(Source: Magical Tux/Flickr)
CEO is alleged to have committed massive market manipulation which lost a fortune in customer money

When it comes to distraught customers of Bitcoin robber baron Mark Marie Robert Karpelès, there may be no happy ending.  And while customers and critics can complain about the former CEO of what was -- for a time -- Bitcoin's biggest money exchange, one thing is for sure.
They can't say he didn't warn them.
X. How Investors Learned to Love the Ticking Time Bomb
He once asserted in an argument on Twitter:
The claim -- like so many telltale clues dropped by Mr. Karpelès -- was a disturbing hint at his dangerous overconfidence in his own coding prowess.  According to recent reports the young CEO shut out his staff, appointing himself code dictator.  He refused to allow his own developers to do what they were paid to do -- make code changes.  And there are rumblings that he may have even committed a stunningly stupid and impulsive gambit, selling his customers' deposits at a fraction of their value in a moment of fear.
Ultimately the 28-year-old CEO managed to unintentionally prove his own point, showing that it was terribly foolish to trust any man -- but especially this man -- with so much money tied to so little accountability.

Mark Karpeles
Mr. Karpelès' lack of caution with customer assets mirrored investors lack of caution in hiring him as their advisor.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

But for those whose lives Mr. Karpelès wandered into and out of before his turn at fame, this likely came as no surprise.  Even a simple Google search would have shown investors unsettling elements which painted the young developer as a ticking time bomb.
Due diligence could have helped these investors learn to love this bomb a little less and start worrying a little bit more.
XI. Less Wolf, More Awkward Turtle
Bitter "bitconned" investors and members of the mass media have shown themselves fond of adopting sensational titles for Mr. Karpelès such as "the Bernie Madoff of Bitcoin" or the "the Wolf of (Digital) Wall Street".
Such titles are meaningful only so far as that they illustrate the sense of betrayal and the transformation of Bitcoin investors' attitudes towards Mr. Karpelès.  As time passed, this young executive went from self-appointed Bitcoin royalty -- a figure adamantly admired by the payment scheme's evangelizers -- to a digital pariah.

And yet such terms also fall short as they portray Mr. Karpelès as being much more clever and socially aware than he really was.

Mark Karpeles
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

Some may wonder why the story about Bitcoins is worth discussing in such detail.

One compelling argument for thorough examination can be given in a word -- money.  Mr. Karpelès lost a whole lot of it, and in a rather head-scratching fashion.

In a broader sense there's also lessons to be learned by any readers from the case.  For Bitcoin's backers the man and his actions are worth examining so that the movement can try to avoid this kind of debacle in the future. 

For those who aren't fans of the Bitcoin, the case is still important as it represents the power of fraud in the digital age.  We live in an age where millions can be stolen in a click.  While the story of Mr. Karpelès may seem to be a rebuke of the Bitcoin movement, it's not just Bitcoin's problem, to some extent.  Rather, it represents a cautionary tale of money, trust, and the internet.

Wall Street Ponzi schemes and other forms of white-collar fraud typically required a certain level of sophistication on the part of the purveyor.  The ringleaders were almost always socially savvy con artists, who knew the right thing to say at the right time and always seemed to be living the dream, until it was too late.
In terms of the loss itself, the fall of Mt. Gox certainly resembles the end results of Bernie Madoff or the real life "Wolf of Wall Street".  But what is fascinating is that the man who lost it all couldn't be farther than those figures that he is being compared to.

Karpeles in Israel
Karpelès in Israel in 2006
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

Even at the pinnacle of his success, his odd behavior drew snide remarks.  A self-described geek with a love for internet culture and online gaming, he had much more in common with the average World of Warcraft addict than the "Wolf of Wall Street".

XI. Karpelès Subscribed to the "Share" Everything Blogging Plan
While there have been a handful of excellent reports on the topic notably Wired's coverage and the work of certain bloggers such as Rick Falkvinge, most news seems to be reporting on the topic with various degrees of inaccuracy. 

Some paint him as a savvy conman -- something that is laughable if you look into his history and postings.  While the term "hustler" might be an accurate description of his work history, never had he messed up quite this badly.  Assuming the likelihood that he did something illegal in losing that half billion, it was almost certainly a crime of opportunity or accident.

Ever the attention seeking dreamer, Mr. Karpelès blogged about his life in explicit detail since at least 2005.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

Other reports have gone to the the other extreme, taking Mr. Karpelès at his word.  In a way this is even worse, as it was that kind of blind trust in someone who is clearly not trustworthy that put the victims of Mt. Gox in the position to lose it all in the first place.

In short, the mass media -- while eager to report on the issue -- aren't overly interested in looking too deeply into it.

And that's a dangerous thing for Bitcoin fans and Bitcoin detractors alike.  People deserve to learn the true story of Mr. Karpelès.  And the facts necessary to form educated perceptions of reality are actually not so hard to find.
In fact, it's quite easy -- given that Mr. Karpelès was clearly a subscriber to the "share everything" plan for over a decade.

Even in his generation, who grew up with blogging, social networking, and internet content sharing, it's rare to see someone this prolific and public.  Mr. Karpelès clearly spent an extraordinary amount and time and effort to post such a vast collection of personal and professional content to the internet.  Among his public postings:
After exhaustively examining these, we have gained a clearer picture of who this fallen leader was, particularly signs of where his strengths and flaws likely lie. 

Karpelès in early 2008
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

In his own words and pictures, he appears almost eager to regularly share intimate details of his personal and professional life, which is not in itself that uncommon.  But what comes as more of a surprise is his willingness to share even when those details paint rather damning portraits of the poster.
XII. Desperate to be Admired and Belong
From the frenetic pace of postings over the years, we can directly gather a couple of generalities about his personality and how he operated.
First, he had a driving need to connect to others and to gain their acceptance and admiration.  This drive would often leave him depressed and cynical.
At the same time the postings reveal how Mr. Karpelès unconsciously put up both a literal (the lens) and metaphorical (actions and demeanor) barrier between himself and his friends.  It seems an ironic duality existed between his need for attention and his own behaviors that blocked his chances at receiving it.

