Ernst & Young revealed that QuadrigaCX, a failed Canadian crypto exchange that lost almost $190 million of its users funds, may have committed fraud. Auditors found that the exchange’s late founder and CEO transferred user funds off QuadrigaCX and used them for margin trading on other exchanges, losing millions.

New report uncovers the truth behind defunct Canadian exchange QuadrigaCX

The fifth report from court monitor Ernst & Young on QuadrigaCX was published, revealing shocking details about the now-defunct exchange. The report, filed on June 19 with the Supreme Court of Nova Scotia, found that Quadriga’s operating structure was significantly flawed since its inception, a stark difference from what was originally presented to the public.

Almost all activities in the company were directed by the exchange’s late co-founder and CEO Gerald Cotten. Cotten’s power effectively removed the segregation between duties and basic internal controls, as well as the segregation of assets between the funds held by Quadriga and its users.

EY noted that no accounting or corporate records of the company were kept, meaning Quadriga never had any visibility into its own profitability. Therefore, Cotten was able to exploit his position as the CEO and use alias accounts to make fake deposits and trades on Quadriga. According to the report, this resulted in the exchange showing inflated revenue figures and conducting artificial trades with real users.

Cotten was also said to have withdrawn users’ cryptocurrency to competitor exchanges into personal accounts he controlled.

“It appears that User Cryptocurrency was traded on these exchanges and in some circumstances used as security for a margin trading account established by Mr. Cotten,” the report said.

Quadriga CEO liquidated 21,000 BTC

EY found that between 2016 and 2019, Cotten transferred 9,450 Bitcoin, 387,738 Ethereum, and 239,020 Litecoin out of his exchange’s accounts. At current market prices, these funds are worth over $220 million.

He also appears to have created multiple fake “verified” accounts on Quadriga, the largest one being under the name Chris Markay and credited them with fiat funds that didn’t exist. The fake money was then used to purchase actual cryptocurrencies from other users.

However, the most shocking fact revealed in the report was Cotten’s loss of more than 21,000 Bitcoin. According to EY, an unidentified cryptocurrency exchange received 21,501 BTC into an account under Cotten’s name. Over the course of three years, Cotten liquidated all of the BTC deposited in the account for the equivalent of approximately $80,000,000 Canadian dollars.

None of the funds liquidated through the exchange were recovered.

And while it might seem that Candian authorities are making progress in the investigation, the majority of the lost funds are yet to be recovered. Court-appointed monitors recovered a total of $10.2 million in fiat earlier this year, and an additional $380,000 after the exchange filed for bankruptcy.