Gerald Cotten, the late Quadriga CEO, created a string of accounts on his Canadian cryptocurrency exchange, each under an alias and containing bogus dollar balances, according to Ernst & Young auditors. He then used those accounts, it's claimed, to buy his customers' cryptocurrency with those digitally conjured dollars that didn't actually exist, and then moved the ill-gotten Bitcoin and Ethereum to his accounts at other cryptocurrency trading sites.
This incredible twist is detailed in a report out this month [PDF], the fifth in a series from the top-flight beancounters, documenting their ongoing investigation into Quadriga following the unexpected death of Cotten at the age of 30. He died, according to his widow Jennifer Robertson, of complications from Crohn's disease in a hospital in Jaipur, India, last December.
Cotten's death left his financial company and its users without access to their respective funds because it appeared Cotten alone knew how to access the private keys that opened the digital wallets containing customer funds, and that his organization had no procedures in place to deal with the possibility of his demise.
Quadriga obtained legal protection from creditors in February to allow it "to resolve outstanding financial issues that have affected our ability to serve our customers."
A month later, Ernst & Young were able to access five of Quadriga's six offline cryptocurrency wallets that supposedly only Cotten could unlock, and that hopefully still contained customers' coins. All five had been cleaned out by April 2018. The sixth was emptied on December 3, 2018, six days before Cotten was said to have died during his travels in India.
The exchange, which supported trading in both cryptocurrency and fiat currency, operated like a traditional brokerage where incoming funds get pooled for investment and account holders get credit for the fractional funds contributed to the whole.
The difference, according to Ernst & Young, is that there's no evidence Quadriga maintained any accounting records since at least 2016, and that Cotten appears to have treated his customers' assets as his personal slush fund.
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The auditing firm found that Cotten made fiat currency deposits not backed by any actual cash into his own accounts on Quadriga, and used these fictitious funds to seemingly buy his own customers' actual cryptocurrency, generating transaction fees for his company in the process and keeping the cyber-coins for himself. "Substantial funds were transferred to Mr Cotten personally and other related parties," the report says.
Cotten is said to have used 14 accounts under pseudonyms like Chris Markay, Aretwo Deetwo and Seethree Peaohh. About 95 per cent of the account activity identified by the auditors involved the Markay account, which saw deposits of CAD$220 million, 34,806 Bitcoin and 540,011 Ethereum between 2016 and 2018.
Ernst & Young said it only about one per cent of these deposits had supporting documentation, and concluded all the other deposits were "not represented by actual fiat or cryptocurrency."
While the Chris Markay account appears to have been funded with unsupported deposits, the report says, "real cryptocurrency was transferred out."
Quadriga had some 360,000 account holders, and about 76,000 are owed funds amounting to about CA$215m (US$163m).
So far, about CA$32m (US$24m) has been recovered from effectively the organization's petty-cash drawer and a few other sources. The court-appointed auditors say they are pursuing the recovery of CA$900k (US$683k) from one of Quadriga's trusted platform partners. Ernst & Young anticipates further efforts along these lines.
Based on its belief that Cotten's and Robertson's personal assets since 2015 were "sourced from Quadriga funds," the auditing firm has enumerated some CA$12m worth of properties, securities, cash, sailing vessels, aircraft and vehicles, among other assets held by Cotten's estate, for potential liquidation so the proceeds can be returned to those owed money.
That won't be anywhere near enough to satisfy Quadriga's obligations. ®