Watchdog probe reveals Quadriga mystery was simply a case of old-fashioned fraud
Late founder of digital currency platform blamed as culprit behind firm’s collapse
TORONTO Following the death of the founder of Canadian digital currency platform Quadrigacx, investigators at Canada’s biggest securities regulator dug into the mysterious case that had stranded more than $200 million of investor funds and assets.
What they found was an old-fashioned fraud wrapped in a new technology, according to a 33page report made public Thursday.
The Ontario Securities Commission, which investigated alongside an RCMP probe, concluded that Gerald Cotten, who died during a trip to India in 2018, carried out the fraud by himself.
“Staff determined that Quadriga collapsed due to a fraud committed by Cotten,” the OSC said, adding that he had opened accounts under aliases and credited himself with fictitious currency and crypto asset balances, which he then traded with unsuspecting Quadriga clients.
When he died, the 30-year-old founder of the cryptocurrency platform was also the only one with access to the keys, or passwords, to the digital wallets of more than 100,000 investors. Those wallets were supposed to hold their crypto assets and cash, and the investors have been pressing since Cotten’s death to find a way to access their investments.
But what the OSC revealed Thursday is that their money was largely gone two years before Cotten died — lost to unsuccessful trades in cryptocurrencies including Bitcoin and Ether, or taken by Cotten to fund a “lavish” lifestyle.
By 2016, Quadriga had morphed into what was more or less a Ponzi scheme, the regulator says, with new investor funds being used to pay out old investors who made withdrawal requests.
“Cotten sustained real losses when the price of crypto assets changed, thereby creating a shortfall in assets available to satisfy client withdrawals,” the OSC explained, adding that he “covered this shortfall with other clients’ deposits — in effect, operating a Ponzi scheme.”
The OSC calculated that the bulk of the $169 million in unrecovered client losses — approximately $115 million — arose from Cotten’s fraudulent trading.
An additional $28 million was lost to trading on other platforms.
“Staff also determined that Cotten misappropriated millions in client assets to fund his lavish lifestyle,” the regulator said.
Following Cotten’s death, the Quadriga case grew sordid, with investors questioning whether he was really dead and seeking last year to have his body exhumed.
His widow, Jennifer Robertson, said in legal filings that she had received threats.
Quadriga filed for protection from creditors in February of 2019, and entered bankruptcy proceedings a couple of months later. Ernst & Young is the trustee in bankruptcy and was able to recover $46 million in assets to pay out to clients, according to the report.
But the OSC report said Quadriga was “already in crisis before Cotten’s death, and most likely would have collapsed even if Cotten had lived.”
When he died in December of 2018, reportedly from Crohn’s disease, the crypto platform owed about $215 million to clients but had almost no assets to cover these liabilities.
“By November 2016, Cotten had injected so many fake assets into the platform that its eventual insolvency was all but assured,” the regulator concluded.
With Cotten dead and the company in bankruptcy, the OSC determined it was not “in the public interest” to bring an enforcement action in the case. But the regulator still wanted to tell investors and the public what happened.
“In this case, our mandate is best fulfilled by sharing enforcement staff’s findings publicly,” the regulator said. “While public release of a report of this nature is rarely done, we believe that making this review of the facts widely available may help prevent this type of situation from recurring.”
The OSC said its months-long probe included collecting evidence from Cotten’s widow, Robertson, as well as several Quadriga clients who reached out to the regulator.
Attempts to speak to Michael Patryn, one of Quadriga’s co-founders, were not successful, the regulator said, noting that evidence indicated he had ceased to be associated with Quadriga after 2016, and that the majority of client funds were deposited after his departure.
The OSC did not have access to encrypted devices owned by Cotten, which Ernst & Young handed over to the RCMP.
The securities regulator’s investigation included several months of data analysis, with external blockchain experts tapped to help analyze the movement of assets to and from Quadriga, the OSC report said.
A dozen Canadian and international regulators assisted with the collection of evidence from jurisdictions outside Ontario.