Gerald Cotten, the founder and chief administrator of now-defunct Canadian cryptocurrency exchange Quadriga, moved customers’ money into his own personal accounts, likely traded fake currency deposits for real cryptocurrency and inflated revenue figures, according to Ernst & Young.
Quadriga, which once called itself Canada’s largest crypto exchange, was granted creditor protection in February after Cotten died of complications of Crohn’s disease during a trip to India. The company, which is estimated to owe over $200 million to 76,000 users, began bankruptcy proceedings in April.
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Quadriga had no system to account for its overall profitability and operating expenses, the report said. Rather, users’ funds were pooled with company funds, with Cotten periodically transferring significant amounts of cash and cryptocurrency to personal accounts outside Quadriga.
Those include a margin trading account that generated “substantial” trading losses and fees, “thereby reducing the net inventory of cryptocurrency available to be returned to Quadriga,” according to Ernst & Young.
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From another account that appears to have been at least partially funded from Quadriga, Cotten appears to have liquidated some $80 million worth of bitcoin over the course of three years. Ernst & Young said it does not know what happened to the proceeds of the sale.
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Cotten also created various user accounts within the Quadriga platform, including under the aliases Chris Markay, Aretwo Deetwo and Seethree Peaohh.
The Chris Markay account reported cash deposits of more than $220 million, in addition to significant amounts of cryptocurrency. Ernst & Young said the recorded incoming transactions are unlikely to reflect actual deposits of cash or digital currency. Nonetheless, the “unsupported deposits” were used to trade real funds from Quadriga users, boosting the platform’s trading volume and generating additional fee revenue, according to the report.
While Cotten was one of only two people with full administrative privileges to the company site, the platform did not record his activities, a setup that Quadriga’s founder is reported to have specifically requested, according to Ernst & Young.
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The documents also mentioned that some accounts were funded with large volumes of cash transactions, with users reportedly handing the cash in person to a Quadriga representative. One such account recorded more than $12 million in in-person deposits over the span of five months.
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Adding to the challenge of tracing funds and piecing together transaction patterns is the fact that Cotten often used encrypted e-mail services and chat communications and often urged those he interacted with to do so as well. Several of the devices from which Cotten is believed to have been conducting business are also encrypted and have so far remained inaccessible, according to the report.
But while many of Cotten’s activities and some user accounts are shrouded in mystery, most of Quadriga’s customers transacting in cash had to provide proof of their identity such as pictures of passports and drivers’ licences. That information, where available, has been saved directly to the company’s platform and “is not masked in any way,” the documents reported.
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So far, Ernst & Young has recouped $32 million in cash and either recovered or located $1 million in cryptocurrency.
Another $12 million in property purchased by Cotten and his widow, Jennifer Robertson, are subject to an asset preservation order. The couple, which did not have material sources of income other than funds from Quadriga, purchased a number of assets over the last few years, including 16 properties in Nova Scotia, a private jet, luxury vehicles and a personal sailing vessel.
Robertson has agreed to disclose all assets and not to sell or dispose of any property subject to the preservation order without the consent of Ernst & Young.
Cotten reportedly did not file personal tax returns for 2014, 2015 or 2017, according to the report. When he did file taxes, he did not claim income from Quadriga.
The company did not prepare or file corporate tax reports with the Canada Revenue Agency nor submit HST filings.
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