wtorek, 22 kwietnia 2014
In June 2011, when customers of now-bankrupt bitcoin exchange Mt. Gox agitated for proof that the Tokyo-based firm was still solvent after a hacking attack, CEO Mark Karpeles turned to the comedy science fiction novel "The Hitchhikers Guide to the Galaxy".
During an online chat, Karpeles moved the equivalent of $170 million in bitcoin at today’s market rates - the virtual equivalent of a bank manager flashing a wad of cash in a wallet to establish credit. The gesture - with a sly wink to the "geek" culture Karpeles believed he shared with many of his 50,000 customers at the time, including an interest in coding, Japanese manga comics and science fiction - succeeded.
By moving 424,242 bitcoins, Karpeles, then 26, evoked the random number, 42, described as the "meaning of life" in Douglas Adams' sci-fi novel. "Don't come after me claiming we have no coins," Karpeles said, according to a transcript of that online discussion. "42 is the answer."
As the price of bitcoin soared from a few dollars to above $1,000, Mt. Gox grew to become the world's largest exchange for the digital currency, handling flows worth $3 billion in 2013, by the company's own reckoning.
But even as Mt. Gox boomed, French-born Karpeles seemed both keen to maintain total control of key operations and indifferent to commercial success, according to former staff and associates who spoke to Reuters, but asked not to be named because of ongoing investigations into the exchange's collapse.
Creditors who want to know how Mt. Gox at one point lost some $500 million worth of bitcoin and another $27 million in cash from its bank accounts, are seeking answers from Karpeles, who has spent recent days huddled in meetings with lawyers in Tokyo. [ID:nL1N0LX12S]
Mt. Gox and its lawyers declined repeated requests for comment for this article.
Lawyers for Karpeles told a U.S. judge last week that he was "not willing" to travel to the United States - as ordered by the judge to answer questions in a bankruptcy court - until his attorneys can "get up to speed" on a new subpoena from the U.S. Treasury Department. [ID:nL3N0N70BW] Karpeles doesn't want to go to the U.S. as he fears he could be arrested by authorities there, a person familiar with his thinking said.
"Regardless of whether it was a massive fraud or whether he was just grossly negligent, at the end of the day he's at fault," said Steven Woodrow, a lawyer representing a U.S. class action against Karpeles brought by Mt. Gox creditors.
Mt. Gox's bid to resuscitate its business was dismissed by a Tokyo court on Wednesday, and the court-appointed administrator said that meant the firm was likely to be liquidated. He added that Karpeles was likely to be investigated for liability in the exchange's collapse. [ID:nL3N0N82HQ]
THE MAGICAL TUX
In its bankruptcy filing, Mt. Gox said 750,000 customer bitcoins and another 100,000 belonging to the exchange were stolen due to a software security flaw. Karpeles has told others he has been hurt by accusations he masterminded the theft, and wants to return the bitcoins and cash to some 127,000 creditors.
Karpeles, who has said he is reluctant to appear in public because of safety concerns, relieves stress by driving around Tokyo at night in a Honda Civic he bought as a company car at Mt. Gox, people close to him said. He lives alone with his cat, Tibane, whose exploits he used to chronicle on now-deleted Flickr and YouTube accounts.
The cat's name, chosen by Karpeles' late grandmother, inspired the name of his first company, Tibanne, which he set up in October 2009 in Japan. His employer at the time, software platform distributor Nexway, had transferred him to the country earlier that year.
Born in Chenove, in the Burgundy region of France, Karpeles wrote his first computer program aged 10. He wrote on his blog that he "never really felt at home in France," and has not been back since moving to Japan five years ago.
Shy and fearful of confrontation, the self-proclaimed "geek" felt comfortable in Japan, where he could also indulge his love of manga, video games and cosplay - a combination of "costume" and "play", where people dress as characters from Japanese anime, graphic manga novels and video games. Karpeles found solace in online communities, where he was known as "The Magical Tux", a reference to the penguin mascot of open-source operating system Linux.
His escapism into virtual worlds was accompanied by what some former associates describe as a lack of interest in how running afoul of law and regulation could threaten his business and reputation.
According to blog posts Karpeles wrote in 2006, he was arrested twice in France before he was 21 for computer fraud-related charges. One resulted in a 3-month suspended sentence. French authorities in Tokyo said they had seen confirmation of one prior conviction, but did not have details.
In Japan, Karpeles was sued by a customer in 2012 who claimed he had paid 15,000 euros ($20,700) for a website to be developed that was never built. Tokyo District Court ruled last May that Karpeles had to return the money.
The U.S. Department of Homeland Security seized $5.5 million in Mt. Gox bank accounts in 2013, saying the exchange had been late to register as a money transmitter.