Karpeles contemplative
Karpelès put up barriers between himself and others, barriers which would drive him on a selfish quest for bitcoin riches and respect.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

He often wrote directly of how he felt a failure to connect with his fellow "geeks" and the less geeky alike.

Mr. Karpelès would blame this on his tech skills or love of "geeky" things like anime.

Karpeles showing anime
Karpelès would use his love of technology and anime as an excuse for his personal problems, when in reality they appeared to stem from a lack of basic social skills and respect for others.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

But he never really paused to consider why his friends -- who in most cases were just as geeky as him -- weren't similarly struggling.  While they were able to find dates and experience the unfettered joys of comraderie, Mr. Karpelès remained disconnected and ever-searching behind the lens.

In a Twitter post he grumbles:
He elaborates further on this disconnect in his writings, stating (translated):

Never during these 20 years I have spent in France have I felt at home.  [On the one hand] I [have] had quite a few family worries.  [Then again], I'm never felt really at home.

Truth be told, I constantly felt like [there was] a vacuum in my life, a little as if I wasn't in my place I was meant to be, or that I was missing something to actually [fully] live, not [just] survive.

3 months ago I lived in France, in a small apartment, and I had a job at the Fotovista (who makes Pixmania and other software). You could say that my life was filled... and yet it is far from the truth.

Finally I took a chance and I left the France. I arrived [here] in Israel and I [tried to integrate] at the speed of light. However, even if the frame is nicer, I don't always feel at home.

I tried many things to try to find my missing half my roots, my home, something that makes me feel good... but so far I've always failed to find a way of life that allows me to feel "alive". It is both painful and frustrating.

In addition, recently, I learned that there was a possibility, admittedly small, but existing, that a part of my family [might] be Japanese. Unfortunately I do not yet have the evidence to confirm or deny this possibility, but I [will look into it].  [If] it proves to be true, it could help me has better understand why I suffer so much from the Western way life.

In 2005 he made the fateful decision to skip out of his job at the time without informing his employer -- in order to take an impromptu vacation to Japan.  That would lead to his firing, leaving him in dire straits financially.  It would also showcase troubling tendencies towards recklessness and impulsive actions.  In the end it would foreshadow the bigger losses that would come years down the road, losses that hit the Bitcoin community like a bag of bricks.
XIII. Japan Turns Loner Into Extrovert, but Insecurities Live on
The isolation felt by Mr. Karpelès often flows over into his photoblogging.  He seldom appears in his own photos.  He often takes pictures of strangers -- particularly young women he spotted walking on the street or at the beaches.

For all his thousands of pictures, only one in every 30 or 40 did he appear in.  And the majority of those shot's were a loner's selfie.

Karpeles Samurai
Karpelès has clung to the belief that he might be part Japanese.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

It is a rare photo in which he is he seen naturally interacting with others in a group.  And considering that Mr. Karpelès documented most of his weekly outings extensively with his camera, it illustrates his relative isolation was a rule not an exception.
Don't be confused; Mr. Karpelès had plenty of friends.  But while they were living life, he was photographing it.  Not surprisingly, in his writings he expresses the sentiment that he never really felt connected to most of them.

Mr. Karpelès would eventually overcome this strong feeling of isolation to a degree, while living in Japan.  He met a Japanese woman and they started dating.  Later they would be wed in April 2011.

Karpeles roller coaster
Karpelès eventually found love, despite his social problems.
[Image Source: Mark Karpelès on Yfrog; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

In Aug. 2007 he writes about his (then) new girlfriend, crowing triumphantly:

You probably can’t believe it, but I now have a girlfriend, who happen to be a cute Japanese woman. Looks like being geek is not really a problem in Japan.
But even if Mr. Karpelès was no longer the sad outsider, the behavior patterns that those long-lingering feelings had bred lived on.

XIII. Love for Animals, Callous Disregard for Humans

In many ways Mr. Karpelès appeared to care more for animals than humans.

His attitude towards employers, employees, and humans in general appeared over cold and callous at times.  He seemed to have little compunction with lying to the face of supervisors (according to reprimand letters and various sources) and was unsympathetic enough to crack a small grin despite his Bitcoin investors' woes.

Karpeles chatting
Karpelès showed no capability to stop himself from slacking off at work, but more troubling was his ability to try to lie to his his employer to cover it up.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

Before meeting his wife, his only consistent friend and companion over the years was Tibane, a white and orange tabby cat.
Mr. Karpelès' love for the cat was so abundant that when he founded his Japanese company (which would eventually go on to purchase Mt. Gox) he would name it after his pet, adding an 'n' to mildly disguise this interesting fact.

Tibanne kittie
Tibane made the move with Mr. Karpelès, jetting from France to Japan.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

He intensely admired his cat, nearly to the point of obsession, spending vast amounts of time chronicling his feline friend's day-to-day existence in photographs.

He also posted a number of interesting YouTube videos of his favorite tabby:
Clearly Mr. Karpelès -- was animal lover, particularly animals of the feline variety.

Mr. Karpelès plays with a kitten while working in Israel in 2006.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

Mr. Karpelès even took to wear animalistic hats on a regular basis, a trend that merged his love for animals with a love for anime/cartoons.

Karpeles hats
Mr. Karpelès was fond of taking self photographs of himself with animal hats, as seen in these images from 2006 and 2007.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

But when it came to humans Mr. Karpelès struggles were far from just internal.

