(This story changes Mandalah description in the 30th paragraph, company name in
the 31st paragraph)
By Sophie Knight
TOKYO (Reuters) - In June 2011, when customers of now-bankrupt bitcoin exchange Mt. Gox agitated for proof that the Tokyo-based firm was still solvent after a hacking attack, CEO Mark Karpeles turned to the comedy science fiction novel "The Hitchhikers Guide to the Galaxy".
During an online chat, Karpeles moved the equivalent of $170 million in bitcoin at today's market rates - the virtual equivalent of a bank manager flashing a wad of cash in a wallet to establish credit. The gesture - with a sly wink to the "geek" culture Karpeles believed he shared with many of his 50,000 customers at the time, including an interest in coding, Japanese manga comics and science fiction - succeeded.
By moving 424,242 bitcoins, Karpeles, then 26, evoked the random number, 42, described as the "meaning of life" in Douglas Adams' sci-fi novel. "Don't come after me claiming we have no coins," Karpeles said, according to a transcript of that online discussion. "42 is the answer."
As the price of bitcoin soared from a few dollars to above $1,000, Mt. Gox grew to become the world's largest exchange for the digital currency, handling flows worth $3 billion in 2013, by the company's own reckoning.
But even as Mt. Gox boomed, French-born Karpeles seemed both keen to maintain total control of key operations and indifferent to commercial success, according to former staff and associates who spoke to Reuters, but asked not to be named because of ongoing investigations into the exchange's collapse.
Creditors who want to know how Mt. Gox at one point lost some $500 million worth of bitcoin and another $27 million in cash from its bank accounts, are seeking answers from Karpeles, who has spent recent days huddled in meetings with lawyers in Tokyo.
Mt. Gox and its lawyers declined repeated requests for comment for this article.
Lawyers for Karpeles told a U.S. judge last week that he was "not willing" to travel to the United States - as ordered by the judge to answer questions in a bankruptcy court - until his attorneys can "get up to speed" on a new subpoena from the U.S. Treasury Department. Karpeles doesn't want to go to the U.S. as he fears he could be arrested by authorities there, a person familiar with his thinking said.
"Regardless of whether it was a massive fraud or whether he was just grossly negligent, at the end of the day he's at fault," said Steven Woodrow, a lawyer representing a U.S. class action against Karpeles brought by Mt. Gox creditors.
Mt. Gox's bid to resuscitate its business was dismissed by a Tokyo court on Wednesday, and the court-appointed administrator said that meant the firm was likely to be liquidated. He added that Karpeles was likely to be investigated for liability in the exchange's collapse.
THE MAGICAL TUX
In its bankruptcy filing, Mt. Gox said 750,000 customer bitcoins and another 100,000 belonging to the exchange were stolen due to a software security flaw. Karpeles has told others he has been hurt by accusations he masterminded the theft, and wants to return the bitcoins and cash to some 127,000 creditors.
Karpeles, who has said he is reluctant to appear in public because of safety concerns, relieves stress by driving around Tokyo at night in a Honda Civic he bought as a company car at Mt. Gox, people close to him said. He lives alone with his cat, Tibane, whose exploits he used to chronicle on now-deleted Flickr and YouTube accounts.
The cat's name, chosen by Karpeles' late grandmother, inspired the name of his first company, Tibanne, which he set up in October 2009 in Japan. His employer at the time, software platform distributor Nexway, had transferred him to the country earlier that year.
Born in Chenove, in the Burgundy region of France, Karpeles wrote his first computer program aged 10. He wrote on his blog that he "never really felt at home in France," and has not been back since moving to Japan five years ago.
Shy and fearful of confrontation, the self-proclaimed "geek" felt comfortable in Japan, where he could also indulge his love of manga, video games and cosplay - a combination of "costume" and "play", where people dress as characters from Japanese anime, graphic manga novels and video games. Karpeles found solace in online communities, where he was known as "The Magical Tux", a reference to the penguin mascot of open-source operating system Linux.
His escapism into virtual worlds was accompanied by what some former associates describe as a lack of interest in how running afoul of law and regulation could threaten his business and reputation.
