In a report on June 19, 2019, Ernst & Young (EY), Quadriga’s bankruptcy trustee said Gerald Cotten, CEO of QuadrigaCX cryptocurrency exchange had transferred over $200 million worth of customer funds into his own account on other digital currency exchanges. The founder had also created fake accounts on Quadriga and funded them with fiat and crypto which did not exist.
EY Report Reveals Fraudulent Transfer of Customers’ Funds
Ernst & Young in a 79-page report stated that the late Gerald Cotten between 2016 and 2018’s end had transferred cryptocurrencies owned by QuadrigaCX customers into other digital currency exchanges. The transferred funds go as high as over $200 million.
More light into the nature of the transfers reveals that Quadriga CEO had moved 9,450 Bitcoin, 387,738 Ethereum, and 239,020 Litecoin valued at $88 million, $105 million, and $33 million respectively, at current market prices. Another exchange with an account in Cotten’s name received 21,501 Bitcoin (($201 million) with all except 8 Bitcoin liquidated totaling $80 million CAD ($60.4 million USD).
EY has tried to reach the exchange even though the platform is only communicating with local authorities in its jurisdiction. According to EY, it is looking to open formal channels with these local authorities. The trustee further outlined that Cotten had margin traded customers funds and incurred losses “substantial losses”. Some assets which were margin traded include Omisego, Dogecoin, Zcash, Dash.
Gerald Cotten Created Fake Accounts on QuadrigaCX
Furthermore, Gerald Cotten created fake accounts owned on the QuadrigaCX. He funded the accounts with millions worth of fiat and crypto which did not exist and then used them to purchase real cryptocurrency from customers on the platform before moving them to other exchanges. One of such accounts with the largest funds bears the name Chris Markay.
While commenting on EY’s report, Evan Thomas, a litigator with Osler Hoskin & Harcourt in Canada who spoke to the media said Cotten acted fraudulently and betrayed the trust of Quadriga users.
Thomas also said:
“It’s possible that he got in over his head and was trying to trade his way 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.”
Quadriga Did Not Set Up Contingency Fund to Mitigate Losses
On the part of the exchange, EY said QuadrigaCX had not set aside any contingency fund to handle unforeseen circumstances and it did not keep administrative logs. There was also mismanagement and poor practices, an instance of which the exchange paid two out of nine payment processors C$11.8 million in fees.
In the same vein, it seems Gerald Cotten instructed TPPs to transfer funds to cover the operational cost of the exchange or fund his account with no oversight. EY has, therefore, suggested that the Cotten’s properties in British Columbia and Nova Scotia, cash holdings, investment securities, an aircraft, luxury vehicles, a boat, and gold and silver coins which now belong to his widow, Jennifer Robertson should be liquidated to cover customers’ loss.
QuadrigaCX Claims CEO is Dead and it Can’t Access Cold Store Wallets
It can be recalled that in February 2019, QuadrigaCX claimed that it is unable to repay the $190 million worth of customer funds because the exchange’s CEO died in December 2018. His death purportedly made them unable to access the cold store wallets where customer funds are stored.
However, months of investigations carried out by EY and other members of the public that have good knowledge about the blockchain revealed that these wallets are totally empty. According to EY at the time, the last time funds had entered 5 out of 6 wallets was in April 2018.
FBI is Seeking Victims of Quadriga for Ongoing Investigation
On June 3, 2019, the U.S. Federal Bureau Investigation revealed that it is seeking victims in the QuadrigaCX case for its ongoing investigation. It outlined that it is mandated to seek out these victims and give them information, resources as well as any other support they may need.
That aside, EY has thrown more light on the processes involved in making claims for customers affected by the loss. According to EY, “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’).”
While the exchange’s site has been down for some time now, it made it difficult for customers to determine their account balance on QuadrigaCX. To that effect, a new portal has been created and it allows people to enter their QuadrigaCX account number and first name in order to reflect how much they can file claims.