XIV. Strongly Opinionated Developers Regularly Fell Victim to Overconfidence, Bias

The young developer was extremely opinionated, as well, often attacking others' opinions in technical debates on Twitter.  One such example -- which proves interesting as it would later lead to him getting hacked -- was his contempt towards distributed Linux binaries:

Kenshin: It is by default in my Fedora 12 ... :P
Mr. Karpelès:
I will not say what I think of Fedora (or any rpm distribution in general. For me there are only Debian and Gentoo.
Welcome @giyomu young Parisian who Ubuntu enthusiast who now follows a Ubuntu critic: ME. : D ^ _ ^
Mr. Karpelès:
Precisely I am anti-RPM, pro-deb (except Ubuntu), and pro-self-compiled (BSD, Gentoo, etc)

Mt. Gox's owner was obsessed with gentoo Linux, and hated more mainstream distributions

He insisted on using distributions like Gentoo that required the user to painstakingly compile actual source files for each install or major update.  He made such snide remarks, such as:


I have a Debian on the laptop. Hey, it works. But it makes a sound of sputtering death.   Tomorrow I will play with the laptop xD
Mr. Karpelès:
The moral of the story? Debian is not a Linux distribution.  Thank you for coming.

Such inflexible dogmatic opinions are dangerous in any technical impression, but not necessarily uncommon.  At most companies this kind of thinking will get drowned out to an extent democratically, but at Tibanne/Mt. Gox Mr. Karpelès' dictatorship prevent that.

Mr. Karpelès had written of amateur hackers:

I will add a third category in this page. [This kind] proclaims themselves "hackers" but are really just "script kiddies." These are people who hope to impress friends / boyfriends / chatters / other (delete as appropriate) by showing them they can do lots of things. Obviously they just use programs and faults discovered by hackers (white hat or black hat, both can write safety reports) and their capacity is limited to using google (already not too bad).
It was clear that he felt himself well above such amateur antics.  But the "script kiddies" would run wild on his Mt. Gox database early in 2011, stealing customer passwords.  And he was the one left to make embarassed excuses.

And Mr. Karpelès' trademark brand of elitist overconfidence would again lead to another loss of customer data to a team of hackers purportedly from Eastern Europe, who penetrated Mr. Karpelès' unpatched/outdated Gentoo servers sometime in the last few months. 

Comments a messenger for the hackers:

<expletive> French (Mr. Karpelès) [did] not update.

Karpeles coding on a train
Mr. Karpelès was sure others' opinions were inferior to his own.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

While he seemed to doubt himself as a person, Mr. Karpelès repeatedly showed a tendency to vastly overestimate the merits of his own knowledge and technical competence.  He also showed little ability to separate his opinions and bias from facts.  Both traits would come to pose a real danger to his customers.
XV. Arrogant and Entitled
Working hand-in-hand with his need for acceptance, the young developer's overconfidence and opinionated nature led to a strong streak of dangerous arrogance.  To Mr. Karpelès his perceived superiority over his peers was so obvious that he felt owed the privileges of power and leadership.
At times his opinionated nature seemed to devolve into arrogance -- a tendency we would see later accentuated in his time at Mt. Gox.  He shows hints of this in one of his blogs, writing:

MagicalTeam protectors of free and the free!

Here's a little idea that came to me while I was returning from my bike ride... I will create a vigilante group has the style of Sentai manga (e.g. Power Rangers).   Obviously I would be the leader, so I have the ranger leader's red coloring.

I will convene the most appropriate elements to empower developers and train a squadron of 5 free-rangers.

Even months after being fired Mr. Karpelès was sure that was owed leadership and power.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

In a blog later that month he writes:

It is possible that the destiny of a person is created depending on the motivation and interest of this person.  In summary, to live well, we must [all] live [selfishly/for ourselves], shutting others out like a clam.  Manga also [teaches] young people that [even] when someone appears to [be a] "bad guy" (someone who causes problems for those [standing in] their way) they are not necessarily [actually bad]. 

Bear in mind, these boastful blogs came just months after he had been fired for the second time in just two years and having blogged that he had seriously considering hanging himself with a network cable from a high-rise window. Clearly, even then he failed to recognize that leadership is only earned by hard work and merit.
Once more, this issue come strongly into play in the fall of Mt. Gox.  For all the uncertainties, it is now clear that Mr. Karpelès continued to take customers' money and rebuke their criticism, long after things got bad.  Regardless of how the exchange became insolvent, by fall 2013 he clearly was aware that it was insolvent, and yet his arrogance blinded him from making an apology for months.
XVI. Unable to Produce
For someone so arrogant and confident in his abilities, you might expect him to be a terrific employee.  But the truth was not so rosy.

While he showed himself perfectly capable of working very hard in short bursts, he was basically incapable of sustaining effort and building long-term lines of work.
As a rule, his work experiences consisted of a period of months to a couple years where everything was going well.  Perhaps due to his desire for kinship and acceptance he gravitated to small, tight-knit development houses -- the kinds where the entire staff would go out for drinks after hours.
For this introductory period he would always seem happy and productive.  But then at some point something would shift and he would start shirking his responsibilities and in some cases, by his own accounting, simply not showing up to work.

Karpeles repairs machine
For a time Mr. Karpelès would be enthusiastic and productive at the job.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

It appears that of the four professional jobs he held before Tibanne (aside from a brief first post that was cut short by bankruptcy) he became disenchanted with two of his jobs and quickly quit, while at other jobs he became so lazy, insubordinate, and unproductive that he was fired.
To Mr. Karpelès these firings were the fault of everyone else but himself.
Likewise, Mr. started numerous hosting businesses over the years.  Some would fail organically due to external factors, but others would fail due to Mr. losing interest in them, and ignoring customers.  In a blog post, he recalls have started at least seven or eight now-defunct hosting firms over the years.  In the blog he delivers a laundry list of "lessons learned".  And while some were decent observations, they ignored the underlying common narrative, which was his own arrogance and inconsistency self-sabotage, his business.
He did seem to recognize this on some level, if only subconsciously.  In a Jan. 2009 blog post he writes:

I never finish anyth…
In fact, sometimes, I happen to finish something, but “finishing something” is just too boring. I always do a new version at some point, so nothing is really “finished”. Just tag it with a version number and continue it (already got this thinkgeek tshirt).
But that was just half of the problem.  The other half -- which he showed little signs of realizing -- was that he blamed others for the messes he perpetually created over the years.

