TOKYO—Mark Karpeles, 33 years old, was the CEO of what was once the world’s largest bitcoin exchange until it went bankrupt on Feb. 28 2014–with 650,000 bitcoins ($400 million) missing.
Hauled up before a Japanese justice system which rarely concedes an error or misses a conviction, it looked like Karpeles was headed for years of incarceration. But on Friday the Tokyo District Court gave him a second chance at life.
Karpeles was first arrested on Aug. 1, 2015, by the Tokyo Metropolitan Police, who believed he must be the bitcoin thief and would crack under interrogation. He did not. They arrested him two more times. He was indicted on three charges. The conviction rate for the indicted in Japan is 99 percent. Last December, prosecutors asked for him to be punished with 10 years in jail. It has already been over five years since his company and his life collapsed.
Friday, a panel of judges found him innocent of the major charges of embezzlement and breach of trust; they found him guilty of improper management of electronic funds–but gave him a suspended sentence of four years.
In simple terms, if he keeps his nose clean and doesn’t break the law, he will not go back to jail and he is a free man.
It was a slap in the face to the prosecutors and a rare victory for the accused. It puts him and his lawyer, Nobuyasu Ogata in the 1% club.
One of the presiding judges pointed out that none of the charges against Karpeles had anything to do with the missing bitcoins and that Karpeles had never intended to harm the company or embezzle funds. His sole crime stemmed from installing a program in the system that tried to recoup the missing bitcoins the firm had been saddled with from the time he took it over in March of 2011.
In a way, the court condemned Karpeles for what has long been his critical fault–a failure to understand that not all things broken can be fixed.
It has been a long road from life as the child of a single mother in Dijon, France, to standing in front of three judges in a Tokyo courtroom, where over a 100 people lined up by 9:30 a.m. to find out what would happen to the man some called The Baron of Bitcoin.
Mark Karpeles was a boy genius. By the age of four, he was dismantling calculators and putting them back together to see how they worked.
People? He found them hard to deal with; things he understood.
He likes to fix things. When he was running Mt. Gox in Tokyo, he fixed the automatic office doors himself, rather than entrusting it to someone else.
In February of 2011, he took over a bitcoin exchange that was terribly flawed and had already been hacked out of 80,000 bitcoins (worth $800,000 by the end of that year). He was sure he could fix it. “Should be fine,” that is what he said. That is what Mark always said, with a zen master grin on his face. In French, “Ça devrait aller.” That is his mantra, his mode of operation.
If you don’t know him, he seems disingenuous. This comes from his lack of emotional range. Mark can be slightly irritated, amused, or he is in his default mode of stoic optimism. There’s not much else. He smiles differently, sometimes, but as one of his employees told me, his emotional flatness can be unnerving.
A former accountant of Mt. Gox, who would only agree to talk if he wasn’t named, said that it was vexing.
“If Mark told you, ‘It will rain tomorrow. Take an umbrella’ or he told you, ‘The building is on fire and if we don’t jump out the window we will probably die’–he would probably say it exactly the same way. And no matter what you would tell him… or warn him about, his answer was almost always….”
“Should be fine.”
But things aren’t always fine.
It was only in Japan that Karpeles learned some things can’t be put back together–that life is not software, that it can’t be fixed with an update or a patch.
Mark Karpeles doesn’t have Asperger’s Syndrome but his social skills were always rather limited. Now, after spending eight months in jail and several years on trial in Japan, he communicates a lot better.
Desperation can help transmute some adverse qualities into strengths. If you had told me in 2014, that there would come a day when Mark Karpeles was cross-examining police officers during his own trial–and doing a kick-ass job–I would have never believed you. People who met him in his late teen years in France were later amazed to discover that he had moved to Japan in 2009 and was later running a company worth half a billion dollars.
One of the cameramen of a French documentary about cyber nerd culture, Suck My Geek (2007), in which young Karpeles makes an appearance, said he never imagined that, “This guy, who lives with his mother, who walks in the rain while typing on his computer, who seems lost in his own universe, would ever be a CEO.”
Karpeles was raised by a single mother and his grandmother in rural France. His grandmother was controlling and did odd things like make him comb his hair over and over.
He was, according to his mother Anne Karpeles, a very bright but difficult child, slightly anti-social, but quickly became fascinated with computers. In the early days of the internet, the awkward Karpeles discovered he could be another person on-line under his moniker MagicalTux, a reference to the Linux icon. He was an online gamer, a huge fan of Japan. He also felt very awkward around the opposite sex. He was bullied at school when he was a teenager and found academia boring. He taught himself to code and learned computer languages.
