflex.

Mt. Gox Receives Subpoena From Federal Prosecutor: Source

Bitcoin exchange Mt. Gox has received a subpoena from federal prosecutors in New York, according to a person familiar with the matter, dealing another blow to the embattled marketplace for buyers and sellers of the virtual currency.

Mt. Gox, one of the largest bitcoin exchanges, shut down on Tuesday, underscoring the risks of bitcoin, the virtual currency that has seen a meteoric rise in the past year. The subpoena was sent this month and asked Mt. Gox to preserve certain documents among other things, the person said.

Write to Christopher M. Matthews at christopher.matthews@wsj.com

fabulist6• 12 years ago

I think you have a subscription then. I'm still hitting the paywall.

mbreese5• 12 years ago

For the WSJ, just do a Google search for the title or change your referrer to Google.

nwh4• 12 years ago

Article without the paywall — http://archive.is/JWikk

AngrySkillzz• 12 years ago

It's pretty embarrassing that you can read most of the article with the paywall intact.

fabulist6• 12 years ago

I was wondering if they were deliberately allowing archive sites past the paywall.

MBCook• 12 years ago

That's amazing. If I'd subscribe to see that article, I would be pretty pissed.

ddeck• 12 years ago

I've never understood how WSJ operate their paywall. They seem to allow it to be bypassed on any article by simply using Google as a referrer.

For any given paywalled article, if you Google the article headline and click on the WSJ link in the results, the full article is displayed.

fabulist6• 12 years ago

s/underscoring the risks of bitcoin/illustrating the risks of speculating, especially with companies long known to be unreliable/g

sugerman• 12 years ago

s/investing/speculation/

fabulist6• 12 years ago

Oh right, thanks mate

wernerb• 12 years ago

http://www.businessinsider.com/report-mtgox-subpoenaed-by-us... is more informative

kevingadd• 12 years ago

Oh, you're right. When that page first went up it was one sentence with a link to the WSJ.

fnordfnordfnord• 12 years ago

It's not much of an article as it is only two paragraphs. Get your popcorn ready for when stuff starts hitting PACER/RECAP.

gojomo2• 12 years ago

Wouldn't it be funny if malleability has confused MtGox about its own hot->cold->hot wallet transactions, and it really has way more coins than it knows?

Then, when MtGox finally has someone with half a clue patch things & rescan, 700K BTC reappear, and they post on their homepage, "Nevvvvvermind – it was all a bad dream."

MichaelGG• 12 years ago

That'd be some confusion. They just need to look at their cold wallet addresses to see the balance, right?

nwh4• 12 years ago

Old wallets can be huge, tens of thousands of receiving addresses large. Most aren't even displayed to the client (change addresses).

exit2• 12 years ago

have you seen the irc chat log with Mark Karpeles? it almost seems possible that that is exactly what has happened:

[12:02] <JonWickedFire> How much did you lose yourself?

[12:04] <MagicalTux> Well, technically speaking it's not "lost" just yet, just temporarily unavailable

[12:05] <JonWickedFire> Well, how much is unavail for you?

[12:06] <MagicalTux> I'm not even sure

http://www.wickedfire.com/shooting-shit/179038-my-conversati...

letstryagain• 12 years ago

What does that even mean, Karpeles isn't making any sense.

agorabinary• 12 years ago

Closing the conversation with a 9gag link. How professional.

euank• 12 years ago

If you read the context, it's quite clear that he's only referencing his own bitcoins.

    [12:02] <JonWickedFire> How much did you lose yourself?
    [12:04] <MagicalTux> Well, technically speaking it's not "lost" just yet, just temporarily unavailable
    [12:05] <JonWickedFire> Well, how much is unavail for you?
    [12:06] <MagicalTux> I'm not even sure
    [12:06] <MagicalTux> didn't check my wallet before pushing the site offline

That final line makes it very clear that he meant he didn't know how many BTC he had in MtGox and thus "lost". How you clipped it, it makes it sound like he might mean he doesn't know how many are temporarily unavailable on mtgox as a whole.

Crito• 12 years ago

Interesting hypothesis. It reminds me of my childhood:

When I was a teenager, like many teenagers, I liked to drink. Unfortunately for me, my father disapproved of teenagers drinking; perhaps once every week or two he would count all of his beer bottles to ensure that I was not sneaking any. There were gaps in his accounting, but I never knew exactly when he would account for them.