XVII. A Man-Child Living in Dreams

A final element of Mr. Karpelès' issues was his tendency to childish behavior and fantasy.

This tendency was perhaps epitomized by the now infamous Reuters interview he delivered bizarrely perched on a bouncy blue exercise ball.

It was apparent that even in the casual world of web technology, Mr. Karpelès regularly crossed the line from relaxed/casual but business like (a la Mark Zuckerberg) to appearing like an overgrown man-child.
His childishness and predisposition to flights of fantasy may have been a key factor in why his employers’ and customers’ criticism never really forced him to recognize what he was doing.  He was truly living in his own world, a world in which he was an anime superhero, uniquely called up to lead the masses.

samurai Karpeles
When not mired in depression Mr. Karpelès viewed himself as some sort of anime superhero
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

These traits may also have contributed to why he lost enthusiasm in positions so quickly.  It almost appeared as if Mr. Karpelès was unwilling to allow his fantasies to be destroyed and would rather get fired or destroy his own businesses, rather than adjust and behave like a responsible adult.
As you read the conclusion to this story and various hypotheses of where the money went, keep these key traits in mind.
To recap, Mr. Karpelès was driven by a desire for acceptance and admiration, was dangerously overconfidence in his own skills, was mercurial in work effort, was prone to lying, was prone to blaming others, and lastly was prone to childish behavior and flights of fantasy.
Given these tendencies one would expect that internally Mr. Karpelès is blaming everyone but himself for losing his customers' money and driving Mt. Gox into bankruptcy.  While he will eventually try to escape to his next fatal fantasy, he blew his best shot at what he most wanted -- fame, admiration, and leadership.
XVIII. Despondent, Struggling With Recent Arrests and Firings, Karpelès Moves to Japan
When we left off, after burning out of jobs in France and Israel, the young developer at last secured an opportunity to fulfill his lifelong dream and move to Japan.

Karpeles in Japan
In 2009 Mr. Karpelès fulfilled a long-standing dream and moved to Japan.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

Seeking a happier home, he fled to Japan, where he found work with a French IT firm ( that had been acquired from a Japanese conglomerate (Nexway).
At this point you may be wondering if these were the only surprises lurking in the past of the troubled young leader (or former leader?) of the Bitcoin movement.  Well the good (or bad) news (depending on your perspective) is that the best is yet to come.
The new resident of Japan began to neglect his work at Nexway.  For months he brazenly wrote on his public Twitter account -- which he often used to conduct professional business -- that he was plotting to leave his employer and strike out on his own.  It was seemingly an unsettling and disrespectful attitude, but it was typical of the man.

That plan was executed in Dec. 2009 when he left Nexway and launched his own firm K.K. Tibanne, Ltd.  He had limited, cash, so he pursued a number of projects to try to generate capital.
XIX. Business is Slow
By Oct. 2010 Mr. Karpelès' experience in web hosting allowed him to gather up some customers, but he was still struggling, living from paycheck to paycheck in the less expensive Shibuya district.

Mr. Karpelès had an apartment in 2010-2012 in the less expensive Shibuya district, just a walk away from a buzzing downtown.
[Image Source: Mark Karpelès on Twitpic; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]


Freewheeling, not enough customers, but it comes slowly...

In late 2010 he became interested in Bitcoins, announcing that he would accept them as payment for hosting services (rather unusual at the time) and announcing his work on a Bitcoin Qt client.  He posts:

Meanwhile he hungrily eyed a fledgling Bitcoin exchange -- Mt. Gox.
XX. Dreams of Bitcoin World Domination Begin With Hunt for "an Investor"
To purchase the young exchange, he would have to channel every ounce of his inner shark.  He first needed to both convince the operator to sell it to him cheaply, arguing that he could transform it into an empire.  And even if he could accomplish that, he still had to find a way to scrounge up tens of thousands in cash -- money he didn't have.
(Note: Past speculation has suggested the deal was worth hundreds of thousands of dollars, but leaked documents indicate it was worth tens of thousands at most, with much of the deal being an equity for development responsibility arrangement.)
He writes on Twitter:
It seemed a daunting task.  But luck was on his side. 

According to a report in Cryptocoins News, he had just maneuvered his way into a lucrative contract in clever fashion.
In early 2010 a young French entrepreneur with the last name "Dubois" had hired a Moroccan developer to create a website for him.  In June 2010 the site was finished, but Mr. Dubois was uncertain of the quality of the final product, feeling it doesn't match his vision.  So he reached out to Kalyhost, the URL of Mr. Karpelès' bankrupt first employer, which he had revived into a hosting page for Tibanne. 


Smelling the aroma of potential contract money, Mr. Karpelès, gladly agrees to analyze the website for free.  In his replies he proceeds to heavily criticize the external design.
Upset, Mr. Dubois files a complaint regarding the Moroccan developer and asks his new French compatriot if Kalyweb might be able to do the development.  At this point he is told that Kalyweb can't handle the project, but that a new firm K.K. Tibanne, which Mr. Karpelès is working on, could build the site.
Mr. Dubois subsequently signs a contract with Mr. Karpelès.  By Oct. 2010 the pair agree to a three-stage €20,000 ($27,460 USD) development plan.  A €5,000 ($6,870 USD) down payment is placed.  Mr. Karpelès returns several months later with bad news.  His hired graphics artist failed to complete a subcontract on time, so the first stage of the three-step development process was stall.
XXI. Karpelès' Lies, Money Grab to Client Lead to Lawsuit
The only problem?
That was a complete lie.  According to court records, Mr. Karpelès could never provide any evidence that there was a subcontractor.  By all appearances he had simply taken Mr. Dubois' money, done no work, and then invented a fantasy to cover himself.
A couple months later Mr. Dubois was suffering from some unfortunate health issues and was in a hospital bed.  He reached out to Mr. Karpelès desperate to get the work done.  Mr. Karpelès informed him that he was having financial difficulties and would need €10,000 ($13,740 USD) to continue the work.
Mr. Dubois sends the money, hoping for a change of luck.  Instead he received a bizarre reply from Mr. Karpelès.
Allegedly Mr. Karpelès claimed that the bank blocked the €10,000 transfer, suspecting Mr. Dubois was involved in money laundering.  He claimed that Japanese authorities had told him that he would not be allowed to speak to his client any more or continue the project.