Karpeles became a Japanese comic book fan and one his few hobbies was playing GraalOnline, a 2D online role-playing game with multiplayer features that was uncannily similar to Nintendo’s Legend of Zelda series. He was an accomplished programmer by the time he was 17, although some would call him a hacker.
He eventually left home in his late teens and was a nomad in Paris for several months before finally finding a job. He would work in internet cafés during the day, or hand out flyers, earning minimum wage or less. At night, he would “hack” into apartment buildings and stay out of the cold. In France, many apartment buildings can be easily accessed if you know two codes: one to enter the building and one to access the stairway. If you have a friend there, they will sometimes give you both codes and all you need to do is then knock on the door when you arrive. Karpeles would watch and listen as people punched in their codes, and then find his way to the third or fourth floor and sleep on the steps.
Karpeles eventually found work in the tech industry by emailing the management of his favorite online role-playing game. He flitted from IT job to IT job, even working in Israel for a few months. By the time he was 23 in 2009, he managed to be dispatched by a French IT firm to Japan, the land of his dreams. A few months later, he created his own company, Tibanne, which provided server support, web and mobile applications, as well as other IT services. He named it after his favorite cat. When a customer asked to pay for services in bitcoin, Karpeles became intrigued with the cryptocurrency.
“I was never a libertarian,” he says. “I believe that people should pay taxes and we need a social infrastructure to take care of the less fortunate. We need a government and we need rules of law. I was fascinated by the code, the complexity of bitcoin. Even if I wasn’t sure what it could be used for exactly, I knew it was amazing,” he told The Daily Beast.
He never approved of Silk Road, the underground marketplace on the dark web where you could buy any drug imaginable and some unimaginably horrible things–with bitcoin.
Ironically, in the trial of the Silk Road creator, the defense argued that Karpeles was actually the cyber drug kingpin aka Dread Pirate Roberts. He was not. “I didn’t want any part in transactions that resulted in people being hurt.”
In fact, he cooperated with federal investigators on the case. As if to show that no good deed goes unpunished, corrupt special agents in the DEA and Secret Service working the Silk Road case, allegedly sold him out to the man they were investigating—and did even more. But that’s another long story.
Mt. Gox, the cryptocurrency exchange was originally created by Jed McCaleb, a genius programmer, as a platform to buy and sell trading cards; it originally stood for Magic: The Gathering Online Exchange.
McCaleb later retrofitted the site to trade bitcoins. Karpeles eventually took over the Mt. Gox platform officially in March of 2011. However, he wasn’t quite up to the task. The website was constantly attacked by hackers.
Karpeles, who admits, “I’m not very good with people. With managing people. It is is difficult,” tried to run everything himself rather than delegate responsibility. Even as the company grew, and so did the number of employees, Karpeles couldn’t keep pace. Instead of focusing on cyber security, he was focussed on creating a “Bitcoin Cafe,” where you could use the virtual currency to buy pastry and coffee. He planned to bake tarts and quiche and other dishes himself. (He is an excellent cook.)
All that remains of that particular dream are a few aqua-blue coffee mugs with Bitcoin Cafe printed on them in white letters. One of them is sitting on my desk, a sort of cyber memento mori. Whatever his failing, it is conceivable Karpeles could have been a good CEO if he hadn’t also decided to be the CTO and the CFO. It was too much for one man.
All that became apparent in February of 2014, when Karpeles, trying to fix a bug in the Mt. Gox software did a reconciliation of the company’s online bitcoin storage and its offline storage and found they were short 850,000 bitcoins: nearly half a billion dollars worth the cryptocurrency.
On February 28, the firm declared bankruptcy and Karpeles had to take the bow of shame at a hastily scheduled press conference. He then reported the theft to the police.
I’m going to stop here for a second and admit something. I’ve come to like Mark Karpeles. In fact, in some ways, I have gone out on a limb to see that he got a fair shake. He has many faults. I thought for years he might be guilty of stealing the missing bitcoins. But my opinion of him and his struggles changed in the summer of 2015.
Aug. 1, 2015, the morning of Karpeles’ arrest, was a Saturday. Some cops call that move “The Saturday Surprise”; it’s a news grabber because nothing much happens on the weekend. Also, the suspect can’t have visitors until Monday, and usually has trouble getting a lawyer. It intensifies the feelings of despair—it’s a mental punch in the guts to soften up a suspect.
