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 about $180 million of investor funds.
What they found was an old-fashioned fraud wrapped in a new technology, according to a 33-page 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 crypto-currency 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 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.
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 client losses – approximately $115 million – arose from Cotten’s fraudulent trading.
“Staff also determined that Cotten misappropriated millions in client assets to fund his lavish lifestyle,” the regulator said Thursday.
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 Robinson, 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.
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, 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.