"A NICE EXPERIMENT"
Karpeles became interested in bitcoin when a customer of his web-hosting services wanted to pay in the digital currency. Unlike other early fans of bitcoin, Karpeles had no particular interest in the libertarian philosophy that drove many bitcoin adopters. Instead, he told Reuters in a 2013 interview, he was interested in the technology as a "nice experiment".
He met the founder of Mt. Gox, U.S. entrepreneur Jed McCaleb, on IRC, an online chat platform. McCaleb, nervous about regulatory scrutiny on bitcoin, wanted rid of the exchange and sold it to Karpeles in March 2011 for no upfront fee, people with knowledge of the deal said. Karpeles told others he had later paid McCaleb a small fee, calling it "a very good deal". McCaleb could not be reached for comment.
Mt. Gox's user base mushroomed from 3,000 to 50,000 within three months as bitcoin gained traction. Unable to keep up with customer support queries, Karpeles hired his first five employees in June of that year, shortly after the company said in public announcements that it believed one or more hackers broke into the exchange's database and drove the price of bitcoin down to zero.
Dazed by that security breach, a former employer said, Karpeles retreated to build a more secure trading platform but left the exchange offline, with thousands of emails from bewildered users unanswered until a group of bitcoin enthusiasts volunteered to come in to help. One was Roger Ver, who says he was stunned when Karpeles proposed they resume work on Monday rather than work through the weekend to solve the crisis.
"He wasn't ever focused on Mt. Gox like he should have been," said Ver.
As the exchange's business grew, Karpeles hired more staff to work in programming, customer support and user verification, eventually taking space in a central Tokyo office with 30 employees, with another dozen contractors overseas.
ROBOTS, EXERCISE BALLS
Karpeles wanted to be liked, three former employees say. He bought lunch for the entire staff and spent thousands of dollars on gadgets and equipment to make the office more "fun" - exercise balls for chairs, beer steins and robots. Late last year, in the middle of increasingly strained times for Mt. Gox, he spent an afternoon putting up a hammock in the recreation room.
But staff found it galling that the boss was buying these goodies even while he refused to give pay raises. They also became frustrated as they waited for Karpeles to authorise decisions or make progress on simple tasks. Developers, stuck without direct access to the Mt. Gox source code, resorted to playing video games, people inside the company at the time say.
Employees were also concerned that Karpeles' tight grip on all company affairs was causing a bottleneck: he was the only person who could access the exchange's bank accounts and bitcoin holdings and resolve requests by traders to cash out.
Former employees say they asked Karpeles to share the passwords to Mt. Gox's bitcoin wallets in case he became incapacitated or unable to access the data. He refused, leaving him as the only person able to piece together the passwords, written on paper stored at his home, the office, and an undisclosed location.
Karpeles' secrecy extended to the company accounts, which he refused to show to prospective investors who came to the company with proposals, according to former employees. Mandalah, a Tokyo consultancy that worked for Mt. Gox, was also frustrated by Karpeles' lack of interest in outreach and business growth, according to people with knowledge of the matter. Mandalah declined to comment.
As other competing exchanges developed more sophisticated trading systems, Karpeles diverted his attention from the exchange to buy an unrelated software company called Shade 3D and began to work on launching a 'Bitcoin Cafe' – which would accept the digital currency as payment - on the ground floor of the office, according to records and former staff.
Karpeles was planning to serve quiche and apple pies he'd made himself in the cafe, which would also showcase a point-of-sales system he had spent hours tinkering with, a former employee said. The cafe never opened.
($1 = 103.7200 Japanese Yen)
($1 = 0.7238 Euros)
For many crypto-minded libertarians, Bitcoin is the future of money. But that dream hasn't been helped much by the numerous high-profile legal cases involving the currency in recent years:The Bitcoin Savings and Trust hedge fund collapsed; uncertainty fueled the implosion of Mt. Gox, the currency's largest exchange; and the high-profile Silk Road takedown is a treacherous story combining Bitcoin, drugs, and alleged murders.
For now, though, one company sits above all others when it comes to cultivating a new level of direct customer mistrust in the Bitcoin community: Butterfly Labs.
For the past year, the Kansas-based Bitcoin miner maker has been embroiled in numerous accusations of fraud. Customer orders, totaling millions of dollars, were significantly delayed or never fulfilled. Through it all, the company insisted that mere manufacturing delays were to blame. However, suspicion never died down. In fact, it's getting worse after it came to light that Butterfly Labs' largest shareholder—a man who is a company co-founder, current "Innovation Officer," and member of the board of directors—pled guilty in 2010 to one count of mail fraud (PDF) for his involvement in an international, multi-million dollar lottery scam.
Now, the company's critics have fresh ammunition because of this same executive. A federal judge in Kansas has ruled that the man in question, Sonny Vleisides, violated the terms of his probation in the lottery scam case. As a result, Vleisides’ probation—previously slated to end in September 2013—will now continue for another two years. This ruling is Butterfly Labs' least concern. In light of new details from the recently published transcript of that January 2014 probation hearing, the legitimacy of the Butterfly Labs operation could soon be decided once and for all.
