When it went belly up earlier this year, Canadian crypto exchange QuadrigaCX owed millions of dollars in crypto and fiat to its users. The exchange had no accounting, no records, and cold wallets turned up empty. Where did all the money go?

It appears millions of dollars worth of funds were funneled off the exchange via a slush account set up by QuadrigaCX CEO Gerald Cotten, who died under mysterious circumstances in India in December. He credited the mock accounts with fake funds, and traded those with bona fide users for real funds, before transferring the ill-gotten gains off the exchange—where they were used to prop up an extravagant lifestyle.

According to details spelled out in Ernst & Young’s fifth monitor’s report released Wednesday evening, QuadrigaCX appears to have never operated as a legitimate business. By the time the dominoes fell, the exchange owed 76,000 users CA$214 million in fiat and crypto. Only CA$33 million has been recovered, which leaves CA$180 million still missing.

The Markay account

Cotten maintained 14 fake QuadrigaCX accounts, held under pseudonyms such as “Chris Markay,” “Aretwo Deetwo” and “Seethree Peaohh,” which were credited with mostly fake funds that were then used for margin trading—and ultimately converted into fiat.

The account with the highest activity, Markay, received fiat credits of CA$220 million and crypto deposits of 34,806 BTC and 540,011 ETH between 2016 and 2018—only 1% of which was supported by any documentation that the fiat or crypto actually existed, the report alleged. In June 2017, the account received a single deposit of CA$100 million, coinciding with a CA$14 million dollar loss that Quadriga attributed to a technical error.

Cotten then allegedly used the Markay account’s fake money to buy real funds from unsuspecting customers, sending a large portion of the proceeds to accounts that Cotten controlled at three other exchanges, as well as “wallet addresses where the beneficial owner of the wallet is currently unknown,” according to the report.

Between 2016 and 2019, Cotten transferred a total of 9,450 BTC, 387,738 ETH and 239,020 LTC out of QuadrigaCX cold wallets. (It is unclear here as to whether the funds were transferred out via the Markay account, or some other means.)

What did Cotten do with funds in his name? He used it to trade—poorly.

Gambling it all away

Cotten traded funds on one exchange for other crypto, mainly BTC, resulting in “overall trading losses,” according to the monitor.

On another exchange, Cotten set up a margin account where he engaged in 67,000 transactions. He traded DASH, OMG, ZEC and DOGE—coins not listed on Quadriga. Margin trading is akin to gambling, and Cotten lost heavily when trades went the wrong way, and margins—borrowed money used to amplify gains—had to be paid back.

Cotten also moved 21,501 BTC to a third unnamed offshore exchange. EY is certain that at least some of the BTC originated from Quadriga, but it can’t verify the rest. Cotten liquidated all but 8 BTC for about CA$80 million over a period of three years. EY doesn’t know what happened to the proceeds.

EY describes this third exchange as operating differently. Buyers and sellers on the exchange select their specific counterparty and use an escrow feature to complete transactions rather than the exchange taking custody of the transacting funds. The monitor identified two specific trading partners who were the counterparties to “significant transaction volume and value” with Cotten.

Cotten made it very hard for EY to verify anything that went on inside Quadriga. The exchange, by design, had no accounting system. User funds and exchange funds were intermixed. Cotten set it up so his actions as an administrator on the platform were not recorded. Much of his email correspondence was encrypted. There was no way to ascertain Quadriga profits. And Cotten did not file personal tax returns for 2014, 2015 or 2017. When he did file returns in 2014 and 2016, he claimed no Quadriga income.

More damningly, EY alleges that Cotten was happy to override the exchange's know-your-customer requirements, and occasionally took advantage of his administrative privileges to "approve new users to the platform who [he] was familiar with."

Like a personal bank account

The monitor also identified significant transfers of fiat to Cotten and his wife Jennifer Robertson. The two took lavish vacations, made use of private jets, and bought several properties. The assets they accumulated—real estate, cash, an airplane, a sailboat, luxury vehicles, and gold and silver coins—are worth approximately CA$12.0 million.

EY was the monitor in the CCAA proceedings. Now, a trustee in the bankruptcy proceedings, EY intends to seek the recovery of the assets for immediate liquidation, so that the proceeds can go to creditors.

As for the Quadriga customers who lost money on the exchange, and knew nothing about what was going on behind the scenes, they will likely get back only a fraction of what they lost.