What was I to do? I devised a simple scheme:

1) Steal a bottle of beer.

2) Drink i^W^W no no, hide it. Hide it in the back of the fridge, or in the pantry.

3) Wait two weeks. [If during step 3 the absence of the beer was discovered, goto step 3a. Otherwise goto step 4]

3a) "What are you talking about Pops, your beer is right here behind the radishes." [goto step 1]

4) Glug glug glug.

pmorici4• 12 years ago

For anyone thinking, "O good the government is here to investigate and get our money back" I wouldn't get too excited I'd say this is more likely them wanting to investigate Silk Road related Bitcoin activity than any desire to help those screwed by Gox.

mbreese5• 12 years ago

No... people lost a lot of money, including investors and investment funds located in the US. This is a case of the gov't doing their jobs and likely has nothing to do with Silk Road. It might have something to do with the MtGox funds previously confiscated by DHS(?) though.

pmorici4• 12 years ago

The previously confiscated funds were directly related to the Silk Road busts. DHS officials inferred as much in their testimony on Bitcoin before congress.

http://thegenesisblock.com/mt-gox-seizures-linked-silk-road-...

The article implies this wasn't just issued today, it is just being reported now but it says it was actually issued "this month". You know what else happened in that time frame? Charlie Shrem was arrested for Silk Road related Bitcoin charges.

I mean It would be great if they were investigating the insolvency but I'd say there is a good chance it isn't related to that.

saraid216• 12 years ago

I like how you jump to thought policing as your gut reaction.

ck2• 12 years ago

New York wants to be the big dog in regulating crypto-currency, which almost feels like they are protecting and working at the behest of the banking industry headquartered there.

But I do not understand how a NY prosecutor can subpoena a Japanese business?

fiatmoney• 12 years ago

Easy, if they think a NY law has been violated.

malka• 12 years ago

I'm pretty sure I am currently violating loads of north korean laws. They should subpoena the entiere world.

glurgh• 12 years ago

It's a Federal prosecutor who just happens to be located in New York.

anigbrowl• 12 years ago

If you're doing business in New York, then you can be sued there. It's called the doctrine of 'minimum contacts.' Of course, they could choose to ignore the subpoenas, but then the NY DA could presume the worst and issue an arrest warrant for anyone connected with the operation, which would make it difficult for them to visit the US.

ubernostrum• 12 years ago

But I do not understand how a NY prosecutor can subpoena a Japanese business?

If you offer services to, or engage in financial transactions with, a person in Jurisdiction A, Jurisdiction A can enforce its laws on you. You should not in any way be surprised by this fact.

thirsteh3• 12 years ago

That's all well and good, but Mt. Gox likely won't conduct any more business in NY. It gets even more problematic if they don't actually operate any legal entity in the U.S.

The U.S. may enforce its laws upon U.S. entities, but it has no authority to do so on e.g. a Japanese one, unless a treaty/agreement exists that facilitates it. This is why China-only companies that engage in IP theft (or vice versa) aren't being hauled into court on the daily. (You wouldn't be surprised if I said China can't enforce its laws on a NY company, right?)

pjan• 12 years ago

Also: Japan authorities looking into closure of Mt. Gox bitcoin exchange

http://www.reuters.com/article/2014/02/26/bitcoin-mtgox-japa...

yeukhon• 12 years ago

Ah. I was sort of right :)

https://news.ycombinator.com/item?id=7296597

Though not FBI, this is interesting.

appleflaxen• 12 years ago

Where were these zealous prosecutors during the global financial meltdown in 2008? It would be nice if people went to jail for fraudelently representing mortgages.

