Investigators Say Late Owner of QuadrigaCX Crypto Exchange Siphoned Client Holdings

Photo: Kin Cheung (AP)

The late founder of catastrophically failed Canadian cryptocurrency exchange QuadrigaCX (QCX) “took most of the money entrusted to him by clients and spent much of it on himself and his wife,” the Wall Street Journal reported, citing a report released last week by court-ordered monitors.

QCX said in early 2019 that CEO Gerald Cotten had died of complications with Crohn’s disease in December 2018 “while travelling in India, where he was opening an orphanage to provide a home and safe refuge for children in need.” The company said that Cotten was the sole person with passwords to access the exchange’s “cold storage,” where the vast majority of its client holdings were held; Ernst & Young, a firm tasked with auditing CQX after it declared bankruptcy in January, later found that many of the wallets associated with the company held a very small percentage of the cryptocurrency owed to customers and were drained eight months before Cotten’s alleged death.

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The Journal wrote Ernst & Young released a report last week indicating that Cotten had “funneled client money out of Quadriga and into accounts he controlled under assumed names,” as well as that the exchange should have assets worth approximately $214 million. In fact, the auditors were able to recover just $33 million:

Ernst & Young said it found significant transfers of cash from Quadriga to Mr. Cotten and his wife, Jennifer Robertson, who briefly took control of the exchange before it filed for bankruptcy.

The report noted that neither Mr. Cotten nor his wife had any material income outside Quadriga but that Mr. Cotten claimed no income from the company on his tax returns. Yet the couple “acquired significant assets including real and personal property” and “frequently travelled to multiple vacation destinations often making use of private jet services,” the report said.

Ms. Robertson didn’t respond to a request for comment.

As CBC noted, Ernst & Young found evidence of significant financial impropriety, including the transfer of large volumes of cryptocurrency “out of QuadrigaCX-controlled cold wallets and into accounts on competitor exchanges controlled by Cotten,” a huge volume of deposits that appeared to have no supporting documentation, and Cotten’s apparent liquidation of “$80 million worth of cryptocurrency in an offshore exchange over the course of three years,” some of which was able to be traced back to QCX. Additionally, CBC wrote, Ernst & Young found “the company engaged in significant cash transactions but there was no way to verify if cash deposits were deposited into accounts containing user funds.”

Auditors also wrote in the report that they had “been unable to locate any traditional books and records, including accounting records documenting Quadriga’s financial results and operations following 2016.” Prior reporting by CBC noted that QCX had ran into legal trouble in the past relating to funds frozen by the Canadian Imperial Bank of Commerce, causing ongoing problems with payment processors.

Additionally, a March 2019 report by Bloomberg found that one of the co-founders of QuadrigaCX operator Quadriga Fintech Solutions Corp., Michael Patryn, was previously known as Omar Dhanani and was sentenced to 18 months in U.S. federal prison for “identity theft related to a bank-and-credit card scam.” He was later deported to Canada; though Patryn declined to comment on his name change or criminal record to Bloomberg, he did tell the site had severed ties with QuadrigaCX three years ago due to a “fundamental disagreement” with Cotten over its listing process.

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However, the report does not resolve suspicions by some that Cotten faked his own death to abscond somewhere unknown. (An Indian hospital released documents in February 2019 supporting information in a prior statement of death from a funeral home and a government death certificate.) As CBC noted, Cotten told family members that he had implemented a so-called “dead man’s switch” to turn over critical QCX data to them in the case of an emergency, but this apparently never occurred.

[WSJ via the Verge]

Update: 6/25/2019 at 12:35 a.m.: This article has been updated with further information about QuadrigaCX’s history.

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Tom McKay

"... An upperclassman who had been researching terrorist groups online." - Washington Post