QuadrigaCX founder used aliases, moved assets into personal accounts: report
Among the aliases Gerald Cotten used were Aretwo Deetwo and Seethree Peaohh.
The deceased founder of the now-defunct QuadrigaCX cryptocurrency exchange transferred users' money to accounts he controlled on competing exchanges under aliases, according to a report by the monitor overseeing QuadrigaCX's bankruptcy proceedings.
What was once one of Canada's largest cryptocurrency exchanges was shut down in January 2019 amid a torrent of online speculation after 30-year-old Gerald Cotten suddenly died from complications of Crohn's disease during a trip to India in December.
Cotten was the only person who knew the encrypted passwords to gain access to QuadrigaCX's offline cryptocurrency reserves, stored in what are called cold wallets.
A total of 76,319 unsecured creditors — virtually all of them QuadrigaCX clients — have come forward to claim they are owed $214.6 million.
In its latest report, Ernst and Young outlined several ways Cotten used QuadrigaCX to move money around to competing exchanges. He moved large amounts of customer assets into his personal accounts on other cryptocurrency exchanges and falsely boosted QuadrigaCX's trading volume.
"The monitor has not located any support justifying these transfers," reads the report.
Ernst and Young's preliminary analysis showed that large volumes of cryptocurrency were transferred out of QuadrigaCX-controlled cold wallets and into accounts on competitor exchanges controlled by Cotten. Some of those accounts were under Star Wars-inspired pseudonyms such as "Aretwo Deetwo" and "Seethree Peaohh."
The conversion of users' cryptocurrency into other currencies through competitor exchanges resulted in incremental fees and currency exchange fluctuations.
"It appears that the activity in the exchange accounts resulted in overall trading losses," Ernst and Young noted.
The monitor identified 14 accounts controlled by Cotten that did not use a process to confirm the user's identity to prevent fraud, money laundering or other illegal activity.
Most of the activity within those Cotten-controlled accounts happened in an account using the alias "Chris Markay." That account reported deposits worth $220 million CAD in currencies such as U.S. or Canadian dollars and cryptocurrency deposits including 34,806 bitcoin (worth about $429 million today) and 540,011 Ethereum (worth about $192 million today) onto the platform between 2016 and 2018.
The monitor flagged a single deposit of $100 million in June 2017, another single deposit of $50 million is January 2018 and a series of monthly $10 million deposits between June and December 2018.
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"To date, the monitor has been unable to independently verify the deposits through blockchain analysis or review of third-party account statements accessed to date. As a result, the monitor notes that it is likely that these deposits are not represented by actual fiat [traditional currency] or cryptocurrency," said the report.
Despite this, Ernst and Young found that these deposits were used in trades involving real cryptocurrency on the Quadriga exchange.
Just one withdrawal was reported from the Chris Markay account, a single $21,186 USD withdrawal made in 2015.
As well, Ernst and Young said Cotten appeared to liquidate $80 million worth of cryptocurrency in an offshore exchange over the course of three years — and some of those funds can be traced back to the QuadrigaCX exchange.
Cotten's privileges as an administrator allowed him to override certain identification requirements (known as KYC or "Know Your Customer" regulations) to "approve new users to the platform who Mr. Cotten was familiar with," according to the Ernst and Young report.
The monitor said it can't know how many of the 363,000 Quadriga customers have documentation to prove their identity.
In its report, Ernst and Young said the company lacked "critical infrastructure" and had almost no records or formal books in which to track the tens of millions of dollars in transactions.
Significant cash transactions
The monitor also said the company engaged in significant cash transactions but there was no way to verify if cash deposits were deposited into accounts containing user funds.
"As an example, [QuadrigaCX] recorded $12.1 million of 'in person payments' received from one user through a series of 19 cash transactions over a five-month period. The monitor has been unable to verify how or if these cash deposits were appropriately deposited into the Quadriga treasury system through third-party accounts or other accounts," the report read.
The monitor also said that some of Cotten's family members were told there was a "dead man's switch" in place to provide them with Quadriga operating information in the event of his death.
"Family members were expecting to receive an email with critical Quadriga operating information within days of Mr. Cotten's passing. Neither the monitor nor others involved with the organization are aware of a dead-man switch email having been received," the report said.