Tokyo Metropolitan Police have arrested Mark Karpeles, the former head of defunct bitcoin exchange Mt. Gox over accusations that he siphoned off $1 million in customer funds to his own bank account.
The exchange filed for bankruptcy protection in Japan in February 2014 and the US one month later after losing 850,000 bitcoins - worth more than $500 million at top-of-the-market prices. Karpeles blamed the losses on a software bug in the blockchain that let hackers plunder accounts.
While 200,000 of the missing bitcoin were later found in an old digital wallet, reports are emerging that Karpeles allegedly presided over a wild and dysfunctional enterprise that treated customer funds with disdain.
The wild west nature of the Mt Gox business has been detailed on reddit by a poster claiming to be Ashley Barr, a former employee at Mt. Gox, who claims that his testimony to Tokyo police was instrumental in Karpeles arrest.
Asked by Karpeles to become CEO, Barr recounts doing due dilligence on the company's accounts: "The expenditures far exceeded every model we had for income. I confronted Mark about it, told him I couldn't take the role if he couldn't explain this gross incompetence in spending (he was also asking employees other than myself to find investors...something impossible without knowing the financial status of the company). Around the same time, we learned that Mark only had one bank account, shared with Mt.Gox's customer deposits. That was the nail in the coffin."
From Barr's account, it appears that Karpeles may have been spending money frivolously while bitcoins were cheap, and was caught up short as the currency began to spike in value. The revelation that the company only ever had once account that was shared with customer funds, if true, could explain a lot.
As one Reddit poster comments: "I guess this really may be an Occam's Razor situation; no hackers, no complex losses due to poor coding - just straight up lavish spending from the corporate (err, personal) bank account. Yikes."