(Reuters) — Mt. Gox, once the world's largest bitcoin exchange,
received U.S. bankruptcy protection on Monday to temporarily halt
U.S. legal action against the Japanese company by traders who allege
the operation was a fraud.
Judge Harlin Hale in Dallas granted temporary bankruptcy protection
to Mt. Gox, which had filed for bankruptcy protection in Japan in
February. Attorneys for Mt. Gox said without bankruptcy protection
the company would be irreparably harmed by a proposed class action
in Chicago federal court and a breach of contract case in Seattle
federal court.
Mt. Gox filed for bankruptcy in Japan last month after it said it
may have lost 750,000 of its customers' bitcoins as part of an
attack by hackers.
The plaintiff leading the Chicago lawsuit was scheduled on Tuesday
to ask a federal judge to freeze Mt. Gox's U.S.-based servers and
other computer equipment and to set up a trust over Mt. Gox's
assets. Mt. Gox's founder, Mark Karpeles, was scheduled to be
deposed later this month in the Seattle lawsuit.
The attorney leading the class action blasted the bankruptcy as a
ruse.
"This case involves a massive fraud," said Steven Woodrow, an
attorney leading the class action, told Hale. "They claim incredibly
that they will preserve assets and protect assets by entrusting the
servers and other property to Mr. Karpeles. Respectfully, your
honor, that is the definition of the fox guarding the henhouse."
Mt. Gox said in papers filed with the Dallas court that the hacking
attack was the subject of an intense investigation that indicated so
far the bitcoins were lost as a result of a flaw in the software
algorithm that underlies bitcoin, the digital currency.
An attorney for Coinlab Inc, which sued Mt. Gox in Seattle for
breaching a contract last year, said her client was troubled by what
appeared to be fraudulent behavior by Karpeles in the days leading
up the U.S. bankruptcy filing.
"We don't have proof yet but we do have concerns about the movement
of hundreds of millions of dollars in bitcoins over the weekend,
moved by Mr. Karpeles," said Jane Pearson, an attorney with Foster
Pepper.
Mt. Gox's attorney, David Parham, denied there was any fraud and
said he believed Karpeles and Mt. Gox were complying with the
Japanese bankruptcy proceeding.
The Chapter 15 filing allows Mt. Gox to ask the U.S. Bankruptcy
Court to recognize its foreign bankruptcy and to assist in the
Japanese proceedings by protecting its U.S.-based assets.
Hale's order protects Mt. Gox's U.S. assets until April, when the
parties will return to court and Mt. Gox will seek a permanent stay
of U.S. litigation. Hale said his order staying litigation did not
apply to non-debtors, presumably Karpeles.
Karpeles was named in a proposed class action filed in late February
by Gregory Greene, an Illinois resident. The lawsuit proposes to
represent all U.S. residents who paid a trading fee to Mt. Gox and
those who had bitcoins or other currency with the exchange when it
halted bitcoin withdrawals on February 7.
Greene is seeking to recoup millions of dollars lost when the
mtgox.com website went down and prevented traders from selling as
bitcoin prices plummeted.
Mt. Gox is also defending a lawsuit in federal court in Seattle by
CoinLab Inc for breach of contract. CoinLab is seeking damages of
$75 million from Mt. Gox.
Mt Gox's tangled web of shell corporations brings turns the
spotlight back to an issue U.S. law enforcement authorities have
perennially raised with Congress. Several states, including
Delaware, where Karpeles had at least two registered corporations,
let foreigners register new corporations without ever setting foot
in the United States, relying instead on agents to act as conduits
for the companies' owners.
The agents send along documents like lawsuits and other business
communications addressed to the companies but keep no records
themselves. They do not keep track of who the company's true
beneficial owner may be. When investigators want to find out more
about these companies' activities, the only information they can get
from the agents is contact information for whatever overseas entity
has been designated to receive correspondence about the company.
Such is the structure of Mutum Sigillum, a company Karpeles
registered in Delaware. He used it to interact with a U.S. bank
through Dwolla, an online payment network. Real money passed through
Mutum Sigillum (which means "worthless little symbol" in Latin) but
it left almost no paper trail in the United States.
It was registered in Delaware by Vincent Allard, a French Canadian
lawyer who for the past 13 years has been living in Dover, Delaware
and, along with his daughter, running a business acting as a
registered agent for Delaware corporations.
Allard specializes in creating companies for people from Francophone
countries, since he speaks French.
When reached by phone on March 5, Allard said he had not heard of
Mt. Gox's bankruptcy in Japan and would nevertheless have almost
nothing to offer investigators if any were to come knocking.
He was not in the office Monday and did not immediately respond to a
request by email for comment on the Texas filing.
Representatives from the Federal Bureau of Investigation and other
law enforcement agencies have been lobbying Congress for years to
pass a bill that would prohibit states from allowing the
incorporation of shell companies without better documentation and
more oversight.
The Incorporation Transparency and Law Enforcement Assistance Act,
introduced in 2011 by Sen. Carl Levin, is before the Senate
Judiciary Committee awaiting a markup.
The bill would require states to record the identities of the
beneficial owners of corporations they register and keep a
corresponding driver's license or passport number, or a copy of a
foreign passport on hand, ready to turn over to law enforcement
officials if necessary.
The case is Mt. Gox Co Ltd, U.S. Bankruptcy Court, Northern District
of Texas, No. 14-31229.
(Reporting by Tom Hals in Wilmington,
Delaware; additional reporting by Emily Flitter in New York; editing
by Jeffrey Benkoe and Richard Chang)