Euro notes folded
[Image Source: Internatonal Development EU]

Except none of this was true.  It was a pure lie, invented to steal €15K (over $20K USD), while doing next to no work.
Again, if accurate the most interesting part of tis report is that this alleged theft is its correlation in timing to the partial purchase of Mt. Gox in March 2011.  If accurate, it is highly probable that Mr. Karpelès turned around and used these (basically) stolen funds to buy MtGOX from Jed McCaleb.
Mr. Dubois eventually hired a Japanese lawyer and tracked down Mr. Karpelès.  A Japanese court eventually awarded Mr. Dubois substantial damages after an expert witness gave a compelling analysis of Mr. Karpelès supposed "progress" on the site.  Analyzing the code progress on the project that Mr. Karpelès eventually submitted for the court, he concluded that the site code was "unusable" and constituted only roughly 5 percent of the necessary code, despite Mr. Karpelès having scored three-quarters (75 percent) of the total contract.
A big irony is that Mr. Karpelès had been so critical of the original Moroccan developer in a clever ploy to gain the contract, yet it appears the Moroccan developer actually produced better resultants than Mr. Karpelès as his site, if not satisfactory, at least worked to some extent.
Some have called the veracity of this report into question, but it's important to remember that many civil complaints are sealed by court and never published online, so a lack of a visible paper trail in searches does not necessarily mean the tale was false.  And the behavior describes certainly matches up with recently revealed documents from former employers who indicate that he was more than willing to breach his employment contract and lie to them.
Either way, far worse publicly documented events would unfold in years to come.
XII. Playing Dictator, Mr. Karpelès Crafts a Flawed, Poorly Written Engine for Mt. Gox
Perhaps using the ill-gotten fruits of the scheme Mr. Karpelès scored MtGOX, which internal documents hint might have been purchased for less than $50K USD.  According to leaked documents, which detailed the equity arrangement explicitly, Mr. McCaleb would not run the business, but would retain a 12 percent equity stake.  Tibbane would take control of 88 percent of Mt. Gox.

Mt. Gox
Mr. Karpelès eagerly assumed the role of Bitcoin "King".
[Image Source: Reuters]

At that point Mr. Karpelès would allegedly make another arrogant and ill-considered decision, deciding to rewrite the working trading code to a more PHP-heavy framework.

The resulting code, which leaked this week has been heavily criticized.

Mt Gox source code

Mt. Gox source code

Among the issues:
  • Fixing what isn't broken

    According to Wired:
  • Karpeles soon set about rewriting the site’s back-end software, eventually turning it into the world’s most popular bitcoin exchange.
  • Poor security

    According to Reddit and Hacker News's analysis of the leaked source code, even after the site suffered SQL injection attacks in 2011, there was no evidence of parameterization in the in-line SQL expressions, despite big promises at the time of enhanced security.  Thus two years later, the site remained very vulnerable to data loss from malicious queries
  • Bad form

    The code featured very lengthy functions, case expressions, and other conditional constructs.  Reoccurring "magic numbers" also littered the 1700+ line code.  Some have suggested that Mr. Karpelès wasn't quite the coding "genius" he painted himself to be.
  • Dangerous financials

    The code used floating point numbers to represent Bitcoins and incoming currency.  While these were generally cast eventually to an integer, they would invariably suffer some extend of roundoff losses, which is considered unacceptable by professionals writing code for financial institutions.  Clearly Mr. Karpelès appeared to be out of his league
  • Dictatorship and No Version control

    Mr. Karpelès refused to let anybody change the source without asking for permission, according to Wired:
  • Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.

According to an insider who spoke with Wired:

[Karpelès] likes to be praised, and he likes to be called the king of bitcoin.  He always talks about how he’s a member of Mensa and has an above-average IQ.

Documents referenced by Wired even show Mr. Karpelès even tried to trademark the phrase "bitcoin" in several regions, perhaps ensuring his exchange an exclusive spot.

XXIII. Subjects Rebel Against "Bitcoin King", Threaten $75M Lawsuit

In a blog, the rising CEO once had written:

I never finish anyth…
In fact, sometimes, I happen to finish something, but “finishing something” is just too boring. I always do a new version at some point, so nothing is really “finished”. Just tag it with a version number and continue it (already got this thinkgeek tshirt).

By early 2013 he was in control of over three quarters of Bitcoin traffic and was happily embracing the role of its evangelist (or "king" perhaps).  But trouble was brewing.
Mr. Karpelès was struggling in court and appeared to be at risk of losing a million or more in damages.
In addition to the pending case of Mr. Dubois, there was another accusation of fraud.  CoinLab, a small American Bitcoin startup had reportedly paid Mr. Karpelès a substantial fee to secure permission to use the well-known Mt. Gox name for a pending exchange offering it was working on.  Mr. Karpelès took the money, but later seemed to go back on the written contract he had signed, saying his company would still do business with American customers.
That appeared in clear violation of the non-compete clause.
If Mr. Karpelès indeed violated the contract, it would not be the first time.  Later in 2013 a court would find he had violated Mr. Dubois' contract.  And by the sound of it he had also violated various workplace contracts over the years.
Mr. Karpelès was determined to fight, but he was also fearful.  CoinLab's lawyers threatened that if the case went to trial, they expected that a conservative estimate of just a "fraction" of the damages would be around $75M USD.
Where would the Mt. Gox CEO get the money if he lost?
XXIV. Massive Market Manipulation
A possible, if shocking answer would soon emerge.
In late March a mysterious figure emerged on Reddit calling themselves the "BitcoinBillionaire".  They proceeded to give away "around $12,000 (more than 63 BTC) worth of the digital currency" to 13 supposedly randomly selected Redditors.  The mysterious figure would say only that they were "early adopter."
Was the move a distraction tactic to disguise an upcoming sale?  Was it an attempt to raise demand?  Was the BitcoinBillionare, self-appointed Bitcoin "king" Mark Karpelès?  Redditors would be unable to find out as after a short April run, the mysterious benefactor deleted his account.  In a farewell message, the user wrote:

You've made me change my mind about this whole thing.  I'm done.