According to blog posts Karpeles wrote in 2006, he was arrested twice in France before he was 21 for computer fraud-related charges. One resulted in a 3-month suspended sentence. French authorities in Tokyo said they had seen confirmation of one prior conviction, but did not have details.
In Japan, Karpeles was sued by a customer in 2012 who claimed he had paid 15,000 euros ($20,700) for a website to be developed that was never built. Tokyo District Court ruled last May that Karpeles had to return the money.
The U.S. Department of Homeland Security seized $5.5 million in Mt. Gox bank accounts in 2013, saying the exchange had been late to register as a money transmitter.
"A NICE EXPERIMENT"
Karpeles became interested in bitcoin when a customer of his web-hosting services wanted to pay in the digital currency. Unlike other early fans of bitcoin, Karpeles had no particular interest in the libertarian philosophy that drove many bitcoin adopters. Instead, he told Reuters in a 2013 interview, he was interested in the technology as a "nice experiment".
He met the founder of Mt. Gox, U.S. entrepreneur Jed McCaleb, on IRC, an online chat platform. McCaleb, nervous about regulatory scrutiny on bitcoin, wanted rid of the exchange and sold it to Karpeles in March 2011 for no upfront fee, people with knowledge of the deal said. Karpeles told others he had later paid McCaleb a small fee, calling it "a very good deal". McCaleb could not be reached for comment.
Mt. Gox's user base mushroomed from 3,000 to 50,000 within three months as bitcoin gained traction. Unable to keep up with customer support queries, Karpeles hired his first five employees in June of that year, shortly after the company said in public announcements that it believed one or more hackers broke into the exchange's database and drove the price of bitcoin down to zero.
Dazed by that security breach, a former employer said, Karpeles retreated to build a more secure trading platform but left the exchange offline, with thousands of emails from bewildered users unanswered until a group of bitcoin enthusiasts volunteered to come in to help. One was Roger Ver, who says he was stunned when Karpeles proposed they resume work on Monday rather than work through the weekend to solve the crisis.
"He wasn't ever focused on Mt. Gox like he should have been," said Ver.
As the exchange's business grew, Karpeles hired more staff to work in programming, customer support and user verification, eventually taking space in a central Tokyo office with 30 employees, with another dozen contractors overseas.
ROBOTS, EXERCISE BALLS
Karpeles wanted to be liked, three former employees say. He bought lunch for the entire staff and spent thousands of dollars on gadgets and equipment to make the office more "fun" - exercise balls for chairs, beer steins and robots. Late last year, in the middle of increasingly strained times for Mt. Gox, he spent an afternoon putting up a hammock in the recreation room.
But staff found it galling that the boss was buying these goodies even while he refused to give pay raises. They also became frustrated as they waited for Karpeles to authorize decisions or make progress on simple tasks. Developers, stuck without direct access to the Mt. Gox source code, resorted to playing video games, people inside the company at the time say.
Employees were also concerned that Karpeles' tight grip on all company affairs was causing a bottleneck: he was the only person who could access the exchange's bank accounts and bitcoin holdings and resolve requests by traders to cash out.
Former employees say they asked Karpeles to share the passwords to Mt. Gox's bitcoin wallets in case he became incapacitated or unable to access the data. He refused, leaving him as the only person able to piece together the passwords, written on paper stored at his home, the office, and an undisclosed location.
Karpeles' secrecy extended to the company accounts, which he refused to show to prospective investors who came to the company with proposals, according to former employees. Mandalah, a Tokyo consultancy that worked for Mt. Gox, was also frustrated by Karpeles' lack of interest in outreach and business growth, according to people with knowledge of the matter. Mandalah declined to comment.
As other competing exchanges developed more sophisticated trading systems, Karpeles diverted his attention from the exchange to buy an unrelated software company called Shade 3D and began to work on launching a 'Bitcoin Cafe' - which would accept the digital currency as payment - on the ground floor of the office, according to records and former staff.
Karpeles was planning to serve quiche and apple pies he'd made himself in the cafe, which would also showcase a point-of-sales system he had spent hours tinkering with, a former employee said. The cafe never opened.
($1 = 103.7200 Japanese Yen)
($1 = 0.7238 Euros)
(Editing by Kevin Krolicki and Ian Geoghegan)