Ernst & Young have released their Fourth Report as Monitor in the Quadriga not-a-bankruptcy. It’s 242 pages. They are pissed. In a proper and decorous manner, you understand.

EY think Quadriga is utterly buggered. They recommend transitioning from Companies’ Creditors Arrangement Act (CCAA) protection to actual bankruptcy.

EY has asked for a court order to, ah, preserve the assets of Jennifer Robertson — the widow of Quadriga founder Gerald Cotten.

And they request the Court’s assistance in extracting the funds that Quadriga’s payment processors are still holding. I particularly recommend pages 22 to 36 — the shenanigans EY are having to go through just to extract a few hundred thousand dollars from Quadriga’s comically dodgy payment processors.

It’s the most politely savage document you’ll ever see from an accountant.

Thankfully, the actual report is only 37 pages. The rest is appendices full of correspondence and documents, which are also frequently hilarious.

(All quoted dollar amounts are in Canadian dollars, except as noted.)

Transition from CCAA to bankruptcy

EY consulted with Stewart McKelvey, attorney to Robertson and the estate of Gerald Cotten, and with Peter Wedlake, Quadriga’s court-appointed Chief Restructuring Officer. Both support moving from CCAA to declaring bankruptcy — the money is gone, and the company is unsaveable.

One of the advantages EY lists for a bankruptcy:

The Trustee will have additional investigatory powers without further relief from the Court that will be of assistance in the ongoing investigation of the business and affairs of the Applicants, including the right to compel production of documents and seek examination of relevant parties under oath.

Asset Preservation Request with Jennifer Robertson and Other Entities

EY isn’t calling anyone crooks — but, at the very least, Robertson’s and Cotten’s assets are commingled with Quadriga’s:

36. During the course of the Monitor’s investigation into Quadriga’s business and affairs, the Monitor became aware of occurrences where the corporate and personal boundaries between Quadriga and its founder Gerald Cotten were not formally maintained, and it appeared to the Monitor that Quadriga funds may have been used to acquire assets held outside the corporate entity.

EY asked Robertson nicely to preserve these assets so they could be sorted through. Talks broke down:

38. Discussions between the Monitor and counsel to Ms. Robertson and the Cotten Estate have culminated in a form of preservation of assets order (the “Asset Preservation Order”) which involves all assets held by the Cotten Estate, Ms. Roberston, the Seaglass Trust, Robertson Nova Consulting Inc., and Robertson Nova Property Management Inc. (collectively, the “Preserving Parties”) whether or not such assets are in the names of the respective parties and whether they are solely or jointly or beneficially owned. The Asset Preservation Order extends to assets which any of the Preserving Parties has the power, directly or indirectly, to dispose of or deal with as if it were their own. A copy of the draft Asset Preservation Order is attached as Appendix “G”.

Robertson has agreed to provide a list of relevant assets to EY. The plan is not to remove all her control, but to make sure the assets are available so that the Quadriga portion can be extracted — making sure the assets are not sold, dissipated or encumbered. She will be working with EY on monetising the assets as will preserve their value.

How did EY get Robertson to cooperate?

The Monitor temporarily discontinued its preparation for a mareva injunction pending the negotiation and agreement of the draft Asset Preservation Order.

A Mareva injunction would have put into place a complete freeze on all assets. The Mareva injunction is pretty much a nuclear weapon in corporate law.

The asset preservation order also includes language to protect potential third-party purchasers of assets from claims against Quadriga.

Extracting money from the payment processors

EY expected $6,413,728 incoming cash in March 2019. The actual total was $4,232. They were missing $589,388 in uncollected Third Party Payment Processor receivables, and $5,824,340 in bank drafts.

Quadriga didn’t have banking at all. It dealt with conventional currency via various payment processors — POSConnect Inc. (“POSConnect”), VoPay International Inc. (“VoPay”), BillerFY Labs Inc. (“BillerFY”), Costodian Inc. (“Costodian”), WB21, 700964 N.B. Inc. (“N.B. Inc.”) and 1009926 B.C. Ltd. (“B.C. Ltd.”).

EY has gone to these companies and extracted Quadriga money held by most of them. However — “The Monitor has encountered various issues in obtaining information and property of the Applicants that the Third Party Payment Processors are holding.”

EY has drafted a “Third Party Payment Processor Order” they would like the Court to approve.

1009926 B.C. Ltd.

1009926 B.C. Ltd. “was a company incorporated by a former contractor of Quadriga” (not named), “and was not an arm’s length Third Party Payment Processor.” This section concerns 1,004 bank drafts payable to B.C. Ltd.