I'm fine with Gox getting investigated, too, but justice shouldn't depend on who you are.

jamesaguilar• 12 years ago

I don't know if you remember, but many heads of banks were brought before congress to answer for the financial crisis. But it just turned out that many of them had not done anything illegal (or at least, not provably so).

dredmorbius• 12 years ago

Congress doesn't have prosecutorial powers against citizens (it has power of impeechment against select government officials). You can be held in contempt for failure to appear, but you cannot be convicted on the basis of what is said, absent action by the courts.

jacalata• 12 years ago

Have you not heard the phrase "too big to fail?" Unfortunately for mt gox, nobody with power relies on it continuing to exist, but they do rely on the continuing existence of a banking system in the US.

alexeisadeski3• 12 years ago

There's not a whole lot of political will to prosecute the consumers who lied on their mortgage forms, so I doubt it'll ever be acted upon.

ewoodrich• 12 years ago

"Federal Government and State Attorneys General Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address Mortgage Loan Servicing and Foreclosure Abuses"

http://www.justice.gov/opa/pr/2012/February/12-ag-186.html

It's not jail, but then again, I highly doubt Karpeles or anyone at Gox will be imprisoned, either (for a number of reasons).

rodgerd• 12 years ago

They were cheerfully going after targets, until it turned out that the public are easy to convince that effective prosecuters should lose their jobs if they visit sex workers.

The fact the current top comment in this thread is someone slagging off a prosecuter for going after insder traders demonstrates that HN's as dumb an audience as the average tabloid reader when it comes to convincing people that enforcing the law against corrupt Wall Street criminals is a bad thing.

dmix• 12 years ago

He wasn't trashing the fact they are going after insider trading, it's that they use lengthy jail time as a badge of winning. When there are better metrics and means of enforcement than endless jail-time.

bsder• 12 years ago

until it turned out that the public are easy to convince that effective prosecuters should lose their jobs if they visit sex workers.

Well,at the time, I wondered how they nailed Spitzer. In retrospect, I suspect this was one of the first parallel construction scenarios.

However, I don't really care if people visit sex workers. Nevertheless, Spitzer was an anti-prostitution crusader. He deserved to lose his job for the hypocrisy.

saalweachter• 12 years ago

In the US, we have a fetish for proving people guilty. That's not to say our false conviction rate isn't through the roof, but even though everyone knows that someone is totally guilty, we don't do anything unless we can prove it.

So the sad fact of the matter is, if someone is a good enough criminal -- for instance, a CEO of a company with dozens of lawyers to advise him, who actually manages to not put anything in writing, and has enough firewalls between him and the activities in question to create reasonable doubt and plausible deniability -- he can totally get away with it.

On the other hand, if someone shows up and it's all amateur hour, and they all but gift wrap a big pile of evidence of their misdeeds, notarize and hand-deliver it to the authorities, we shouldn't hold off on prosecuting them just because smarter, bigger criminals are getting away with it, any more than we should hold off prosecuting the easy homicides just because the hard ones go unsolved.

downandout3• 12 years ago

Bitcoin as a concept would be attacked by governments under even the best of circumstances. I don't know why the major players in it have to be so dumb and/or unscrupulous as to draw this level of negative attention to it.

As for Mt. Gox itself, its principle(s) will be aggressively prosecuted and sentenced. The New York US attorney behind the subpoena is Preet Bharara. Preet is responsible for shutting down online poker and obtaining the longest sentence for insider trading ever handed down, among other such dubious "accomplishments". He has never met a camera he didn't love, and will take the opportunity to thrash not just Mt Gox but also Bitcoin itself in the media.

dopamean• 12 years ago

This is the most accurate characterisation of Preet Bharara that I've ever read.

sliverstorm2• 12 years ago

Why are they dumb and/or unscrupulous? I would hazard that the bright, somewhat-more-scrupulous minds are busy making it big elsewhere. Perhaps traditional finance.

jnbiche5• 12 years ago

I would hazard that the bright, somewhat-more-scrupulous minds are busy making it big elsewhere. Perhaps traditional finance.

Yes, because we all know how scrupulous traditional finance is.

dobbsbob• 12 years ago

Maybe he can use php to roll his own lawyer. The article says it was served "this month" so I think they are being called to answer for the $10 million or so tied up in seized US accounts earlier and not because they assclowned away 744,000 bitcoins

tzs• 12 years ago

What do you find dubious about the insider trading conviction and sentence?

downandout3• 12 years ago

I find his accomplishments dubious because a) I believe that there are substantially more effective ways to deter crime and punish offenders than the lengthy prison sentences that his office pushes for in most cases, and b) he uses every major case he brings elected office, and is unnecessarily destroying many lives in that pursuit. In my opinion, that negates any positive things he may have done and renders all of his accomplishments dubious.

captainchaos2• 12 years ago

Ok, at the risk of sounding completely naive...

