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Pearce v. Karpeles

United States District Court, E.D. Pennsylvania

July 26, 2019

GREGORY PEARCE, individually and on behalf of all others similarly situated, Plaintiff,
MARK KARPELES, an individual, Defendant.


          ROBERT F. KELLY, Sr. J.

          Presently before this Court is Defendant Mark Karpeles' (“Karpeles”) Motion to Dismiss for Lack of Jurisdiction pursuant to Federal Rule of Civil Procedure § 12(b)(2), Plaintiff Gregory Pearce's (“Pearce”) Response in Opposition to the Motion to Dismiss, and Karpeles' Reply to Pearce's Response in Opposition to the Motion to Dismiss. For the reasons noted below, Karpeles' Motion to Dismiss for Lack of Jurisdiction is denied.

         I. BACKGROUND [1]

         A. General Factual Allegations

         This case arises out of the collapse of Mt. Gox (“Mt. Gox” or the “Exchange”), one of the world's most prominent bitcoin exchanges. (Compl. ¶ 9.) Bitcoin is a digital currency that is used like money. See Investor Alert: Bitcoin and Other Virtual Currency-Related Investments, SEC (May 7, 2014), bulletins/investor-alert-bitcoin-other-virtual-currency. Bitcoins can be exchanged for other digital currencies or can be exchanged for traditional currencies such as the U.S dollar. See Id. Each bitcoin is stored in an individual's digital wallet. See David Glidera, Getting Started with Bitcoin, 32 No.17 WJCOMPI 1, *2 (2015). Mt. Gox touted that it would keep its users' bitcoins safe and that users would be able to retrieve any bitcoins or cash that they had stored on the site. (Compl. ¶ 9.) Mt. Gox, at one point, claimed to be the “world's most established Bitcoin exchange.” (Id.) However, as the sole controlling force behind Mt. Gox and the designer of its software, Karpeles was aware that there were security “bugs” in the system, but did not make these defects known to the public. (Id. ¶¶ 16-17.)

         Karpeles is a French citizen who owned and operated the Mt. Gox Bitcoin Exchange.[2](Id. ¶ 4.) He was the CEO of Mt. Gox and “provide[d] overall direction, responsible for supervising main operations and steering the company according to his vision.” (Id.) As President and CEO, Karpeles was involved in nearly every detail of the Exchange, from the technical (writing and designing the software used to run Mt. Gox) to the operational (handling all of Mt. Gox's third party negotiations and contracts). (Id. ¶ 14.) Additionally, Karpeles directed the drafting and dissemination of Mt. Gox's public statements and representations, as well as statements made through Mt. Gox's customer service department, and handled all aspects of Mt. Gox's accounting. (Id. ¶ 4.)

         In order to use Mt. Gox's services, users had to create an account through its website and agree to the Terms of Service, which expressly warranted that Mt. Gox would “hold all monetary sums and all Bitcoins deposited by each Member in its Account, in that Member's name as registered in their Account details, and on such Member's behalf.” (Id. ¶ 10.) Users would have to verify their accounts by providing Mt. Gox with detailed information such as their full name, date of birth, country of birth, physical address, as well as proof of identity. (Id. ¶ 11.) Users could then transfer their previous bitcoins directly to their Mt. Gox account or deposit cash into their account by wiring money to Mt. Gox's Japanese banking partners. (Id. ¶ 12.) Afterwards, users could begin to make purchases and trades on the Exchange. (Id.)

         In mid-2013, Mizuho Bank, LTD. (“Mizuho”) was the exclusive processor of all bank deposits and withdrawals made by Mt. Gox users located in the United States. (Id. ¶ 21.) In that capacity, Mizuho facilitated international cash wire transfers from Mt. Gox users into the Exchange and processed user requests to withdraw fiat currency from the Exchange to their outside bank accounts. (Id. ¶ 18.) To facilitate a user's money into the Exchange, Mizuho accepted payments that had been wired by users through their outside banks. (Id. ¶ 19.) The wire transfers designated Mt. Gox as the beneficiary of the wire and Mizuho as the beneficiary's bank, but also included the Mt. Gox user's account number to which the funds were to be directed. (Id.) Moreover, to withdraw cash from the Exchange, Mt. Gox users submitted requests online through their Mt. Gox account. (Id. ¶ 20.) Mt. Gox would compile these requests-which included a user's bank account information as well as the amount to be transferred-and provide the requests to Mizuho for processing. (Id.)

         Around this time, Mizuho became concerned about Mt. Gox's growing transaction volumes amid reports that U.S. authorities were investigating Mt. Gox for business dealings related to money laundering. (Id. ¶ 22.) Accordingly, Mizuho decided to distance itself from Karpeles and Mt. Gox. (Id. ¶ 23.) In order to allegedly force an end to their relationship, Mizuho implemented a series of new policies, and ultimately, in June 2013, stopped processing international wire withdrawals for Mt. Gox altogether. (Id. ¶¶ 23-24.)

