By CCN Markets: Gerald Cotten, the CEO of the Canadian crypto exchange QuadrigaCX whose death is the reason for $190 million of missing funds and a bankrupt company, had transferred user funds to his personal accounts to use them as security for margin trading, a report by Ernst & Young revealed.
After Cotten had died, QuadrigaCX went offline as the company's CEO had exclusive access to the wallets where the exchange's funds were held. In April, the Canadian cryptocurrency exchange declared bankruptcy.
The Nova Scotia Supreme Court granted Quadriga protection from their creditors, and Ernst & Young was hired to monitor the defunct crypto exchange in the creditor proceedings.
QuadrigaCX chief's many misappropriations
Now, after four months of investigation, EY has published its fifth report, revealing multiple incidents where Cotten had misappropriated Quadriga user funds.
"Funds received from and held by Quadriga on behalf of Users appear to have been used by Quadriga for a number of purposes other than to fund User withdrawals," the report stated.
Instead of maintaining user funds exclusively in Quadriga's hot and cold wallets, Cotten transferred large amounts of cryptocurrencies to the CEO's personal accounts on competitor exchanges. According to EY, Cotten either exchanged the user funds or used them as collateral for his own margin trading activities.
Cotten's misappropriation had negatively affected Quadriga's reserves. Losses occurred due to the margin trading activity of the deceased CEO and the incremental fees charged by the competitor exchanges.
Users Contributing to a Life of Luxury
EY's investigation also revealed that Cotten and his wife had received "significant transfers of fiat" from Quadriga.
In the last few years, Cotten and his wife acquired – by either personally or companies controlled by the couple – a substantial amount of assets, including real and personal property.
According to the monitor, they also traveled frequently to multiple destinations, using private jet services in many instances.
As nor Mr. Cotten neither Mrs. Cotten had received any other income than Quadriga funds, it seems like that the users of the cryptocurrency exchange had financed the couple's life of luxury.
Using an Alias to Fake QuadrigaCX Trades
Cotten created multiple accounts on QuadrigaCX with aliases to make fake deposits and trades that resulted in inflated revenue figures and artificial user trades.
"Once 'deposited', the Unsupported Deposits were used to facilitate trades within the Platform and to withdraw real Cryptocurrency from Quadriga. Substantial trading activity was processed through the Identified Accounts which were counterparties to approximately 300,000 trades conducted on the Platform. This activity improved Platform trading volumes and generated additional fee revenue for Quadriga as an artificial market was established to provide bona fide users a trading partner to complete requested transactions," the report stated.
According to EY, as users were trading real funds for the fake deposits, "their ability to withdraw Funds from Quadriga became subject to Quadriga’s reserve levels at the time the withdrawal request was made."
$31.5 Million Recovered
It looks like EY is making significant progress with the recovery of user funds. To date, a total of $31.5 million has been recovered from various sources.
Along with the monitor, the FBI is investigating Quadriga's dubious case with the agency posting a tweet in May in an attempt to identify the victims.
The FBI and partners are seeking to identify victims in the QuadrigaCX investigation. If you believe you may be a victim, or have concerns regarding your Quadriga account, complete this brief questionnaire here: https://t.co/hPeDUM9s3Q.
— FBI (@FBI) June 4, 2019