This quote gives a sample of how EY conducted their investigations:

The Monitor has cross referenced a sample of 36 Bulk Drafts into the Quadriga platform and confirmed, without exception, that the Bulk Drafts sampled were recorded as fiat deposits into the applicable Affected User accounts. The sampled Affected Users subsequently had the ability to initiate trades on the Quadriga platform to buy cryptocurrency and in all but one (1) instance reviewed by the Monitor, the Affected Users did trade the fiat balances credited to their Quadriga accounts for cryptocurrency.

The principals of 1009926 B.C. Ltd. have not responded to correspondence. EY asks the Court for its assistance in obtaining the drafts.

WB21/Black Banx

EY are pretty sure that WB21 have CDN$8,991,911.77 and US$2,360,755.53 in Quadriga funds.

On 6 February, EY wrote to Michael Gastauer at WB21 Canada asking for the return of the cash, and any relevant information. WB21 Singapore replied the next day, claiming that Quadriga had opened an account with them — and that WB21 Singapore’s compliance group had closed Quadriga’s acccounts on 31 December 2018, on the basis that they were “entitled to freeze accounts and withhold funds if there was reasonable doubt that the end user had engaged in fraudulent or suspicious activity.”

EY wrote again on 9 February requesting copies of these agreements between Quadriga and whichever branches of WB21. WB21 Singapore replied on 18 March; they acknowledged they held an account, but that it only held CDN$11.77 and US$5.53 — and that they “might be able to provide further information” only upon concluding an internal investigation. EY has asked the Court to assist.

José Reyes, BillerFY and ePAD

You may recall that money held by José Reyes’ payment processor Costodian on behalf of Quadriga was the subject of the 2018 asset freeze by the Canadian Imperial Bank of Commerce (CIBC), that left Quadriga with great difficulty in paying out conventional currency to customers.

Reyes also runs BillerFY and another processor, ePADregistry Inc. (“ePAD”), which EY discovered had also received relevant funds. Reyes had worked with Quadriga since 2016.

EY wrote to Reyes on 6 February requesting the money back, and any relevant information and documentation. EY wrote again on 9 February, this time to BillerFY’s legal counsel, “noting in particular that it required the statements of the BillerFY RBC account that was disclosed in the interpleader proceedings with CIBC as being the recipient of Quadriga deposits from Costodian.” EY wrote a third time on 21 March, extending their request to ePAD. Neither Reyes, ePAD nor BillerFY has responded.

POSConnect

POSConnect have about $330,000 of Quadriga funds. POSConnect want to hold the funds until 28 April 2019, pursuant to their agreement with Quadriga, “as amounts may become owing under the contract due to disputes with Quadriga customers.” They are working with EY to resolve matters.

VoPay

VoPay has about $217,000 of Quadriga funds. Stewart McKelvey, acting as counsel for Quadriga, asked for these back, but:

VoPay had received numerous complaints from Quadriga customers having deposited funds through VoPay who were frustrated with Quadriga’s lack of communication. Several of these Quadriga customers were allegedly threatening legal action and or filing criminal complaints against VoPay if customer deposits were not returned.

VoPay confirmed to EY that it was holding $116,262.17 for Quadriga. They will happily return this! … subject to EY “addressing issues associated with a hold that had been placed on a VoPay bank account by the RBC and concerns regarding chargebacks that may result due to complaints from Affected Users.” EY and Quadriga were not in a position to indemnify VoPay against these claims, and EY is seeking an order from the Court.

Alto

Bureau de Change Alto is a currency exchange shopfront in Montréal. Alto “believed it had never done business with any of the Applicants.” EY noted a transfer from Quadriga to Alto of $160,000 in bitcoins and $30,000 in cash. EY believes that “Alto currently holds either $20,876.78 or $36,212.97 of Quadriga funds.”

Robertson Nova Consulting

Robertson Nova Consulting Inc. (RNCI), a company owned by Jennifer Robertson, acted as a payment processor for Quadriga from at least 2016 (archive) — despite Robertson having claimed in her original affidavit requesting CCAA protection for Quadriga that she’d never had anything to do with the business side of Quadriga.

Robertson says that RNCI holds no Quadriga funds at present. She is fully cooperating with EY on sorting out RNCI’s involvement.

What’s next?

The next hearing is 8 April. The present CCAA will likely be converted to a bankruptcy proceeding, with EY as trustee — with one final monitor’s report to come.

It’s pretty clear that whichever forensic accountant wrote this report is slavering at the bit to go after everyone involved.

There are no direct requests to law enforcement in this report, but it’s also clear that EY is compiling the information the authorities will need if they see fit to look into this further.

As financial thrillers, the EY Monitor’s Reports are brick-sized airport novels, but so far this particular series has escalated every step of the way, and has the makings of a literary classic.

Update: Amy Castor also has a summary of the report.