         In June 2013, Mt. Gox users began to report substantial difficulties in withdrawing cash from their Mt. Gox accounts. (Id. ¶ 26.) Despite growing problems with the Exchange's reliability and security, Karpeles repeatedly assured users and the public that delays in processing transactions were due to a temporary backlog and that users' assets were safe. (Id. ¶¶ 26, 29.) These public claims were false. (Id. ¶ 30.) On February 7, 2014, Mt. Gox halted all user withdrawal requests of bitcoin, leaving many users unable to withdraw bitcoins or fiat currency from their accounts. (Id. ¶¶ 33-34.) Karpeles claimed that he had detected “unusual activity” with repsect to the Mt. Gox Bitcoin wallets, but Karpeles concealed the fact that he had been aware of the supposed security “bug” since 2011. (Id. ¶ 33.) Moreover, in February 2014, Karpeles made numerous representations to the public and to Mt. Gox users that the withdrawal issues were only temporary and that user assets were safe. (Id. ¶ 29.) On February 24, 2014, the Mt. Gox website went dark. (Id. ¶ 35.) Users were no longer able to access or view their accounts and a message on the webpage notified visitors that a “decision was taken to close all transactions for the time being.” (Id. (emphasis in original)) Then, a few days later, on February 28, 2014, Mt. Gox filed for bankruptcy protection in Japan. (Id. ¶¶ 35-36.) During a press conference, Karpeles revealed that Mt. Gox had lost over $450 million worth of bitcoins through a security breach.[3] (Id. ¶ 37.)

         B. Factual Allegations Relating to Pearce

         Pearce created a Mt. Gox account in November of 2013, and he provided Mt. Gox with his West Chester, Pennsylvania, address, as well as proof of his identity. (Pl's Br. in Opp'n Mot. to Dismiss, Ex. 1 (Decl. of Gregory Pearce (“Pearce Decl.”)), ¶ 1.) As a result of Mt. Gox's virtual presence, a total of 19, 208 addresses associated with Mt. Gox accounts came from Pennsylvania. (Karpeles Decl. ¶ 15.) After creating his account with Mt. Gox, Pearce transferred his previously purchased bitcoins to his Mt. Gox account and began to sell and trade through the Exchange. (Compl. ¶ 43.) In order to to be able buy, sell, trade, and withdraw bitcoins, as well as to maintain and protect his bitcoins Pearce paid transaction fees to Mt. Gox. (Id. ¶ 44.) In January 2014, Pearce purchased a “YubiKey” from the Mt. Gox website and requested that it be shipped to his home address in West Chester, Pennsylvania. (Pearce Decl. ¶ 2.) The Mt. Gox website described the YubiKey as a physical item that implemented two-factor authentication when logged into the Mt. Gox website. (Id.) In early February 2013, Pearce received the YubiKey at his Pennsylvania address. (Id. ¶ 3.)

         In January 2014, Pearce converted some of his bitcoin to fiat currency with the intention of immediately withdrawing $5, 900 from his Mt. Gox account.[4] (Compl. ¶ 45.) On January 29, 2014, Pearce submitted a withdrawal request for $5, 900 from his Mt. Gox account, with instructions to deposit the funds into his U.S. bank account. (Id. ¶ 46.) That same day, Pearce received an email from Mt. Gox confirming that the withdrawal request had been received. (Id.) However, Pearce never received his funds, and, on February 10, 2014, he received a message from Mt. Gox's customer support indicating that all international withdrawals were delayed. (Id. ¶ 47.) During this same time, Pearce attempted to cancel his fiat currency withdrawal request and move his entire Bitcoin balance out of Mt. Gox, but his attempts to transfer his Bitcoin balance out of the Exchange also failed. (Id. ¶ 48.)

         At no point prior to, or during the transfer of his bitcoins into the Mt. Gox Exchange did Mt. Gox or Mizuho notify Pearce of the following: Mt. Gox had suffered any type of computer “bug”; Mizuho was no longer providing withdrawal services to Mt. Gox users; and both bitcoin and fiat currency funds would be permanently inaccessible. (Id. ¶ 50.) Pearce claims that he would not have opened his account with Mt. Gox or transferred his bitcoins into the Exchange, or would have taken immediate steps to withdraw his bitcoins from the Exchange, if he had known that: Mizuho was interfering with Mt. Gox's ability to service users; his ability to make cash withdrawals from the exchange would be materially compromised; the security of Mt. Gox had been compromised; or Mt. Gox intended to go offline and declare bankruptcy. (Id. ¶ 51.)

         Pearce initiated this class action suit against Karpeles and Mizuho on January 24, 2018. (Doc. No. 1.) On August 27, 2018, this Court found it did not have personal jurisdiction over Mizuho and dismissed it. See Pearce v. Mizuho Bank, Ltd., Civ. No. 18-306, 2018 WL 4094812, at *7 (E.D. Pa. Aug. 27, 2018). In his Class Action Complaint, Pearce claims one count of negligence and one count of fraud against Karpeles. (Doc. No. 1.) Pearce brings these claims on behalf of himself and the “Mt. Gox Class.” (Id. ¶¶ 58-84.)

         LEGAL ...

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