QuadrigaCX CEO Operated Fake Crypto Exchange Accounts With Customer Funds

Gerald Cotten, QuadrigaCX’s late founder, and CEO has allegedly used customers’ funds to trade for his own account on other cryptocurrency exchanges, as stated by the firm’s bankruptcy trustee, Ernst & Young in a 70-page report released on Wednesday. 

The Frauds 

After the apparent death of Cotten last December, Quadriga got into trouble. In the latest report, Ernst & Young claims that Cotten transferred millions of dollars from the customer accounts into other exchanges. Reportedly, the funds he siphoned were used to furnish Cotten’s personal lifestyle and trading habits. 

Putting it in simpler terms, Cotten has purportedly stolen more than $200 million USD from his customers. The report stated: 

“Significant volumes of Cryptocurrency were transferred off Platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr. Cotten. It appears that User Cryptocurrency was traded on these exchanges and in some circumstances used as security for a margin trading account established by Mr. Cotten.”

Fees and trading losses “appear to have adversely affected Quadriga’s cryptocurrency reserves,” and some other sums were sent to wallets whose owners EY could not confirm.

Between 2016 and the end of 2018, Cotten has had transferred 9,450 bitcoin, 387,738 ethereum, and 239,020 litecoin from his exchange’s accounts amounting to $88 million, $105 million and $33 million USD at present market prices respectively. While the value has had fluctuated dramatically increase or decrease over the specified time. 

Notably, Cotten is allegedly also guilty of creating fake accounts on Quadriga, showed fake fiat amounts credit into the account and use that fake fiat to purchase actual crypto from consumers, with the largest account using the name Chris Markay.

Further incurred losses 

The report further adds that Cotten margin traded zcash, dash, dogecoin, and omisego and incurred “generated substantial losses.”

Moreover, an unidentified third exchange received 21,501 bitcoin around $201 million as per today’s price was deposited in an account under Cotten’s name. All of the bitcoin except 8 bitcoin were liquidated, netting some $80 million CAD ($60.4 million USD).

Though the exchange is not cooperating with EY, it is cooperating with local authorities in its jurisdiction. EY is currently planning to open “formal channels” with these authorities. Evan Thomas, a litigator with Osler Hoskin & Harcourt in Canada, told CoinDesk that “based on the report, what [Cotten] did was clearly fraudulent and betrayed the trust of Quadriga users.”

Thomas indicated that Cotten’s actions could not have been an accident: 

“It’s possible that he got in over his head and was trying to trade his way out out of a deficit using other people’s money, but given that the fake accounts have existed since at least 2016 and he misappropriated funds for luxury travel and real estate investments, it seems more likely that this was a calculated and deliberate fraud.”

In January, QuadrigaCX filed for protection from creditors owing customers $190 million worth of crypto and fiat that could only be accessible only late CEO Gerald Cotten knew where the private keys were. The court appointed EY as a monitor to hunt for the missing funds. Later in April, EY was given the responsibility of trustee when QuadrigaCX formally entered bankruptcy. 

During May, the estate stated that only have $21 million of assets to cover $160 million in remaining liabilities, although most recent reports sum it closer to $24.5 million. The U.S. FBI is looking into the losses, as are Canadian authorities.

Several Other Issues 

EY further details rampant mismanagement, poor practices such as not keeping administrative logs and had no contingency plan for the loss of funds or its leader. Moreover, the exchange observed poor accounting practices. For instance, the exchange paid two of its nine payment processors $11.8 million CAD (roughly $9 million USD) in fees alone.

Most importantly, the Quadriga did not maintain any documentation, the report stated: 

“The Monitor has been unable to locate any accounting with respect to the pooled Quadriga Funds. The Monitor notes the TPP accounts were used to process User Fiat transactions, fund general Quadriga operating costs and on multiple occasions, funds were directed to Mr. Cotten, parties related to Mr. Cotten or counsel/parties acting on his behalf.”

The firm added:

“It appears that as and when operating expenses were required to be paid, or when Mr. Cotten desired funds to be transferred to himself or related parties, he simply instructed TPPs to issue payments with no oversight.”

As per EY, the properties Nova Scotia and British Columbia, investment securities, cash holdings, a boat, an aircraft, luxury vehicles and gold and silver coins that belonged to Cotten, and that now subsequently belong to his widow Jennifer Robertson were paid through Quadriga’s customers’ funds, therefore should be liquidated.  EY stated: 

“As Mr. Cotten’s and Ms. Robertson’s personal expenditures and the accumulation of their personal assets since 2015 was sourced from Quadriga funds, the Trustee intends to seek the recovery of the Preserved Assets subject to the Asset Preservation Order back to the Estate for immediate liquidation on the basis that the funds which Mr. Cotten directed be paid to them constitute preferences or transactions at under value under the BIA and may be subject to other causes of action asserted by the Trustee.”

If successful, the proceeds from the said sales could be as much as $12 million CAD ($9 million USD), which will eventually go to creditors’ estate. 

Customer Should File claims

EY stated in a separate filing that outlines the process through which the QuadrigaCX users can claim their lost money, which they lost when the exchange went belly-up.  EY said.

“Users will be requested to complete and deliver their Proofs of Claim to the Trustee prior to 5:00 p.m. (Halifax time) on August 31, 2019 (the ‘Claims Submission Date’).”

EY adds that since Quadriga’s website has been down from January,  the creditors filing claims may face difficulty to find the information they need for to prepare claims. As per EY, a committee and lawyers representing users “have expressed concern with the platform site being offline as Users cannot access statement details or information necessary to complete their claims.”

EY responded to the same that it will work with the creditors’ lawyer in order to aid users to retrieve to account balance information. The process will involve an online portal. The users will be required to type in their QuadrigaCX account number and first name, “If a match is found, your balances will be displayed,” a warning is published EY-built web page stating, “Be sure to print or screen capture the results.”

EY further added that “mindful of User privacy concerns which [were] also taken into account in preparing the claims process.

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