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Mt. Gox wins bankruptcy protection but fraud allegations fly

Mt. Gox's founder Mark KarpelesMt. Gox, formerly the world's biggest bitcoin exchange, received temporary U.S. bankruptcy protection on Monday that stopped some of the fraud litigation filed against the company.

Federal District Court Judge Harlin Hale in Dallas bankruptcy for Japan-based Mt. Gox stayed a proposed class action against the company that was filed in Chicago, and a breach of contract case in Seattle.

But another federal court -- in the Northern District of Illinois -- granted a temporary restraining order Tuesday to freeze all U.S. assets of Mt. Gox, Tibanne KK (a Tokyo-based bitcoin exchange) and Mt. Gox CEO Mark Karpeles.

Mt. Gox filed for bankruptcy last month in the U.S. and Japan after claiming it lost more than 750,000 of its customers' bitcoins (worth roughly $540 million) through an attack by hackers.

Karpeles, Mt. Gox's founder, said in court documents that a flaw in the software algorithm that underlies the digital currency allowed the hackers to steal the bitcoins.

Plaintiffs attorneys leading the lawsuits against Mt. Gox questioned the bankruptcy filing.

Jane Pearson of Foster Pepper in Seattle said "we do have concerns about the movement of hundreds of millions of dollars in bitcoins over the weekend, moved by Mr. Karpeles," Reuters reported Tuesday.

Judge Hale's bankruptcy order protects Mt. Gox's U.S.-based assets until April. The company has to return to court then to request a permanent stay of the U.S. litigation.

The lead plaintiff in the class action is Gregory Green, an Illinois resident suing on behalf of all U.S. residents who lost money when the website crashed. After the site went dark, traders couldn't sell bitcoins while their price was falling.

Green's lawyers told the federal court in Illinois they needed a freeze on the U.S. assets of Mt. Gox and Karpeles while they start discovery. They are trying to determine why the company folded and if there was fraud.

The plaintiff in the Seattle lawsuit is CoinLab Inc., a bitcoin technology incubator. It's suing for breach of contract and is asking for damages of about $75 million.


Julie DiMauro is the executive editor of FCPA Blog and can be reached here.