Tokyo lawsuit raised red flags on Mt. Gox funding, compliance

TOKYO Wed Mar 12, 2014 11:27pm IST

Kolin Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox, in front of the building where the digital marketplace operator was formerly housed in Tokyo February 26, 2014. REUTERS/Toru Hanai/Files

Kolin Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox, in front of the building where the digital marketplace operator was formerly housed in Tokyo February 26, 2014.

Credit: Reuters/Toru Hanai/Files

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TOKYO (Reuters) - Two months before Mt. Gox filed for bankruptcy it was sued by a customer seeking the return of funds in a case that highlights some of the red flags raised in the run-up to the collapse of what was once the world's biggest bitcoin exchange.

New York resident Marko Simovic filed a civil action at the Tokyo District Court on December 24, seeking to recover $105,000 he had on deposit at Mt. Gox and about $14,000 in interest, court filings show.

Simovic, who described himself as a software developer who previously managed the bitcoin operations for a hedge fund, said Mt. Gox dodged repeated requests to withdraw funds from his account, which as of July 1 was credited with $935,000 in cash. Simovic could not be reached for comment.

Mt. Gox refuted Simovic's claims in a brief filed by law firm Baker & McKenzie. It said Simovic didn't comply with online procedures, and cited withdrawal limits that would have required two months for him to draw down his account. That rebuttal was submitted to the court three weeks before Mt. Gox filed for bankruptcy protection on February 28, saying it had lost bitcoins and cash worth more than half a billion dollars to hackers.

The lawsuit was cited in a U.S. bankruptcy filing earlier this week, which is related to the company's Tokyo bankruptcy proceedings.

EXIT STRATEGY

Simovic said at the time he was worried that Mt. Gox could go bankrupt and decided on an exit strategy: he converted his cash into bitcoin, which he then sold on Bitstamp, a rival exchange. He managed to recoup $833,000, leaving the rest in his Mt. Gox account, according to the lawsuit.

"Rather than leave my money at Mt. Gox as required by their expensive, extremely slow and uncertain withdrawal procedure, I decided to move the funds as soon as possible," Simovic wrote in a brief that was part of the court file and dated December 18. "This was the only way I could get my money back quickly. Moreover, I was concerned there might be a run on Mt. Gox."

The suit also shows that Simovic raised questions about whether Mt. Gox was complying with Japanese laws.

In a September 11 letter to Mt. Gox's chief marketing officer Gonzague Gay-Bouchery, Simovic's lawyer expressed concern that Mt. Gox may be in violation of investment and banking laws that prohibit unlicensed companies from receiving deposits and engaging in currency exchange services.

In a court filing, Mt. Gox said it had checked with Japan's Financial Services Agency (FSA) and there was no need for it to register with the banking regulator. No one could be reached at Mt. Gox or Baker & McKenzie for comment. The FSA declined to say whether it had spoken to Mt. Gox.

Mt. Gox's collapse has brought into focus the question of how to regulate crypto currencies. Japan is still struggling to craft a response. Last week, the government said bitcoin was not legal tender, but might be taxable and subject to money-laundering controls.

(Reporting by Nathan Layne and Taro Fuse; Editing by Ian Geoghegan)

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