QuadrigaCX Collapsed as Late CEO Gambled Clients Money, Says OSC

A provincial Canadian regulator concluded that the downfall of crypto Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term QuadrigaCX, which left 76,000 users out of pocket for about $200 million, was the result of fraud by its co-founder and CEO Gerald Cotten.

The Ontario Securities Commission (OSC) today released a report detailing the results of its 10-month investigation into the collapse of QuadrigaCX, Once Canada’s largest cryptocurrency exchange.

The securities regulator said Cotten committed fraud by opening accounts under aliases and credited himself with fictitious currency and crypto balances, which he traded with unsuspecting Quadriga clients. The late 30-year-old chief executive covered this shortfall with other clients’ deposits – in effect, operating a Ponzi Scheme Ponzi Scheme A Ponzi scheme is a scam that looks to lure investors, ultimately paying profits to earlier investors with funds from more later investors.This form of fraud tricks victims into believing that products are instead generated from product sales or other means. In actuality, most investors are completely oblivious to the actual origin of incoming funds.One of the central attributes of a Ponzi scheme is the necessity of its ongoing nature, which is dependent on a steady flow of new contributions and A Ponzi scheme is a scam that looks to lure investors, ultimately paying profits to earlier investors with funds from more later investors.This form of fraud tricks victims into believing that products are instead generated from product sales or other means. In actuality, most investors are completely oblivious to the actual origin of incoming funds.One of the central attributes of a Ponzi scheme is the necessity of its ongoing nature, which is dependent on a steady flow of new contributions and Read this Term wrapped in modern technology, said the OSC.

The OSC staff calculated that the bulk of the $169 million in client losses – approximately $115 million – arose from Cotten’s fraudulent trading. They also determined that Cotten misappropriated millions in client assets to fund his lavish lifestyle.

The regulator further explains Cotton, who died from complications of Crohn’s disease in India while honeymooning, hadn’t held cryptocurrency belonging to Quadriga’s users in the exchange’s wallets. Instead, he moved large sums to his personal accounts at competing exchanges, in some cases using it as collateral for a trading account he operated and generated substantial losses and fees. At one point, Cotten lost $28 million while trading client assets on three external crypto platforms without authorization from clients.

The report identified several examples of cash transferred from Quadriga to fund the purchases of personal assets for Cotten and his wife, including 16 properties in Nova Scotia, real estate in British Columbia, vehicles, a sailing vessel and a personal aircraft.

QuadrigaCX misplaced another $500,000

“This lack of registration facilitated Cotten's ability to commit a large-scale fraud without detection. So did the absence of internal oversight over Cotten. From 2016 onwards, Cotten was in sole control of a company that had hundreds of thousands of clients and transacted over a billion dollars of fiat currency-denominated assets and over five million crypto asset units. He ran the business as he saw fit, with no proper system of internal oversight or controls or proper books and records,” the regulator further states.

QuadrigaCX was shut down last year following the sudden death of its founder and CEO Gerald Cotton in December 2019. The five-year-old business reportedly misplaced another $500,000 in cold wallets. Court documents say the $190 million in missing cryptocurrency is locked in offline digital wallets while Cotton was the only person who had the password to the company’s wallets.

In the meantime, the court-appointed representative counsel for employees and retirees because that “vulnerable group had little means to pursue a claim in the complex CCAA proceedings.”