Mt. Gox founder Mark Karpeles appears at a news conference at the Tokyo District Court last month

Mt. Gox granted US bankruptcy protection

Bitcoin exchange Mt. Gox has received US bankruptcy protection to temporarily halt US legal action that alleges the operation was a fraud.

Judge Harlin Hale in Dallas granted temporary bankruptcy protection to the Japanese company, which was once the world's largest bitcoin exchange, that the company’s attorneys says will protect it from irreparable harm posed by a proposed class action in Chicago federal court and a breach of contract case in Seattle federal court.

Mt. Gox filed for bankruptcy in Japan last month after it said it may have lost 750,000 of its customers' bitcoins as part of an attack by hackers.

The plaintiff leading the Chicago lawsuit was scheduled to ask a federal judge to freeze Mt. Gox's US-based servers and other computer equipment today and to set up a trust over Mt. Gox's assets. The firm’s founder, Mark Karpeles, was scheduled to be deposed later this month in the Seattle lawsuit.

"This case involves a massive fraud," said Steven Woodrow, an attorney leading the class action, told Hale. "They claim incredibly that they will preserve assets and protect assets by entrusting the servers and other property to Mr Karpeles. Respectfully, your honour, that is the definition of the fox guarding the henhouse."

Mt. Gox said in papers filed with the Dallas court that the distributed denial of service (DDOS) hacking attack was the subject of an intense investigation that indicated so far the bitcoins were lost as a result of a flaw in the software algorithm that underlies bitcoin, the digital currency.

English-language Japanese paper Japan News has reported that the atttack reached 150,000 DDOS hits per second, “mostly from servers in the United States and Europe”.

An attorney for Coinlab, which sued Mt. Gox in Seattle for breaching a contract last year, said her client was troubled by what appeared to be fraudulent behaviour by Karpeles in the days leading up the US bankruptcy filing.

"We don't have proof yet but we do have concerns about the movement of hundreds of millions of dollars in bitcoins over the weekend, moved by Mr Karpeles," said Jane Pearson, an attorney with Foster Pepper.

Mt. Gox's attorney, David Parham, denied there was any fraud and said he believed Karpeles and Mt. Gox were complying with the Japanese bankruptcy proceeding.

The Chapter 15 filing allows Mt. Gox to ask the US Bankruptcy Court to recognise its foreign bankruptcy and to assist in the Japanese proceedings by protecting its US-based assets.

Hale's order protects Mt. Gox's US assets until April, when the parties will return to court and Mt. Gox will seek a permanent stay of US litigation. Hale said his order stating litigation did not apply to non-debtors, presumably Karpeles.

Karpeles was named in a proposed class action filed in late February by Gregory Greene, an Illinois resident. The lawsuit proposes to represent all US residents who paid a trading fee to Mt. Gox and those who had bitcoins or other currency with the exchange when it halted bitcoin withdrawals on 7 February.

Greene is seeking to recoup millions of dollars lost when the website went down and prevented traders from selling as bitcoin prices plummeted.

Mt. Gox is also defending a lawsuit in federal court in Seattle by CoinLab for breach of contract. CoinLab is seeking damages of $75m (£45m) from Mt. Gox.

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