QuadrigaCX Update: Widow claims CEO used own money to pay clients

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It’s Friday. It must be time for another update on the continuing saga of QuadrigaCX, the beleaguered Canadian crypto exchange that has re-written the book on how not to operate an exchange of any kind, while handling other people’s money. Now Gerald Cotten’s poor widow would have us believe that, out of the goodness of his heart, he poured his own wealth into the exchange in order to pay clients, whose funds had been frozen by the Canadian Imperial Bank of Commerce (CIBC).

The storyline that his widow is referencing goes way back to January of last year, well before any of the recent events related to his mysterious death in India and the disappearance of “cold storage” private keys and US$140 million in client funds. The CIBC took it upon itself at that time to freeze five accounts with roughly US$21 million, since it believed that the ownership of the accounts was in doubt.

The accounts appeared to be owned by the exchange’s payment processor, Custodian Inc., and its owner, Jose Reyes. Legal briefs were filed, and the court favored the bank’s position. The funds were turned over to the court for the determination of ownership, which has yet to be resolved. Unsubstantiated rumors had been flying about in 2018 that Cotten’s exchange had been dealing with quite a few shady characters, which may have been the reason that CIBC acted as it did.

In its filings, QuadrigaCX (QCX) had asked for the court’s understanding:

This court should not succumb to the bank’s unsubstantiated and highly offensive speculation that there must be shady dealings afoot because Quadrigacx’s business is a trading platform for individuals trading in cryptocurrencies. CIBC ‘has been holding the respondents’ funds hostage since Jan. 8, 2018, while it hopelessly attempts to find an ex-post facto justification for wrongfully freezing and continuing to freeze the accounts in the first place.

Banks the world over are reticent to deal with many crypto related companies.

The news today is that Cotten had been using his own money to honor customer withdrawal or transfer requests. Jennifer Robertson, Cotten’s wife and executor of his estate, said in a statement:

While I had no direct knowledge of how Gerry operated the business, he told me that he had been putting his own money back into QCX to fund user withdrawals in 2018 while the CIBC money remained frozen. I believe Gerry had the best interests of the business in mind, and cared for his customers.

In another twist, the exchange’s attorneys announced that they had to withdraw, due to a potential conflict of interest with the court-appointed monitor, Ernst & Young (EY). In another statement, Robertson explained:

I have been advised by Stewart McKelvey that, in light of concerns regarding a potential conflict of interest that have been raised as a result of information which has come to the attention of the Monitor since the start of the CCAA process, they have withdrawn from representing QuadrigaCX (QCX) and the other applicant companies in the CCAA process. Details of such information from the Monitor have not been disclosed to me.

In the meantime, EY has not had any luck locating the missing $140 million in customer funds. It did announce that it was able to find a few small fiat holdings at various other exchanges, but “most notably, six bitcoin cold wallet addresses Quadriga said it used were empty, raising questions as to whether the exchange still has any of the missing cryptocurrencies at all.” Judge Michael Wood is not amused.

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