Ernst & Young shocked QuadrigaCX insider: The late CEO opened a fake account and misappropriated client funds for margin trading

According to Coindesk's June 20 report, the QuadrigaCX bankruptcy trustee said that the founder and CEO of QuadrigaCX had opened a private account with other cryptocurrency exchanges and used the client's funds to trade.

3D rendering: Bitcoin cryptocurrency coin with the national flag

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Ernst & Young said in a shocking 70-page report released on Wednesday that Gerald Cotten, who died last December, transferred millions of dollars of cryptocurrency from customer accounts to other transactions. These funds are used by Cotton for personal expenses and transactions. In general, Cotten actually stole more than $200 million from his clients. The report reads:

“A large amount of cryptocurrency is transferred from the Quadriga platform to the competitor's exchange and into the personal account controlled by Cotten. It seems that the user's cryptocurrency is traded on these exchanges, and in some cases, these funds are used by Cotton. Provide a deposit for the financing and trading account opened for yourself."

These fees and transaction losses "appear to have an adverse effect on Quadriga's cryptocurrency reserve," while other payments were sent to the wallet, but Ernst & Young could not confirm who the wallet owners were.

From 2016 to the end of 2018, Cotten transferred 9,450 bitcoins, 387,738 Ethereums and 239,020 Litecoins from his exchange account. The value of these currencies fluctuated and increased significantly during this time, and their value reached US$88 million, US$105 million and US$33 million, respectively, based on current market prices.

Cotten also seems to have created multiple fake accounts on Quadriga, and credited these accounts with the amount of legal currency that does not actually exist, and used these fake legal coins to purchase the real cryptocurrency from the customer, the largest account. I used a name called Chris Markay.

More losses

The report went on to write that Cotten used margin to trade cryptocurrencies such as Zcash, Dash, Dogecoin and Omisego, and caused huge losses.

The third unidentified exchange received 21,501 bitcoins ($201 million at today's price) and deposited it in an account under Cotten's name. Except for 8 bitcoins, all were liquidated, with a net amount of approximately $80 million (approximately $60.4 million).

Although the exchange did not cooperate with Ernst & Young's investigation, it is working with local authorities within its jurisdiction. Ernst & Young is currently seeking to establish “formal channels of communication” with these authorities.

Evan Thomas, a litigation attorney at Osler Hoskin & Harcourt in Canada, told CoinDesk that Cotton's behavior could not have been an accident, apparently deliberate, he said:

"According to the report, Cotton's behavior was apparently suspected of fraud and betrayed the trust of Quadriga users.

He is likely to be heavily in debt, trying to use other people's funds to trade to make up for the deficit. But considering that he has opened false accounts at least since 2016 and has misappropriated funds for luxury travel and real estate investment, it seems more likely to be a well-planned fraud. QuadrigaCX applied for creditor protection in January this year, owing customers $190 million in cryptocurrencies and legal currency, most of which have no access, because only its late CEO Gerald Cotten knows where the private key exists.

Initially, Ernst & Young was appointed by the court as the Quadriga CX regulator, and then acted as trustee when Quadrigacx officially went bankrupt in April, but its search for missing funds was largely inconclusive.

As of May this year, Quadrigacx's remaining assets were only $21 million, and it was unable to repay $160 million in debt, but recent reports show that the remaining assets are close to $24.5 million. The US Federal Bureau of Investigation and the Canadian authorities are investigating these losses.

other problems

Ernst & Young’s report also details Quadrida’s serious mismanagement and bad behavior, noting that Quadriga did not maintain a management log or a contingency plan for financial losses or abuses by its leaders. In addition, the accounting operations of the exchange seem to be very bad.

For example, the exchange paid only $11.8 million (about $9 million) to two of the nine payment processors. But Quadriga still didn't save any documents. The report reads:

“The verification agency has been unable to find any accounting information related to the fund pool Quadriga Funds. The verification agency stated that the TPP account is used to process the user’s legal currency transactions and to fund Quadriga’s general operating costs. But in most cases, the funds flow to Cotten's personal account, parties associated with Cotten or lawyers/parties acting on his behalf."

The report continues to write:

“It seems that when it is necessary to pay operating expenses, or when Cotten wants to transfer funds to himself or related parties, he only needs to instruct the TPP to issue payments without supervision.”

Ernst & Young also believes that Cotton has several properties in Nova Scotia and British Columbia, investment securities, cash, a yacht, an airplane, multiple luxury cars and a lot of gold coins. The silver coin was paid with Quadriga's client funds, and although it is owned by his widow, Jennifer Robertson, these funds should be used for liquidation. Ernst & Young wrote in the report:

“Because Cotten and Robertson’s personal spending and personal assets accumulation since 2015 have come from Quadriga’s funds, the Trustee plans to count these retained assets as Quadriga’s property under the terms of the Asset Preservation Order and Immediate liquidation, Cotton is instructed to pay their funds constitute a preferential or low-value transaction under the BIA, and may be affected by other reasons for the lawsuit filed by the trustee."

If these assets are sold successfully, the total amount of up to 12 million Canadian dollars ($9 million) will be owned by the creditor.

Customer claim

In another document, Ernst & Young also outlined the claims procedures that former users of QuadrigaCX should follow when they lost money due to the bankruptcy of the exchange. Ernst & Young wrote:

"Users will be required to complete the claim and submit it to the Trustee by the date of submission of the claim at 5 pm (Halifax time) on August 31, 2019."

Ernst & Young acknowledged in the document that since Quadriga's website has been closed since January, it is difficult for creditors to find the information they need to prepare a claim.

Ernst & Young writes that committees and lawyers representing users "are concerned about the downline of the platform's website because users cannot access the details of the statement or the information needed to complete the claim."

Ernst & Young responded to their concerns and stated that it works with creditor lawyers to help users find ways to retrieve account balance information.

This process included Ernst & Young creating an online portal where users were asked to enter their Quadrigacx account and name information. The website warned that:

"If a match is found, your balance will be displayed. Be sure to print or take a screenshot."

Ernst & Young added that it will “focus on user privacy issues and take these issues into account when preparing claims.”

Special claim form

Ernst & Young said it also revised the standard form for bankruptcy claims, "to accommodate Quadriga's special claims in cryptocurrency and French currency."

The format of the form is as follows: (Note: The word "ethereum" is miswritten as "etherium" and the table is separated by page breaks in the file.)

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Thomas told CoinDesk that according to the new report, customers may not have much money to recover. He concluded that:

"At present, the main sources of creditor funds recovery include some legal currency and frozen assets. This report does not address potential damages claims against other parties, but this may be a matter that the trustee should consider."

Original: https://www.coindesk.com/quadrigacx-ceo-set-up-fake-crypto-exchange-accounts-with-customer-funds

Author: Marc Hochstein, Nikhilesh De

Compile: Libert

Source: Translation: Babbitt Information (http://v1.8btc.com/431647)