Reportedly deceased QuadrigaCX co-founder Gerald Cotton withdrew customers' funds to trade on both spot and leveraged margin exchanges, incurring significant losses in the process, alleges the latest public report on court proceedings surrounding the incident.
The report, the fifth commissioned to the global accountancy firm Ernst and Young (EY) by the Supreme Court of Nova Scotia, found that a vast sum of cryptoassets were transferred from QuadrigaCX exchange wallets to wallets operated by “competitor” exchanges and controlled Cotton, between the period 2016-19. The vast majority of the transfers occurred under Cotton’s alias “Chris Markay.”
Specifically, 9,450 bitcoin, 387,738 ether and 239,020 Litecoin were said to be transferred from QuadrigaCX in this way, and the questionable transfers resulted in “overall trading losses” trading on both spot and margin exchanges.
An additional sum of 21,501 bitcoin was also transferred to an exchange wallet controlled by Cotton, although it is unknown precisely how much of this sum originated from QuadrigaCX wallets. The proportion is unknown because the wallet is held in an offshore location not obliged to comply with EY’s requests for full accounting details. EY added however, that this information has been given to law enforcement of the unspecified jurisdiction.
To understand how this could be, recognize that Quadriga apparently had no internal controls or accounting records, no segregation of customer assets from Quadriga’s assets, and no visibility into its own profitability, ever.— Evan Thomas (@evanmthomas) June 20, 2019
EY also claim that Cotton traded on QuadrigaCX itself, using what were likely false deposits of fiat currency to buy cryptocurrency on the platform and counter-trade customers. About 300,000 trades were made from these “unsupported deposits,” which helped beef up QuadrigaCX’s trading volume and trading revenues.
The EY report outlines some generally poor practices that seem to have enabled the scandal, includin poor Know-Your-Customer (KYC) standards enforced on the exchange, which enable the easy exploitation of the platform; no separation between users’ wallets and the exchange’s wallets; and a “significantly flawed” financial reporting and operational control operating infrastructure, which EY claim were largely directed by Cotton alone and in which “typical segregation of duties and basic internal controls did not appear to exist.”
An Unpaid Bill
The QuadrigaCX story has been so big as to make it to non-crypto media in Canada. It has recently been reported by the CBC that Cotton’s alleged exploits have left former customers in the lurch, to as much as $250 million (Canadian) of unreturned funds.
EY claim that roughly 76,000 users’ funds are stuck in limbo as, in effect, unpaid IOUs, and confirm a figure of $214.6 million CAD remains unpaid.