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Gerald Cotten, CEO of QuadrigaCX.

Facebook / Remembering Gerry Cotten

New revelations that the late founder of defunct cryptocurrency exchange QuadrigaCX moved customer funds to personal accounts and made risky trades provide the strongest evidence yet that the operation was a fraud, industry experts say.

Gerald Cotten, Quadriga’s 30-year-old CEO and founder, created artificial trading volume and inflated company revenue, according to a report released Wednesday by Ernst & Young, the monitor overseeing the exchange’s unwinding.

“Based on what’s in the report, it was a fraud,” said Evan Thomas, a Toronto-based lawyer at Osler, Hoskin & Harcourt LLP who works with cryptocurrency companies. “Quadriga represented that customer assets were secure but the founder was misappropriating those assets to fund his lifestyle and to trade on other exchanges.”

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Mr. Cotten, who died last December from complications related to Crohn’s disease while honeymooning in India, operated the company from his Nova Scotia home on his laptop, assisted by a handful of contractors. He was the only one who knew where the company stored its cryptocurrency reserves and the passwords to access them, according to an affidavit filed by his widow, Jennifer Robertson. Since his death, 76,000 Quadriga users have been unable to access roughly $214.6-million of their funds – a significant portion of which is missing.

In the days after Mr. Cotten’s death, family members awaited the arrival of an e-mail containing information and passwords needed to retrieve Quadriga’s funds. Mr. Cotten had told his family that he had set up such a safeguard, referred to as a dead man’s switch, but the e-mail never arrived, Ernst & Young said in its report.

In January, the company filed for protection under the Companies’ Creditors Arrangement Act (CCAA), leaving users and the court-appointed monitor struggling to untangle the operations of a company with no accounting records or internal controls.

Ernst & Young said it found that Mr. Cotten controlled a number of Quadriga accounts under various aliases – including Chris Markay, Aretwo Deetwo and Seethree Peaohh – that were credited with a large amount of funds but were likely not backed by any actual fiat or cryptocurrency. These accounts were involved in roughly 300,000 trades as counterparties, generating additional fee revenue for Quadriga, and were used to withdraw real cryptocurrency.

The monitor also reported that Mr. Cotten failed to hold cryptocurrency belonging to Quadriga’s users in company wallets, instead moving large sums to his personal accounts at competing exchanges. In some cases, the funds were used as security for a margin trading account operated by Mr. Cotten that was subject to “substantial fees and generated substantial losses,” according to the report. These losses depleted Quadriga’s cryptocurrency reserves.

For Quadriga users still hoping some of their funds will be recovered, the news came as another blow.

“What happened is morally revolting,” says Ryan Kneer, a Calgary-based market-maker in cryptocurrency. Mr. Kneer serves on the official committee that represents Quadriga users in the court proceedings. He started using Quadriga daily in April of 2017 and built up significant trading volume before the platform was shuttered after Mr. Cotten’s sudden death.

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Ernst & Young said a significant amount of fiat currency was transferred to both Mr. Cotten and his widow. The report notes the couple frequently travelled to vacation destinations via private jets and acquired assets worth approximately $12-million, including 16 properties in Nova Scotia, a boat, an airplane and luxury vehicles.

Ms. Robertson agreed to an asset preservation order in April and has been co-operating with Ernst & Young, which said it will seek to liquidate the assets. Ms. Robertson’s lawyer declined to comment.

“He was basically using our money to fund his lifestyle,” said Ali Mousavi, a Quadriga user based in Vancouver. Mr. Mousavi, 29, had about $71,000 tied up with Quadriga, which includes his life savings and loans he took out to invest in cryptocurrency. He left his corporate job in December to launch a startup, but now says he might have to abandon those plans. “I might give up my dream and take a job I don’t want because of the financial damage that has been done," he said.

For users who have lost money, the revelations are all the more painful given the price of bitcoin has rallied in recent months. Since Quadriga filed for CCAA at the end of January, bitcoin has soared approximately 168 per cent to US$9,167.

It remains to be seen how much money individual users will recoup. Gregory Azeff, a Toronto-based lawyer at Miller Thomson LLP who represents the affected users, said he expects that between $35-million and $40-million will be available for distribution, but the payout to individual users depends on how many claims are filed. In April, a Nova Scotia judge agreed to transition the CCAA proceeding to a bankruptcy case.

Meanwhile, U.S. authorities are conducting an investigation into Quadriga. Earlier this month, the Federal Bureau of Investigation posted a questionnaire on its website asking “victims” about their account balances and transactions on the platform.

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Mr. Cotten’s body was embalmed in Jaipur, placed into a casket and flown to New Delhi, then to Toronto and finally to Halifax, where a funeral was held, according to Ms. Robertson. But a death certificate from India and a statement of death from a funeral home in Halifax have not been enough to shut down the conspiracy theories.

“I would like to see substantial proof of his death," said Kevin Brown, a resident of Saint John who lost $15,000. “Many of us want his body to be legally exhumed.”

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