Quadriga CX back in the news – E&Y report reveals sordid self-dealing

Craig Wright – Satoshi Nakamoto imposter or not – Judge not impressed

Quadriga CX – do you remember this strange Canadian crypto exchange caper where the CEO disappears, dies in India of complications from Crohn’s disease, but gives no one the passwords to access client monies, supposedly worth US$140 million in cold wallets at the exchange? For anyone that did follow this lurid case, the details got seamier with each passing week, as Ernst & Young, the court appointed investigator in the case, kept exposing defalcations that could only be construed as outright fraud, despite the protestations of his wife (widow?) of less than one year.

Net-Net: Gerald Cotten, the CEO in question, absconded with the missing funds, which had supported a lavish lifestyle and possibly were lost trading, while trying to cover operating deficits at his firm. This conclusion is a rather nice version of the supposed truth in deference to the dead. As far as we know, there has never been an official inquest or autopsy of Mr. Cotten’s remains, causing doubters to believe that he faked his own death and is now lying on a beach somewhere, sipping his beverage of choice.

Bizarre remains the best descriptive for this case, but creditors are screaming for justice, a return of their funds, and an end to this charade that has captured news headlines for the past six months. After Ernst & Young released its 70-page report to the court, the Wall Street Journal reported that the late founder of the beleaguered Quadriga CX “took most of the money entrusted to him by clients and spent much of it on himself and his wife.” His wife of less than one year, Jennifer Robertson, briefly took control of the exchange before it filed for bankruptcy, but has yet to comment on the E&Y findings.

Ernst & Young also noted that it had “been unable to locate any traditional books and records, including accounting records documenting Quadriga’s financial results and operations following 2016. Making any determinations were impeded by what were described as shoddy business practices, including:

  • Rampant mismanagement and poor practices;
  • No exchange administrative logs;
  • No contingency plan for the loss of funds or its leader, and
  • The exchange seemingly engaged in poor accounting practices and maintained no documentation for any transactions.

Paragraph after paragraph of the bombshell report speaks to a man in trouble, but one who planned out his actions over a lengthy period of time, much in the vein of a Bernie MaDoff type investment Ponzi scheme. Several quotes from the report reveal a sordid history of premeditated efforts to deceive:

  • “Significant volumes of Cryptocurrency were transferred off Platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr. Cotten. 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.”
  • “The Monitor (E&Y) has been unable to locate any accounting with respect to the pooled Quadriga Funds..The Monitor notes the TPP (Third-Party Processor) accounts were used to process User Fiat transactions, fund general Quadriga operating costs and on multiple occasions funds were directed to Mr. Cotten, parties related to Mr. Cotten or counsel/parties acting on his behalf.”
  • “It appears that as and when operating expenses were required to be paid, or when Mr. Cotten desired funds to be transferred to himself or related parties, he simply instructed TPPs to issue payments with no oversight.”
  • “The couple acquired significant assets including real and personal property and frequently traveled to multiple vacation destinations often making use of private jet services.”
  • “As Mr. Cotten’s and Ms. Robertson’s personal expenditures and the accumulation of their personal assets since 2015 was sourced from Quadriga funds, the Trustee intends to seek the recovery of the Preserved Assets subject to the Asset Preservation Order back to the Estate for immediate liquidation on the basis that the funds which Mr. Cotten directed be paid to them constitute preferences or transactions at under value under the BIA and may be subject to other causes of action asserted by the Trustee.”

Evan Thomas, a litigator with Osler Hoskin & Harcourt in Canada, told reporters that:

Based on the report, what [Cotten] did was clearly fraudulent and betrayed the trust of Quadriga users. It’s possible that he got in over his head and was trying to trade his way out of a deficit using other people’s money, but given that the fake accounts have existed since at least 2016 and he misappropriated funds for luxury travel and real estate investments, it seems more likely that this was a calculated and deliberate fraud.

The last accounting of debits and credits estimates $160 million in liabilities, but only $24.5 million in assets recovered. There are also personal assets of Mrs. Robertson that may need to be liquidated and there are funds held by a court trustee, awaiting release.

At the end of the day, however, Mr. Thomas does not hold out much hope for customers and creditors:

Right now, it looks like the primary source of recovery for creditors will be the fiat and the frozen assets. The report doesn’t address potential damages claims against other parties but that may be something the trustee will consider.

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