Soon after the sell-off would begin.
During March, Bitcoin trading volume dipped from around 20,000-30,000 Bitcoins exchanged per day, to around 100,000 by the end of the month.  This in turn triggered a plunge in value from around $600-700 USD per BTC to around $100 USD.
It seemed as if someone was testing the market, in retrospect, looking to try to push it to its max and see how much value could be cashed out.
Could Mr. Karpelès be behind this mess, looking to get cash to cover himself from potential legal liabilities?  It would be a stunning accusation if true.
XXV. Selloff Nets Coin Holder(s) Enough to Pay Off Karpelès' Lawsuits
Such a hypothesis would sound like pure paranoia were it not for a series of highly curious events. 
First, at the height of the trading madness, Mt. Gox suspended trading saying the market needed to "cool off".  This baffled many as other exchanges had never done this and indeed continued to trade despite Mt. Gox's stand.  Why would Mt. Gox turn away paying customers willing to give it millions in fees?
But what if Mt. Gox was not playing exchange at all?  What if it was playing shadow trader.  If Mr. Karpelès chose April 2013 to cash out most of his Bitcoin holdings to hedge his bets, it would have been basically impossible as -- at the time -- he controlled about three-quarters of the total Bitcoin exchanges.  It would have been far too slow a process, and far too obvious.
Unless... What if Mt. Gox were to close down?  Now, all of its accounts would be flowing out, being converted on other exchanges to USD.  Value would of course, plunge, but that was unavoidable with such a hasty and impulsive grasp at liquidity. 
But wouldn't this be obvious?  Well, what if someone wrote code to split Mt. Gox's wallet into thousands of smaller wallets, and then these small wallets all began to trade with the other exchanges in the wake of the Mt. Gox shutdown.  Mt. Gox could probably even blame the shutdown on the influx of customers and inevitable drop in trading values.
Guess what happened?
With volumes hitting 1 percent of all BTC in circulation per day by early April, on April 10 the bubble appeared to burst.  The currency lost half its value in a day as thousands of new wallets mysteriously -- or should we say "magically" -- appeared out of thin air.  And lo and behold at the height of the frenzy Mt. Gox shut down citing a technical glitch.
Was this another fabrication crafted by Mr. Karpelès to hide taking clients money?
XXVI. Media Believed Mt. Gox Was the Victim
At the time few suspected that.  Most viewed Mt. Gox's shutdown sympathetically.  After all, it surely lost a large amount of fees by being unable to keep up with the epic volume, right?
BBC News comments:

The selling frenzy began as Bitcoin's main exchange, MTGox, struggled to keep up with the volume of trade in the virtual currency.
[S]aid MTGox, the "rather astonishing" number of new accounts that had been opened in the past few days caused a bump in trading volumes that it was unprepared for. In one day, the number of trades in Bitcoins had tripled, it said.

And ArsTechnica says the selloff remains an open mystery, remarking:

There is no obvious explanation for why the digital currency has fallen so far and so fast...

Mt. Gox hammed it up, saying it was victim of a DDOS attack, as too many customers were asking for trades.  The claim did raise some eyebrows.  After all, wasn't this supposed to be an advantage of cryptocurrency -- much more fluid and low cost transactions?

Few were asking the obvious question -- where did all these tiny wallets on Mt. Gox come from?

Assuming for a second, that all the small wallets were really a single massive wallet that had been incrementally split over the last month, that would mean that in April one large player sold around 750,000 bitcoins, at an average price of around $100 USD.  That meant someone had generated $75-80M USD in the month -- roughly the amount Mr. Karpelès would need to cover both lawsuits if he lost.

So a plethora of small accounts appear on Mt. Gox, and then began pouring cash to other accounts while Mt. Gox shuts down to "protect" the currency.  And just like that a pile of around 700K-800K bitcoins in thousands of small accounts is liquidated for $70-80M USD.

XXVII. Splitting the Pool to Cover One's Tracks

Further evidence of this may lie in the leaked source code. 

A line in the main "Update()" routine contains a comment:

