Ontario Securities Commission: QuadrigaCX Was Fraud, Late Founder Gerald Cotten Ran Ponzi Scheme

On June 11, the Ontario Securities Commission announced that a panel of the Commission authorized the publication of a Commission staff report regarding the 2019 collapse of crypto asset trading platform QuadrigaCX (Quadriga).  The Commission stated that the collapse, which occurred after the sudden death of its co-founder and CEO Gerald Cotton, “caused massive losses for 76,000 investors from Canada and around the world, who collectively lost at least $169 million. Approximately 40 per cent of these investors were Ontarians.”

The Commission staff’s key conclusion was that Quadriga’s collapse resulted from a massive fraud by Cotton. As the Commission put it,

Cotten opened accounts under aliases and credited himself with fictitious currency and crypto asset balances, which he traded with unsuspecting Quadriga clients.  Cotten sustained real losses when the price of crypto assets changed, thereby creating a shortfall in assets available to satisfy client withdrawals.  Cotten covered this shortfall with other clients’ deposits – in effect, operating a Ponzi scheme.  Staff calculated that the bulk of the $169 million in client losses – approximately $115 million – arose from Cotten’s fraudulent trading.

The Commission staff also determined “that Cotten misappropriated millions in client assets to fund his lavish lifestyle.”  “In its final months,” they noted, “Quadriga had almost no assets left and was operating like a revolving door—new client deposits were immediately re-routed to fund other clients’ withdrawals.”

Note: This report is likely the most complete account of Quadriga’s operations and collapse that will be available for some time.  Over a ten-month period, the Commission staff – owing in part to the fact that Quadriga did not maintain proper business records — analyzed trading and blockchain data, as well as records from third-party payment processors, banks, and other crypto asset trading platforms, interviewed key witnesses, and collaborated with numerous regulatory agencies in Canada and other countries.  In particular, to determine how Cotten managed Quadriga client assets, the staff analyzed “platform data relating to more than 368,000 client accounts and over six million individual transactions, as well as thousands of Quadriga-related emails.”

In view of the fact that Cotton is deceased and Quadriga bankrupt and subject to a court-supervised distribution process, a full accounting of what happened with Quadriga is as much satisfaction as most investors and the general public are likely to get.  Compliance officers in the financial sector should review the report in detail, to see how Cotten was able to maintain and expand the scheme through Quadriga over an extended period until his death.  Crypto investors should also read the report closely, for two reasons: (1) as a general cautionary tale; and (2) as a means of learning the kinds of red flags that should prompt prospective investors to shy away from other high-risk crypto asset trading platforms, especially if those platforms assert that they are not subject to registration with securities or commodities regulators.

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