I've been following this story for a while, and it seems that no one can say for sure if this is embezzlement or gross incompetence. Based on leaked memos it seems to be most people are learning towards the latter, but I'm curious if there's any evidence either way.

Based on the claimed transparency of Bitcoin, I would have expected embezzlement on this scale to have been noticed earlier, or at the very least have people be able to follow the Bitcoin trail to determine what is actually happening.

Am I wrong or just missing something?

wpietri2• 12 years ago

I don't think anybody yet knows.

Note that it could also be negligence and fraud. For example, they might have discovered the losses early but hushed them up in hopes of making it up later. That's a classic way massive financial issues happen.

However, the transparency of Bitcoin only helps if it's used that way. There have been proposals to develop approaches so that anybody can externally verify an exchange or "bank". But as far as I know, MtGox hasn't released enough information for other people to verify their story.

rwallace• 12 years ago

My gut feeling, speaking as an outsider reading the news, is Karpeles was never dishonest, just hopelessly out of his depth and too stubborn to ask for help.

In the normal course of events I also would expect money disappearing over that long a timescale to have to have been embezzlement by an employee, and I would certainly consider that a plausible hypothesis here. On the other hand, reading the IRC chat transcript where Karpeles talks about how he's been under so much stress that it's ruining his health, it's obvious he made the classic mistake of trying to work so many hours he couldn't think straight.

So I'm guessing either he delegated the accounts to someone with no oversight and it was an inside job... or he refused to delegate, which meant the accounts were in the hands of someone too tired to be capable of coherent thought, which amounted to the same result as nobody looking at them, and an outside job would suffice.

Moral of this story for customers: don't risk money you can't afford to lose.

Moral of this story for founders: don't try to be a hero and do more than one job's worth of work, especially in a domain where a screwup may cause significant harm.

mattm2• 12 years ago

I've spent way too much time following this and I agree with your thoughts as well. Karpeles seems to personify the phrase we know in software development - that he knows just enough to be dangerous but not enough to be competent.

I was stunned at this blog post (http://antonopoulos.com/2014/02/25/statement-on-mt-gox/) where Andreas Antonopolous said:

"During this time, Mark Karpeles was active on the forums and developer boards and appeared to be implementing fixes to Gox software to address Tx-Mal."

He really should not have been looking for solutions himself.

jnbiche5• 12 years ago

Thank you for one of the few rational comments I've read about the whole ordeal. And yes, as a Bitcoiner since 2011 (who last dealt with Gox that same year), your assessment of Karpeles is spot on. My impression is that he's not dishonest, just the classic Dunning-Kruger programmer we've all worked with.

The hard thing about accounting for these Bitcoins is that we keep track of them via addresses, but Karpeles was robbed at a lower level of abstraction -- via outputs. So he's probably struggling with that.

EDIT: I should have written that my impression is that he's not a thief. I suspect he has been dishonest about what he's known about his company's situation, in the sense that he's probably lied by commission or at least omission. But I don't think he stole anything.

captainchaos2• 12 years ago

Thanks for the insight, I still thought the Bitcoin protocol would have had enough transparency to make the case clear as to whether or not this is a situation of dishonesty or incompetence. I guess the protocol does not provide the level of transparency I assumed.

thinkcomp2• 12 years ago

I'm not a lawyer, but what's likely to happen here is the following:

Soon, Mark Karpeles and/or Tibanne Kabushiki Kaisha and/or Mutum Sigillum LLC are likely to be charged with at least one violation of 18 U.S.C. § 1960 for not having a money transmission license in any state. Even though Karpeles broke state laws, it's a federal crime by extension. He may be extradited from wherever he is to the U.S. to stand trial in federal court.

What's interesting is that Coinbase, BitPay, Dwolla and every other current/former Bitcoin exchange company is in the exact same boat legally speaking, and yet people still trust them because of deliberately misleading statements they've made on a regular basis, such as last night's joint announcement. None of them are operating legally, whatever they may say. But mostly they don't say, because my company is already suing two of the three over this very fact. Many of them can be linked to Mt. Gox; Dwolla has already stopped dealing with Bitcoin as a result of NY DFS's subpoenas to the best of my knowledge; US DHS also investigated Mutum Sigillum LLC and froze its assets.