The police called Mark at five that morning, before the newspapers were delivered to the house of everyone in Japan, most of them already emblazoned with a headline that today Mark Karpeles was going to be arrested. He knew it, we knew it.
The phone call was a professional courtesy, since for over a year Karpeles had actually been working with the Tokyo Metropolitan Police High-Tech Crime Squad to try and determine who had hacked into the Mt. Gox servers and stole the bitcoins. I had covered that department as a police reporter for a Japanese newspaper from 2002 to 2005. I still knew people there.
Apparently, somewhere along the line, the Tokyo Metropolitan Police Investigative Division 2 —white collar crimes—had decided on their own that the hacker must be Mark. After all, wasn’t that the most logical choice or the easiest way to solve the case? The police theory seemed to be that once they had Karpeles in jail on any charges, that he’d crack under interrogation and admit to having stolen the bitcoins himself.
A few days before his arrest, I met with Karpeles, and over coffee and cinnamon toast, I laid it on the line for him. I explained that he’d be arrested, held the maximum of 23 days if he didn’t confess, and probably be re-arrested again. And again.
Mark seem unphased. I’d met him a few times since his company went under, at that point in time, but I never knew how to read him. He was chubby, pale, and his hair long back then, usually a little greasy and slightly curly. His nose looked like it had been plastered onto his face when it was still clay and then pushed down a bit.
I wasn’t sure I was getting through to him. There always seemed to be a lag time in our conversations, like the kind you used to get when you’d call someone from overseas on a landline. You’re not quite sure that you’re being heard.
“Do you understand what I’m saying?”
I asked twice.
He nodded, “I have not done anything. I am not guilty.”
He said it as if I’d slightly insulted him.
“It doesn’t matter to them,” I told him. “They’ll make you guilty. They’ve already reached that conclusion.”
I tapped my index finger on the table in the coffee shop where we were sitting.
“Do not confess to anything. Do not sign anything. If you make any statement, make it in French. Japanese prosecutors hate cases that aren’t sure things. That’s why they have a 99 percent conviction rate—they dump 50 percent of the hard cases. So don’t do their job for them. Make them use actual evidence, if they have some. You sign nothing in Japanese—even though you can read Japanese.
“They will bully you, threaten you, promise you a lighter sentence if you confess, block you from talking to your lawyer, lie to you about testimony they don’t have and evidence they don’t have and will do everything to break your spirit.
“Don’t confess. No matter how many times you’re arrested, no matter how many charges they throw at you—you stick it out. Because 23 days, 46 days, or possibly 69 days may feel like forever—but it’s a lot less time than five years in a Japanese jail.”
I realized as I was speaking that I had probably crossed the line from being a reporter to maybe being a friend of sorts, but I couldn’t help myself. There was some evidence to suggest that he might be innocent. And even cops were telling me that he was getting screwed by the system. So I wanted him to at least have a fighting chance.
Mark nodded. “I trust you know what you are talking about. I will be ready.”
I didn’t believe him.
I told him, “Dress nicely. Look good. Stand with your head tall. Be ready. It may be the last time people will see you on their TV screens for a long time. Look professional. Look upstanding. Be ready.”
“I understand,” he assured me. “Should be fine. I will be ready. ”
Mark stayed up all night, he later admitted. He didn’t shave or really prepare to be taken away.
Just before the police arrived, he threw on a blue t-shirt with the English words, “Effortless French” and donned a black and white baseball cap that was modelled after Monokuma, a robot bear character in a popular video game series. It didn’t make him look guilty but it did make him look clueless.
The day after his arrest, because I knew his lawyer Ogata, and because there wasn’t anyone else, I ended up briefly taking care of his cats. Which, for someone who is deathly allergic to cats, is not easy. I was certain that the cats, at least, were innocent.
I also noticed that on his desk were the business cards of special agents from the IRS, the FBI, Homeland Security and officials of the Department of Justice. It would be months before I could ask him why he had those cards.
When we met again, after he was finally granted bail, eight months after his arrest, he had lost so much weight I barely recognized him. Over coffee and cinnamon toast (again) we caught up. And I would have to say, it was a different Karpeles. He wasn’t so sure of himself and he listened carefully. The lag time was there but I felt like I’d moved from dial-up to an ISDN connection.