more than 500 coins on this host, shuffle some

The code looks like it takes one large wallet and splits it into multiple small wallets.  This isn't abnormal, really as most exchanges function as a "tumbler", self-trading to stabilize prices and prevent a single wallet growing too large and preventing a security risk.
But what if the threshold was set lower -- much lower.  What if instead of 500 coins, the line became 0.05 Coins?  Quickly Mt. Gox might see a large amount of insider trading.  While no money would be made, its large wallets would be transformed to numerous small wallets.
But wouldn't this all mean that Mt. Gox and Mr. Karpelès would be in deep trouble when customers came looking to withdraw?
That is an excellent question to ask.  But the answer might be deceptively simple.
Ponzi schemers always believe that if they stay just ahead of the curve, they can recoup their losses and no will notice their insolvency.  Indeed, if Mr. Karpelès sold his coins, he surely would have believed that within a few months he would have recouped a couple hundred thousands coins -- enough that no one would notice.
But the decision to halt trading came back to haunt him as customers began to defect in droves, moving to other exchanges.  Meanwhile in May 2013, as promised, CoinLab filed a lawsuit in U.S. federal court seeking $75M USD in damages.
XXVIII. Bitcoin CEO Runs Out of Rope
Sometime in late 2013 a Tokyo court (reportedly) ruled in Mr. Dubois' favor, ordering Mr. Karpelès to pay up.  Meanwhile customers were defecting in droves.
Were the hypothesis of Mt. Gox being "Empty Gox" to hold true, these defections would likely quickly overwhelm the fees -- a percentage of Bitcoins from every deposit -- that Mt. Gox was accruing thanks to higher exchange rates.  If Mt. Gox was playing a Ponzi scheme it had fatally miscalculated its return in the next phase and was now in deep trouble.
Desperation certainly seemed apparent.  In September Mt. Gox filed a countersuit against CoinLab claiming it owed Mt. Gox $5M USD.  The argument was that it had not breached the contract, as it never promised to stay out of the market.  Instead, Mt. Gox's Japanese lawyers argued, CoinLab breached its contract, by failing to produce the remaining millions promised for the Mt. Gox brand, after the initial payment of a few million.
The lawsuit was vague and seemed to be poorly constructed, leading observers to find it puzzling.
Why would a man worth half a billion risk his company for a few million and damage his reputation with such poorly crafted claims?
Perhaps the answer was that the "BitcoinBillionaire" was running out of Bitcoins and cash as well.
In May the U.S. Department of the Treasury seized an estimated $5M USD in accounts belonging to Mt. Gox's owners.  Some of these funds were reportedly returned by the Financial Crimes Enforcement Network (FinCEN) -- the enforcement arm of the Treasury -- after Mt. Gox registered in June 2013 as a money exchange, agreeing to file paperwork and finally crack down on overt money laundering.  But in going official Mt. Gox was forced to commit to more fees, out of its dwindling money pile.
And as the leaked call illustrates, banks weren't exactly eager to lend this Tokyo transplant a helping hand.
In October transactions begin to fail.  Things escalate quickly.  Mt. Gox raised more eyebrows, asking customers to pay it additional fees for "faster withdrawals.  But rather than balance withdrawals with incoming fees, this only worsens the issue leading to more withdrawal requests and defections.
By November 2013 the final transaction tracing to Bitcoins that Mr. Karpelès moved in 2011 goes through.  Customers are essentially locked in.  What they don't know is that Mt. Gox now has basically no Bitcoins.  It has no customer Bitcoins.  It has no Bitcoins of its own.  It admits it has some cash, but indicates it is not enough to cover customer holdings at current values.
The rest is history. 
XXIX.  The Painful End
The story inevitably had to come to an end.  With 6 percent of Bitcoins (roughly) "lost" by Mt. Gox's accounting, bankruptcy was inevitable.  Things finally reached a boiling point last month.
For those who watched the OC, a decade back, you might be reminded of Jimmy Cooper is approached by angry client who demands, "Where's my money!"

... before decking the well-intentioned by dishonest Ponzi schemer.

Mr. Karpelès would fast feel the effects of the fall, much like Jimmy Cooper.  While no one delivered a hard cross to his jaw (that we know of), protesters began to hound him outside his Tokyo office.  Death threats emerged.
To Mr. Karpelès, he was the victim.  He had been the victim of family issues as a "misspent youth", he was a victim of managers who didn't understand at Kalyweb, RYA-Network, and Linux Cyberjoueurs.  He was the victim of shadowy hackers, he was a victim of unreasonable partners Mr. Dubois and Coinlab -- partners who were unwilling to give him the freedom to do whatever he wanted and deliver however little he wanted, freedoms a king surely deserved.

Karpeles at fancy event
Mr. Karpelès was interested in working with investors, only so long as they gave him complete authority.
[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

In coming weeks it may be proven or partially proven that this was a logical course of events.  Many have already picked apart his claims that the losses were due to Mr. Karpelès' typical scapegoats ("hackers" and "thieves") who exploited a flaw in Bitcoins called transaction malleability.
Critics quickly pointed out that what Mr. Karpelès was claiming was basically impossible.  Transaction malleability exploitation is very real and possible, but it would require individual communication phone calls, email, etc. to execute each and every time.  Stealing 850,000 Bitcoins would require literally thousands of phone calls.
In retrospect Mr. Karpelès claim would seem laughable, but it's hard to laugh when people lost so much.
XXX. Past Bitcoin Scams Show Mt. Gox Customers are Unlikely to Get Their Money Back
And unfortunately past exchanges suggest customers may never get much of their money back.  Rick Falkvinge writes an excellent history of past scams in a blog, writing:

According to an anonymous high-profile source, the first and original bitcoin scam was the online coin wallet People would deposit hundreds of thousands of coins there, as the currency was new and hundreds of thousands of coins weren’t yet worth a lot.

Then, on July 29, 2011, the site went blank, just like the Gox website did. People panicked and gradually accepted a catastrophic loss of funds.

On August 11, 14 days later, the site came back online and declared – just like Gox – that they “had been hacked”, had filed for bankruptcy protection, just like Gox, but “had managed to recover” 49% of the funds. People could fill out claim forms to recover these funds – 49% of their original balance. As this was enough time for most people to internalize the loss, they were happy again at the sudden windfall; things suddenly weren’t as bad as they had seemed. In the meantime, the anonymous person who ran disappeared with a huge amount of money, according to the source.

In other words, the scam cynically exploited people’s loss and grief to actually make them happy when they got something back. Most “hacks” of bitcoin sites since then have actually been copycat scams of, again according to this source.

Another good analysis comes from The Guardian's Alex Hern who in Dec. 2013 chronicled the fall of the ironically titled "Sheep Marketplace".  That site was not an exchange, but it operated a similar cash out scheme, draining roughly 96,000 worth of Bitcoins, worth roughly $100M USD at the time.  He summarizes:

Victims of the biggest theft in bitcoin history tried to put the much vaunted anonymity of the currency to the test as they attempted to recover their stolen money. But instead, they were left out of pocket and with egg on their faces.
At one point, at least, the internet detectives were on the right track. Sheep Marketplace really did shut down, and bitcoins were stolen. But rather than play a shell game to try and keep the money hidden, the thief appears to have done what any normal person would have: traded the digital currency for real money at the earliest opportunity.

He also points out how in the wake of the theft there were numerous false accusations of various people who turned out not to be who the Reddit mob thought they were.  In trying to recover their coins, Redditors got basically nowhere, while actually doing more damage.

