United States District Court, E.D. Pennsylvania
GREGORY PEARCE, individually and on behalf of all others similarly situated, Plaintiff,
MARK KARPELES, an individual, Defendant.
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.
General Factual Allegations
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),
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.)
is a French citizen who owned and operated the Mt. Gox
Bitcoin Exchange.(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.)
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.)
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.)
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.)
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. (Id. ¶ 37.)
Factual Allegations Relating to 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.)
January 2014, Pearce converted some of his bitcoin to fiat
currency with the intention of immediately withdrawing $5,
900 from his Mt. Gox account. (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.)
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.)
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. ¶¶