“I’m on a good track now”
According to the United States Postal Inspection Service, victims collectively lost more than $25 million during the lottery scam Vleisides participated in. The government accused his father, James Ray Houston (who has since passed away in prison), of being the mastermind behind the entire scheme. As the USPIS wrote in January 2011:
According to the indictment, the victims were purchasing “positions” in tickets for lotteries that would be grouped together or “pooled” to buy larger blocks of tickets, thereby increasing their chances of winning. Funds received from victims were not used to purchase tickets, but to pay “winnings” to other victims, to fund the scheme, and to benefit the defendants. Victims were sent checks falsely represented as lottery “winnings;" however, the amount of the alleged “winnings” was far less than the amount the victim had sent in.
Vleisides and three others were also implicated in the scam, and he took a plea deal. In a post on Bitcoin Forum in September 2012, Vleisides described the experience this way:
After two and a half years preparing, we neared trial. The prosecutor calls for a meeting and offers me a deal. I can go home if I accept a single count of mail fraud and skip the trial. They would drop 23 charges and leave me with a simple postal violation (lesser count of mail fraud). I thought about it and it didn't take long for me to agree to get the shackles off. I signed and went home to my mother's house in Kansas City. I sat there looking at the wall for a long time. I didn't feel like leaving the house much. It was difficult to get over the emotional loss. My life was ruined. Mom got me an account on match.com and encouraged me to date. I met a wonderful girl and we had a little boy. We named him Indy. My life continued and I started to look for a new project to begin again. A fresh start. I'm on a good track now, trying to put the past behind me.
When Vleisides moved to Missouri, his case was transferred to that federal district for judicial supervision of his probation, which included this “special condition”:
The defendant shall not engage, as whole or partial owner, employee or otherwise, in any business involving loan programs, gambling or gaming activities, telemarketing activities, investment programs, or any other business involving the solicitation of funds or cold-calls to customers without the express approval of the Probation Officer prior to engagement in such employment. Further, the defendant shall provide the Probation Officer with access to any and all business records, client lists, and other records pertaining to the operation of any business owned, in whole or in part, by the defendant, as directed by the Probation Officer.
Vleisides recovered from his mental slump and soon helped start Butterfly Labs. According to a 2012 court document, Vleisides’ lawyers say that BFL “began on napkins, scraps of paper, and spare parts on his kitchen table," adding that "the hours that Mr. Vleisides has put in to develop the product have been long and arduous. There have been times when he arrived before the sun came up and left after it went down." While Vleisides was "remorseful about what has occurred," he was looking toward a better future, they added. "The justice system could not ask for more from a person that has been punished."
Revenue and a growing rap sheet
But on September 3, 2013, Vleisides’ probation officer, Courtney Pierce, filed a violation report with the Missouri federal judge handling his case (just over two months after Ars published our first articles about Butterfly Labs and its mining machines). In her memo to the judge, Pierce wrote that Vleisides was now an employee of and the dominant shareholder in BFL, a company which "advertises all of its technology for purchase through pre-order... Vleisides did not seek the express approval of the probation officer prior to engaging in a business that involves the solicitation of funds through pre-orders."
The Probation Office has been notified by the US Postal Inspection Service that hundreds of complaints have been filed against BFL from individuals who have placed pre-orders for hardware from BFL.The seriousness of Vleisides' instant offense [the lottery scam], coupled with his current involvement in a somewhat similar business enterprise are cause for concern.
Before Vleisides' violation, BFL was already facing accusations of fraud and mismanagement. In December 2013, a German-Polish man who lives in China filed a lawsuit over a $62,000 order that was never fulfilled; he accused BFL of breach of contract, fraud, and negligent representation. And Butterfly Labs lost a civil case by default in Kansas’ Johnson County Court in late November 2013. The plaintiff, a Californian named William Lolli, won a judgment of more than $13,000 but told Ars that he has not yet collected the award.
The company's troubles may only worsen from here. A new lawsuit filed in early April 2014 (read the21-page complaint) accuses BFL of engaging in “deceptive and unconscionable business practices.” The suit, which seeks class-action status, was filed earlier this month in Kansas. It accuses BFL of collecting payment for “non-existent Bitcoin mining equipment, failing to ship Bitcoin mining equipment orders for which consumers have pre-paid, misrepresenting the date such equipment is to ship to customers, and profiting from Bitcoin mining for Defendant’s own benefit using customers’ equipment without permission or authorization from customers.”
BFL, its corporate attorney, Vleisides, and Vleisides' criminal attorney all failed to respond to Ars’ repeated requests for comment. But it's clear that despite all the legal wrangling, the company is doing well. According to testimony from BFL’s de facto chief financial officer, the company expected to earn $25-$30 million in revenue in 2013.