QuadrigaCX CEO moved customer funds into his own accounts

The late founder and CEO of now-defunct crypto exchange platform QuadrigaCX used customer funds to trade crypto for his own account on competitor exchanges, according to a new 70-page report from Ernst & Young (EY).

“Significant volumes of cryptocurrency were transferred off platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr. Cotten.”

The report claims that Gerald Cotten, who passed away in India last December, transferred customer crypto off the Quadriga platform into competitor exchanges and into his personal accounts. Quadriga customers’ funds were purportedly used to provide for Cotten’s assets, which included a private jet, luxury vehicles, investment holdings, gold and silver coins, a personal yacht, and several properties in Nova Scotia and BC. The assets, now expected to be liquidated, are worth a collective $12 million.
 
EY found Cotten had established a margin trading account that traded numerous cryptocurrencies, which generated “substantial losses” for the exchange, due to the high fees associated with them. As a result of the losses, Quadriga liquidated a significant portion of the cryptocurrency to satisfy the shortfall, which reduced Quadriga’s remaining inventory.
 
“Significant volumes of cryptocurrency were transferred off platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr. Cotten,” the report said. “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.”
 
It was discovered that Cotten created counterfeit accounts on Quadriga’s platform, credited them with non-existent fiat amounts, then used this fake currency to purchase actual crypto from Quadriga’s customers. The forged accounts were registered under several pseudonyms, including Chris Markay, Seethree Peaohh, and Aretwo Deetwo. EY’s report found that during 2016 to 2018, Cotten transferred 9,450 in Bitcoin, 387,738 in Ethereum, and 239,020 in Litecoin out of Quadriga’s account, at the time worth $116 million, $138 million and $43 million CAD, respectively.
 
Through these fake accounts, artificial deposits were traded within the platform, resulting in inflated revenue numbers, fraudulent trades with users, and the withdrawal of cryptocurrency. Substantial amounts of that were used to process user transactions, fund Quadriga’s operating costs, and on many occasions, go to Cotton and his now-widow, Jennifer Robertson. EY said when operating expenses needed to be paid, or when Cotten wanted the funds for himself, he told the third-party payment processors to issue payments with “no oversight.”

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Quadriga filed for creditor protection at the beginning of 2019, when it was revealed the exchange owed customers $200 million, most of which was stored on the deceased CEO’s encrypted laptop. EY was appointed to oversee the search for the missing money. In May, efforts to recover the $200 million in lost cash and crypto resulted in only $28 million of recuperated assets, nearly all of which was in the form of cash.
 
“He was basically using our money to fund his lifestyle,” Quadriga user Ali Mousavi told The Globe and Mail. Mousavi had about $71,000 invested with Quadriga.

EY’s report also detailed widespread mismanagement and inadequate accounting practices, finding that the exchange’s operational infrastructure was “significantly flawed.”
 
“Generally, the platform as an administrative tool to manage the Quadriga business lacks critical infrastructure and design,” the report said, citing no accounting or reporting functionality within Quadriga’s platform, and that the platform provided no visibility into whether or not Quadriga was operating profitably.
 
Experts have predicted Quadriga customers who lost funds will receive a collective recuperation of between $35 million and $40 million, but individual payouts will be determined by the number of claims filed. The Canadian authorities, as well as the US Federal Bureau of Investigations, are now reportedly investigating the losses.