It's understandable why people try, though.  According to an unconfirmed Reddit post, at least one Mt. Gox diehard with roughly $50K in losses was so despondent that he killed himself with a shotgun.  If true, there could be blood on Mr. Karpelès' hands.
But you can't bleed a stone.  If the picture painted by the facts above is how it looks, then Mt. Gox has basically no money and no Bitcoins.  For all intents and purposes, its claims are close to true.  But its losses are not owing to hackers or shadow thieves.  If true, the losses are the fault of one man's arrogance, greed, fearfulness, impulsiveness and stupidity.
XXXI. Foolish Trust, Blind Idealism -- History Repeats
But perhaps that's too much blame to put on Mr. Karpelès.  After all, most seasoned investors would give an embarrassed chuckle if you told them you were going to invest hundreds of millions in a site originally called "Magic the Gathering Online Exchange", which had no insurance against losses, was run by a skeleton staff, and was led by a man who was just 26 when he bought the exchange.
If the 20-something CEO -- a man who had previously struggled to hold down an office job -- creating a half billion dollar empire sounded too good to be true, it probably was.  In retrospect there were moments of glory for the investors, Mr. Karpelès, and Mt. Gox.  But that glory would inevitably be match by far darker lows.
Thus is the nature of flights of idealistic fantasy -- those "10 day dreams" as Mr. Karpelès referred to his original Japanese adventure as.
Such cautionary tales litter history, yet decade after decade, century after century they are ignored by man.  Over two and a half decades before Mr. Karpelès was born, a silver tongued countryman who happens to share a middle name with Mt. Gox's fallen leader -- Maximilien François Marie Isidore Robespierre -- rose fast in power during heady days of the French Revolution.

Maximilien Robespierre [Image Source: Wikimedia Commons]

The causes of the Revolution were not that foreign by today's standards.  Today we have banks -- the "one percenters" who critics claim are the brokers of bloodshed, depravity, and all modicum of social inequity.  In the eighteenth century the French had their own "one percenters" -- the aristocracy who were accused of pretty much the same checklist of offenses.
In hope of excising these domestic demons and entering an era of peace and utopian hand holding, the French public put its trust in the young, unorthodox, but highly confident Mr. Robespierre.  What ensued next was a brutal campaign of guillotine executions known as the reign of terror, which only ended with the arrest and execution of Mr. Robespierre in 1794.
In retrospect many wise older men and women put their belief in a dishonest young man, who at the culmination of his years of revolutionary efforts to seize power was only 35.  At the time of his execution he was 36.  Why had so many people put so much trust in him?
When the smoke settled those in France savvy enough of making sense of the mess were left to ponder how Mr. Robespierre had been able to so easily commit the kind of evils he claimed to be freeing the people from.  How could he not have seen the distance between the rhetoric and reality of his blood political power grab?  And more importantly how could the people not see?
Today the fall from grace of Mr. Robespierre's countryman is provoking similar soul searching.
While nobody died from Mr. Karpelès' actions -- or at least far fewer, depending on the veracity of certain accounts, his tale shares some key commonalities to Mr. Robespierre's -- naive idealism, a youthful power-seeker, a disastrous outcome, and a haunting sense of betrayal.
How had people been foolish enough to believe that they could rid themselves from the greed of the global banking industry and nationalist states by turning to a French developer with a long, barely hidden history of fraud?
XXXII. Betrayal: The Legacy of Mt. Gox
The answers won't get any easier as time passes.
Mr. Karpelès wasn't the first man seemingly outed as selfish scammer riding on the coattails of the Bitcoin movement.  Past incidents have illustrated how vulnerable Bitcoin is to Ponzi schemes, even "accidental" ones as Mt. Gox/MtGOX might have been.  At the same time these scams have also showcased the payment movement's resiliency, in the resolve of Bitcoin's backers.

But that resolve will surely be tested in months to come, as the fall of Mt. Gox continues to echo through cyberspace.
There's little doubt that skeptical, open-minded investors will have a much harder time trusting in Bitcoin.  This crisis of credibility is witnessed in the fact that in last two months two of the three members of The Bitcoin Foundation (including Karpelès) stepped down amid financial fraud accusations.  It's also seen, not only in the fall of Mt. Gox, but an increasing rate of scam accusations regarding smaller exchanges or trading hubs as well.

One thing all of these stories make abundantly clear is that Bitcoin related crime is on the rise.  The movement's backers would be wise to tread lightly.
Perhaps Bitcoin's evangelists will find a way to overcome such evils.  Or perhaps these flaws will prove fatal and the currency will vanish from the Earth like Mr. Robespierre and his short-lived Jacobin regime.

[Image Source: Mark Karpelès on Flickr; Fair Use clause TITLE 17 > CHAPTER 1 > § 107]

But either way, Mr. Karpelès has left an indelible mark on history, one inked in heady heights and appalling ugliness.  At one time he controlled 90 percent of Bitcoin trading globally.  Today no company can come close to that.  Nor can any fallen bitcoin business or bitcoin scammer claim to have lost the fortune that Mt. Gox did.
In the Bitcoin revolution, Mr. Karpelès won't be the first evangelist turned mogul to fall from grace.  He wasn't the first Bitcoin scammer.  And he won't be the last.  But he will go down in history as perhaps the most prominent figure in such schemes.

Of all the Bitcoin scammers he seems -- on the surface at least -- one of the least ill-intentioned.  But his deep character flaws led him to engage in abusive and outlandish behavior, which make the story of Mt. Gox all the more fascinating and tragic.
The man who would call himself king of Bitcoin had arrive almost by accident -- a man in the right place at the right time for all the wrong reasons.  And as fast as he rose, the faster he fell.
Even among Bitcoin's most stubborn supporters some element of this cautionary tale will surely stick as they ask themselves how such high hopes bore such bitter fruit.

Sources: MagicalTux Blog, MagicalTux on Flickr, MagicalTux on Twitter, Wired

"So if you want to save the planet, feel free to drive your Hummer. Just avoid the drive thru line at McDonalds." -- Michael Asher

Copyright 2017 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki