OSC finds Quadriga CEO ran “Ponzi scheme” leading up to crypto exchange’s downfall

Gerald Cotten

A new report released by the Ontario Securities Commission (OSC) has revealed that now-defunct crypto asset trading platform QuadrigaCX collapsed due to fraud committed by its co-founder and CEO, Gerald Cotten.

“The bulk of the $169 million in client losses – approximately $115 million – arose from Cotten’s fraudulent trading.”

The report, which was publicized by the OSC Thursday, revealed that Cotten opened accounts under aliases and credited himself with false currency and crypto-asset balances, which he traded with unaware Quadriga clients. The OSC classified Cotten’s actions as a Ponzi scheme, which is typically a form of fraud that lures investors and pays profits to earlier investors with funds from the more recent investors.

“The information presented in this report highlights the unique risks that can arise when using crypto-asset trading platforms,” said Jeff Kehoe, enforcement director at the OSC. “These risks are magnified when platforms trading securities and derivatives do not register with regulators and do not disclose critical information about their practices.”

While the cryptocurrency sector and securities regulators have clashed in the past, leaders in the Canadian crypto space have argued that what differentiates Quadriga from other crypto-platforms is security and regulation. CEO of Canada Stablecorp, Jean Desgagne, emphasized setting “a new standard of transparency and auditability,” when launching a new stablecoin cryptocurrency; and CEO of 3iQ bitcoin fund Fred Pye pointed to regulation as a key differentiator between 3iQ and fraught exchanges.

Following the news of Quadriga’s collapse last year, crypto trading platform Coinsquare released a statement pointing to its “strong relationships with the applicable regulatory authorities.” Notably, however, it was recently revealed that Coinsquare had experienced a data breach last year.

RELATED: How can Canada prevent another QuadrigaCX?

The OSC noted that Cotten sustained “real losses” when the price of crypto assets changed, which created a shortage in available assets for clients looking to withdraw funds from Quadriga’s platform.

“The founder covered this shortfall with other clients’ deposits – in effect, operating a Ponzi scheme,” the OSC said. “Staff calculated that the bulk of the $169 million in client losses – approximately $115 million – arose from Cotten’s fraudulent trading.”

The collapse of Quadriga in 2019 caused massive losses for 76,000 investors from Canada and around the world, who collectively lost at least $169 million. Approximately 40 percent of these investors were Ontarians, the OSC determined. The commission’s staff also found that Cotten misappropriated millions in client assets to fund his lavish lifestyle.

Quadriga filed for creditor protection at the beginning of 2019, when it was revealed the exchange owed customers $250 million, most of which was stored on the late CEO’s encrypted laptop. Cotten died in December 2018 due to complications with Crohn’s disease. Ernst & Young (EY) was appointed to oversee the search for the missing money.

RELATED: Widow of QuadrigaCX CEO to forfeit around $12 million to Ernst & Young

In July, it was first revealed by EY that Cotten used customer funds to trade crypto for his own account on competitor exchanges. When Quadriga collapsed in early 2019, $215 million worth of clients’ money was unaccounted for. The OSC’s investigation found that $28 million was lost by Cotten on other crypto exchanges, $115 million was lost by Cotten on Quadriga, and $46 million was recovered.

“OSC staff would likely have pursued an enforcement action against Cotten and Quadriga,” the commission stated. “However, this is not practical given that Cotten is deceased and Quadriga is bankrupt, with its assets subject to a court-supervised distribution process.”

The publishing of the report comes after a 10-month investigation undertaken by the OSC, which was completed in collaboration with securities commissions in British Columbia, Quebec, Nova Scotia, New Brunswick, as well as the United Kingdom, United States, Switzerland, Singapore, and the British Virgin Islands.

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Isabelle Kirkwood

Isabelle Kirkwood

Writer, globetrotter, drone pilot & David Attenborough enthusiast