The irony is that Mt. Gox is most likely in Japan in the first place because of the insane state regulatory structure in the U.S. So our state MTLs push entrepreneurs out, leave consumers high and dry, and make crashes of the sort we're witnessing now more likely. We need a federal regulatory regime; it's a shame that the other entrepreneurs and investors affected--including the ones who run this site--are too cowardly to come out and say it publicly as I have. There's only one exception: Greg Kidd, who is invested in a number of payment companies, including Coinbase, and now works for Ripple.

http://fedpaymentsimprovement.org/wp-content/uploads/Greg_Ki...

Here's my suggestions for what should happen now:

http://www.thinkcomputer.com/20140214.cfpbcomment.pdf

mschuster91• 12 years ago

MtGox has a FinCEN MSB license (http://bitcoinmagazine.com/5560/mtgox-gets-fincen-msb-licens...).

thinkcomp2• 12 years ago

There's no such thing. FinCEN does not issue licenses, it just processes MSB registrations. The Bank Secrecy Act (BSA) requires FinCEN registration and SAR report filing; 18 U.S.C. § 1960 requires state licenses. The fact that Mt. Gox knew it had to comply with BSA requirements means that it should have also been aware that it needed state licenses.

mattm2• 12 years ago

Mt. Gox is in Japan because Mark Karpeles moved to Japan well before Mt. Gox started up. Here is his blog - http://blog.magicaltux.net

jnbiche5• 12 years ago

That's true. thinkcomp's argument probably should be that the reason the largest exchange is in Japan is because of U.S. regulatory regime. There have been legitimate contenders (TradeHill) who had to shut down because of regulatory issues, or banking issues related to regulatory issues.

That's not even counting the serious entrepreneurs who passed on the opportunity to establish a competent exchange because they knew it wasn't possible to establish one legally without tens of millions of dollars.

jnbiche5• 12 years ago

There's only one exception: Greg Kidd, who is invested in a number of payment companies, including Coinbase, and now works for Ripple. http://fedpaymentsimprovement.org/wp-content/uploads/Greg_Ki...

I like this guy. Greg's pdf is well worth reading (and pretty funny at points) if you're interested in this space.

And while I'm not sure I agree with Aaron's tactics, it's clear that there is a huge problem here: it's impossible for new businesses to innovate in the money transmission industry.

Overall, I agree with both Aaron and Greg's assessment of the problem: state money transmission laws are strangling financial innovation. However, I am very wary of placing more power in the hands of a federal government that failed to act in good faith in this space (see HSBC's fines versus the treatment Bitcoin is getting).

And realistically, some sort of unified state money license requirement like the NMLS is a far more likely outcome than letting the federal government to take over these responsibilities altogether.

einhverfr• 12 years ago

Well yeah....

Keep in mind this means nothing other than that a crime is being investigated. We know a crime took place. It's a good thing it is being investigated.

What we don't know is what crimes are being investigated and the article doesn't provide any of that information.

negamax• 12 years ago

This month. There's no date. Let's not relate it to recent events. Actually this kind of insinuates what's happening.

geuis• 12 years ago

Stop linking to paywall sites, please.

tomelders• 12 years ago

If a bank lost everyones money, we would expect governments to subpoena them. This is news like "Sun rises for 1.6425 × 10^13th time in a row" is a headline.

mcv• 12 years ago

The news here is that bitcoin is apparently considered to be money by this prosecutor. Or at least close enough to it.

captainmuon• 12 years ago

If the government really wants to kill bitcoin, its a bit surprizing that they are pursuing this legally. Instead they should make it such that people cannot sue for their losses. They should define legally that bitcoin is neither money nor commodity, that it is of zero value, and that this is so obvious that it is impossible to commit fraud with it. It's your own fault if you pay money for something such obviously fraudulent. (Not that this is my opinion!)

If customers would not be able to raise claims, and frauds would get away with impunity, this would quickly destroy any honest businesses in bitcoin, and reduce it to a fringe phenomenon some people use to buy drugs anonymously.

I'm guessing the government really doesn't want to do that, because while it would reduce bitcoin to the underground, it would become even more uncontrolable. Rather, they'll try to canalize it through the existing banking system. Its already hard now to buy bitcoins anonymously, and it will probably become harder.

theklub• 12 years ago

I can't help but feel like at this point in time buying Bitcoin and helping sustain the price is making criminals rich.

Mt. Gox Receives Subpoena From Federal Prosecutor: Source

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