The founder of defunct cryptocurrency exchange QuadrigaCX moved users’ money into his personal accounts, created artificial trading volume and inflated company revenue, according to a report from Ernst & Young.
Rather than holding cryptocurrency in company wallets on behalf of Quadriga’s users, its 30-year-old CEO, Gerald Cotten, moved large sums of customer assets into his personal accounts at competing exchanges, said the report.
In some cases, the funds were used as security for a margin trading account operated by Mr. Cotten, who died from complications related to Crohn’s disease while on his honeymoon in India last December.
About 76,000 Quadriga users have been unable to access roughly $214.6 million of their funds since Mr. Cotten’s death, and a large proportion of the company’s cryptocurrency holdings are missing. Mr. Cotten operated the exchange from his laptop and was the only one who knew where the company stored its cryptocurrency reserves and the passwords to access them, according to an affidavit filed by his widow, Jennifer Robertson.
“The margin account trading activities were subject to substantial fees and generated substantial losses,” says the report from Ernst & Young, which was appointed monitor after Quadriga filed for protection under the Companies’ Creditors Arrangement Act (CCAA) in January.
As a result of the losses, Quadriga’s cryptocurrency reserves were “adversely affected,” according to Ernst & Young.
Over the course of three years, Mr. Cotten appeared to liquidate the equivalent of $80-million from one account he maintained on an offshore exchange. At least some of the cryptocurrency deposited into the account appears to have originated from Quadriga, according to the monitor. What happened to the proceeds of the sale is unknown.
Quadriga also engaged in a significant number of cash deals, according to the report. In some cases, Mr. Cotten appears to have credited user accounts with deposits with the expectation that the user would deliver cash in the future. This may account for some of the shortfall in Quadriga’s cryptocurrency holdings, Ernst & Young notes.
Substantial amounts of cryptocurrency were also transferred to wallets whose owners Ernst & Young has not been able to confirm.
Mr. Cotten controlled numerous Quadriga accounts under various aliases, which were credited with a large amount of funds. Ernst & Young said it is likely the deposits are not represented by any actual fiat or cryptocurrency. Nevertheless, the funds were used to facilitate trades and withdraw real cryptocurrency from Quadriga.
One account Mr. Cotten controlled under the alias Chris Markay recorded deposits worth more than $220-million in fiat along with a huge amount of cryptocurrency. The alias accounts were involved in roughly 300,000 trades as counterparties, generating additional fee revenue for Quadriga. Other accounts were opened under the pseudonyms Aretwo Deetwo and Seethree Peaohh.
The monitor noted that its investigation has been severely hampered by the lack of any corporate or accounting records. Mr. Cotten also operated with an unusual degree of secrecy. Two computers and a USB stick belonging to Mr. Cotten are encrypted, and Ernst & Young has not been able to access them. He also preferred secure communications methods, and on numerous occasions told people he was dealing with to move from email or text messaging to encrypted services.
While Mr. Cotten had full access to Quadriga’s platform, the system did not record his activities within the site. Ernst & Young says it was advised this setup was done at Mr. Cotten’s request.
Ernst & Young also found that a significant amount of fiat currency was transferred to both Mr. Cotten and his widow. The report notes the couple acquired assets worth approximately $12-million, including 16 properties in Nova Scotia, a boat, an airplane and luxury vehicles. Mr. Cotten and his wife “frequently travelled to multiple vacation destinations often making use of private jet services,” according to the report.
Ms. Robertson previously agreed to an asset preservation order in April and has been cooperating with Ernst & Young.
Because the couple’s wealth was sourced from Quadriga funds, Ernst & Young plans to recover the assets for “immediate liquidation.”
So far, Ernst & Young has recovered $32-million in fiat currency and taken possession of or identified another $1-million in cryptocurrency. Most of the funds have been retrieved from third-party payment processors. Quadriga could not obtain corporate bank accounts and relied on other companies to process transactions for users.
Quadriga also relied on independent contractors to use their own personal or corporate bank accounts, often without any formal written agreement in place. Mr. Cotten told payment processors to provide only limited information about the nature of the business to financial institutions to limit scrutiny.
In April, a Nova Scotia judge agreed to transition the proceedings from a CCAA case into a bankruptcy case.