A provincial Canadian regulator concluded that the downfall of crypto exchange QuadrigaCX, which left 76,000 users out of pocket for about $200 million, was the result of fraud by its co-founder and CEO Gerald Cotten.
The Ontario Securities Commission (OSC) today released a report detailing the results of its 10-month investigation into the collapse of QuadrigaCX, Once Canada’s largest cryptocurrency exchange.
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The securities regulator said Cotten committed fraud by opening accounts under aliases and credited himself with fictitious currency and crypto balances, which he traded with unsuspecting Quadriga clients. The late 30-year-old chief executive covered this shortfall with other clients’ deposits – in effect, operating a Ponzi scheme wrapped in modern technology, said the OSC.
The OSC staff calculated that the bulk of the $169 million in client losses – approximately $115 million – arose from Cotten’s fraudulent trading. They also determined that Cotten misappropriated millions in client assets to fund his lavish lifestyle.
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The regulator further explains Cotton, who died from complications of Crohn’s disease in India while honeymooning, hadn’t held cryptocurrency belonging to Quadriga’s users in the exchange’s wallets. Instead, he moved large sums to his personal accounts at competing exchanges, in some cases using it as collateral for a trading account he operated and generated substantial losses and fees. At one point, Cotten lost $28 million while trading client assets on three external crypto platforms without authorization from clients.
The report identified several examples of cash transferred from Quadriga to fund the purchases of personal assets for Cotten and his wife, including 16 properties in Nova Scotia, real estate in British Columbia, vehicles, a sailing vessel and a personal aircraft.
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“This lack of registration facilitated Cotten’s ability to commit a large-scale fraud without detection. So did the absence of internal oversight over Cotten. From 2016 onwards, Cotten was in sole control of a company that had hundreds of thousands of clients and transacted over a billion dollars of fiat currency-denominated assets and over five million crypto asset units. He ran the business as he saw fit, with no proper system of internal oversight or controls or proper books and records,” the regulator further states.
QuadrigaCX was shut down last year following the sudden death of its founder and CEO Gerald Cotton in December 2019. The five-year-old business reportedly misplaced another $500,000 in cold wallets. Court documents say the $190 million in missing cryptocurrency is locked in offline digital wallets while Cotton was the only person who had the password to the company’s wallets.
In the meantime, the court-appointed representative counsel for employees and retirees because that “vulnerable group had little means to pursue a claim in the complex CCAA proceedings.”