QuadrigaCX CEO Created Fake Accounts, Traded User Funds and Transferred Them to Personal Accounts

Fiduciary and operational incompetence have been a matter of record since news emerged that Gerald Cotten, CEO of the Canadian cryptocurrency trading platform QuadrigaCX, died without giving anyone password access to $215 million CAD of user cryptocurrencies he ostensibly kept in cold wallet storage devices.

But the latest report (see below) from E&Y monitors appointed to help dismantle what is left of QuadrigaCX reveals additional malfeasance on Cotten’s part.

Though the “Fifth Report of the Monitor” dated June 19th and submitted as part of Quadriga’s bid for credit relief is based on unaudited financials, the conclusions therein are also supported by information gleaned in interviews with Quadriga directors and senior management, independent contractors and “other parties with historical involvement with Quadriga,” E&Y says.

In short, the report confirms that Cotten appears to have been running Vancouver-based Quadriga virtually alone from a laptop located in his home in Nova Scotia; internal controls were absent; funds of some of the exchanges 76 000 customers were commingled with exchange funds and gambled; Cotten created fake user accounts and traded from them “resulting in inflated revenue figures”; and Cotten transferred exchange funds to his personal accounts.

The allegations are detailed, in the words of E&Y monitors, here:

(a) Quadriga’s operating infrastructure appears to have been significantly flawed from a financial reporting and operational control perspective. Activities were largely directed by a single individual, Mr. Cotten and as a result, typical segregation of duties and basic internal controls did not appear to exist;

(b) No accounting records have been identified by the Monitor and there appears to have been no segregation of assets between Quadriga Funds and User Funds. Funds received from and held by Quadriga on behalf of Users appear to have been used by Quadriga for a number of purposes other than to fund User withdrawals. With its available infrastructure, Quadriga does not appear to have had visibility into its profitability, if any;

(c) The Company appears to have engaged in significant “cash” transactions. The Monitor has been unable to verify if cash deposits were deposited into accounts containing User Funds and or properly recorded;

(d) The Monitor has been unable to locate basic corporate records including the location and security passwords associated with Quadriga’s Fiat and Cryptocurrency inventories between TPPs, bank accounts, wallet addresses and third-party exchanges. In addition, the Monitor understands passwords were held by a single individual, Mr. Cotten and it appears that Quadriga failed to ensure adequate safeguard procedures were in place to transfer passwords and other critical operating data to other Quadriga representatives should a critical event materialize (such as the death of key management personnel);

(e) The Company relied extensively upon the services of TPPs to administer its fiat treasury functions. Adequate governance arrangements, oversight or reporting functions in relation to Fiat maintained by these third parties does not appear to have been in place;

(f) User Cryptocurrency was not maintained exclusively in Quadriga’s hot and cold wallets. 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. Trading losses incurred and incremental fees charged by exchanges appear to have adversely affected Quadriga’s Cryptocurrency reserves. In addition, substantial amounts of Cryptocurrency were transferred to wallet holders whose identity the Monitor has been unable to confirm;

(g) Mr. Cotten created Identified Accounts under aliases where it appears that Unsupported Deposits were deposited and used to trade within the Platform resulting in inflated revenue figures, artificial trades with Users and ultimately the withdrawal of Cryptocurrency deposited by Users;

(h) Substantial Funds were transferred to Mr. Cotten personally and other related parties. The Monitor has not located any support justifying these transfers. Interim Investigation Procedures

In previous reports, monitors have indicated that current assets at Quadriga total no more than $21 million CAD, about 10% of what Quadriga users lost when the platform failed earlier this year.

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