Mt. Gox Vulnerability Covered Up by Founder McCaleb, Lawsuit Alleges

The latest in the long trail of events since the 2014 shutdown of the then-largest - but now defunct - cryptocurrency exchange Mt. Gox is a lawsuit that two former traders on the exchange brought against founder Jed McCaleb.

The traders, Joseph Jones and Peter Steinmetz, allege McCaleb of fraudulently and negligently misrepresenting Mt. Gox to "Induce" traders to use the exchange.

The duo, who filed the lawsuit on May 19 in a court in California, allege that McCaleb was aware of "Serious security risks" in the architecture of Mt. Gox back in late 2010 to early 2011, but neither followed-up to fix the issues nor disclosed the vulnerabilities to the public.

The lawsuit from Jones and Steinmetz builds on the previous findings published in a Daily Beast report, that suggests that Mt. Gox had security flaws from its early days.

The lawsuit claims that in or before January 2011 - when the Mt. Gox account was compromised, leading to the unauthorized sale of thousands of users' Bitcoins - McCaleb was informed about the security flaws and was aware that more than 80,000 Bitcoin had already gone missing.

McCaleb failed to take any action to fix the security issues, but instead sold the majority of his interest in Mt. Gox to the eventual CEO of the exchange Mark Karpeles, the lawsuit claims.

"Mt. Gox was hacked prior to being transferred on from what ordinarily was made by the Mt. Gox creator McCaleb. I have not been able to review everything myself because right now the lawyer holds the files but based on what they could find on the blockchain, as for the stolen bitcoins, are basically analyzed from the different court documents that will be made available. I'm 99 percent sure that the hacking came from what originally was made by McCaleb, the original creator of Mt. Gox.".

As McCaleb wrote, Mt. Gox appeared to have made enough money to cover the loss of 80,000 Bitcoins, given that McCaleb came back around December 2011 to request an earnout worth $263,431 from Karpeles, in accordance with the sale agreement between the two.

A similar lawsuit filed against McCaleb by two different ex-users of Mt Gox last year showed email conversations with McCaleb that suggests that he was aware of the security flaws that had lead to Bitcoins going missing from the platform.

The 2018 lawsuit, filed by Donald Raggio and his son Chris Raggio, claimed that McCaleb did not do enough to recover a total of 9,500 Bitcoins that were stolen from the pair's accounts on Jan. 9, 2011.Meanwhile, the struggles of Mt. Gox creditors to get their funds back is lingering.