During the next year and before Karpeles’ trial finally began in July of 2017, I came to suspect that he might actually be innocent—of the hack at least. It was only after having drinks with an American law enforcement agent in an izakaya (Japanese pub) in the Kanto area that I really felt certain of his innocence. The agent grudgingly admitted that he was pursuing an international hacker, Alexander Vinnik, suspected of involvement in the hack of Mt. Gox and other bitcoin exchanges. He had reached out to myself and journalist Nathalie-Kyoko Stucky.
During our long drinking session with that special agent, he expressed frustration that the Japanese police would not give him access to the Mt. Gox database—which would allow the task force consisting of the IRS, Homeland Security, the FBI, and the Secret Service, to finally get their man.
He was sure that the trail to their suspect was in the data.
“Why doesn’t the National Police Agency share the data with us? Or the Tokyo Police? I don’t get it.”
I explained it to him.
“If you catch someone else for the Mt. Gox hack, they just look like idiots. Why would they do something that might hurt their case in court? They just want to win. Saving face trumps justice in Japan.”
He was surprised but he nodded. Somehow, the joint task force did get a hard copy of the Mt. Gox database delivered to the U.S. in September of 2016. It helped them solve the case. The Japanese authorities weren’t actually very happy about it.
When the feds finally got their man on June 25, 2017, one of the special agents on the task force gave me a heads up a few hours after the arrest. Karpeles was tipped off as well.
The Japanese media, which had vilified Karpeles, toned down their coverage after it appeared that the real criminal had been captured outside of Japan.
Now, some of what they wrote about Karpeles was indeed true. He had spent lavish amounts of his money on an antique bed. He had paid for sexual massages from prostitutes, which in Japan is actually legal—as long as it doesn’t include vaginal penetration. He had also tipped them lavishly.
This had nothing to do with the criminal charges but it made good copy.
While the Asahi and other newspapers walked back some of their coverage of Karpeles and his alleged crimes, Japanese prosecutors objected to the defense attempts to introduce the indictment of Vinnik as evidence saying that, “He hasn’t been convicted yet and U.S. prosecutors are unreliable.” It may have been the only time I’ve ever heard a working prosecutor in Japan argue that a suspect should be treated as innocent until proven guilty.
Friday morning, a judge admonished the prosecution for essentially mounting a frivolous case on the alleged embezzlement charges, “in which there was no intention to break the law and no laws broken.” One of the panel of judges also mentioned the arrest of Alexander Vinnik, implying that the Tokyo Police and prosecutors had failed in their original investigation. He seemed to suggest that they had arrested Karpeles in an attempt to make him confess to a crime which they could not solve.
Most of the Japanese press deliberately failed to mention Vinnik, and simply referred to the hacking of Mt. Gox as being unsolved and the case technically closed. The sins of omission were understandable. Prosecutors in Japan hand feed scoops to the mainstream press and lapdogs don’t like to bite the hands that feed them.
By the way, Carlos Ghosn, the former chairman of Nissan, like Karpeles was also arrested three times. He is also facing dubious charges of special breach of trust, for which Karpeles was also accused. Judging by the unusual outcome of Friday’s trial, if I was the prosecutor handling his case, or the back-stabbing CEO of Nissan, I’d be feeling pretty queasy right now.
Kim Nilsson, a Swedish engineer who lost 12 BTC (which he had bought at a low price of $3600) in the collapse of Mt. Gox felt it was a fair sentence. Nilsson also played a critical role in helping US authorities track the bitcoins that had been hacked from Mt. Gox. He was there in the courtroom for the verdict. “It was a fair sentence. Mark ran the bitcoin exchange recklessly and he deserved to be essentially slapped on the wrist and put on probation. He is guilty but not that guilty,” he said.
Karpeles texted me after the trial, “Thanks for everything. I am grateful to the court and happy to be judged not guilty for embezzlement and breach of trust. I will discuss with my lawyers and decide how to proceed on the remaining charge. I knew it is very unlikely for the court to reach a not guilty verdict. That’s very unusual in Japan. I am grateful to my lawyer and everyone who supported me.”
Mark Karpeles has been many things: a geek, a hacker, a CEO, a homeless nomad, but sometimes adversity changes people for the better. I’m almost sure of it. Because he showed up in court on Friday not in a t-shirt that said “Effortless French” or “There’s no place like 127.0.0.1 [home]” but in a dark gray suit, with light gray narrow stripes. He was wearing plain black socks and black straight tip shoes. He was dressed like an adult. He behaved like an adult. He has a steady job as Chief Technology Officer (CTO) of London Trust Media and he’s working hard these days.
Maybe, this time, it “should be fine” ….at last.
Nathalie-Kyoko Stucky contributed to this report.