- The CEO embezzled massive amounts of client funds for years through fake accounts
- EY report points to hundreds of millions of fiat transferred to other exchanges
- The report also highlights rampant mismanagement and poor practices in Quadriga
On June 19, a new scoop of QuadrigaCX scandal has come to light revealing that the late founder and CEO, Gerald Cotten used customers’ funds to trade for his own account on other cryptocurrency exchanges.
Court-appointed monitor – Ernst and Young (EY), shed new light on the unraveling scandal with buffing truths about the running of the QuadrigaCX operations. It appears that Cotten successfully stole more than USD 200 million from his customers and used the funds to finance his luxurious lifestyle and outrageous trading habits.
Fresh details have emerged on how the late Cotten ran his scandalous activities. Apart from running an exchange with virtually no separation of duties and basic internal controls, as well as standard segregation of QuadrigaCX funds and client funds, Cotten was also the only one with access to the private keys of the cold wallets. This enabled him to transfer 9,450 bitcoin, 387,738 ether, and 239,020 litecoin out of his exchange’s accounts between 2016 and end of 2018.
Cotten also created fake accounts on Quadriga and credited them with hundreds of millions of dollars of fiat and cryptocurrency that didn’t actually exist. He then used this fake fiat to buy actual crypto from unsuspecting customers.
Sneaky Transfer of Funds
The report by EY further claims that Cotten transferred all his digital currency off the QuadrigaCX exchange and deposited it on several accounts he owned on other exchanges. In fact, he managed to transfer almost 10,000 BTC, 390,000 ETH, and 240,000 LTC out of QuadrigaCX between 2016 and 2019.
Most of this was margin traded to zcash, dash, dogecoin and omisego in what can only be described as gambling with other people’s money. Unsurprisingly, he ran up huge losses, and his margin was liquidated.
An unnamed exchange also received 21,501 BTC in an account under Cotten’s name, all but 8 BTC of which was liquidated for the equivalent of around $80 million over 3 years. This $80 million is also unaccounted for.
Mismanagement of Funds
Ernst and Young’s report further highlighted rampant mismanagement and poor practices on Cotten’s exchange, observing that Quadriga did not keep administrative logs and had no backup plan for the loss of funds or the death of its CEO.
Furthermore, the exchange apparently engaged in poor accounting practices, with Mr. Cotten transferring funds for operating expenses to himself or related parties.
Cotten and his widow acquired substantial fiat transfers from Quadriga over the years. They also accumulated personal assets such as real estate, private aircraft, yachts, luxury cars, and jewelry, which are currently subject to a preservation order.