Regulators uncover how Canadian crypto firm sunk due to late founder’s Ponzi scheme

In 2019, the Canadian crypto trading platform Quadriga CX collapsed. The OSC uncovered how this collapse was due to the mismanagement of funds

Canada’s biggest securities regulator revealed that the collapse of local cryptocurrency trading platform Quadriga CX last year was caused by a Ponzi scheme operated by Gerald Cotten, who passed away unexpectedly in December 2018.

According to the company’s Facebook page, Cotten died at the age of 30 due to complications of Crohn’s disease while he was volunteering at an orphanage in India. His death was announced in January 2019.

By February that year, Quadriga had ceased operations and filed for creditor protection. The company had more than 76,000 clients who were owed a combined $215 million CAD ($158,890,375 USD)  in assets; as well as that roughly 40 percent of these clients were Ontarians. This prompted the OSC to take the lead in investigating the case.

Their investigation, which took ten months, involved conducting interviews with key witnesses, analysing trading and blockchain data and collaborating with several regulatory bodies in Canada and abroad.

“What happened at Quadriga was an old-fashioned fraud wrapped in modern technology,” an employee at the Ontario Securities Commission (OSC) revealed.

The staff added that while the public release of an investigative report is rare, the authorities also believed that “the tens of thousands of Ontarians who entrusted Quadriga with their money and crypto assets deserve to know what happened.”

The report revealed that when the price of crypto assets changed and he started facing losses, Cotten covered the shortfall that ensued with deposits from other clients.

The lawyer for Cotten’s widow, Richard Niedermayer, did not immediately respond to a request for comment.

“The evidence demonstrates that most of the $169 million asset shortfall resulted from Cotten’s fraudulent conduct, which took several forms,” the investigative report stated.

“Operating without any proper system of oversight or internal controls, Cotten was able to misuse client assets for years, unchecked and undetected, ultimately bringing down the entire platform.”

Around 76,000 investors from Canada and around the globe collectively lost at least $169 million CAD ($124.2 million USD) from the collapse of Quadriga in 2019. Regulators added that roughly $115 million CAD ($84,987,875 USD) of this amount was due to Cotten’s fraudulent trading.

According to the OSC, the platform owed approximately $215 million CAD ($158,896,825 USD) to its clients. Cotten also siphoned off assets for personal use, as he was discovered to have transferred about $24 million CAD to himself and to Robertson between May 2016 and January 2018.

Around $46 million CAD ($33,991,930 USD) have been recovered by Ernst & Young, the bankruptcy trustee, and paid to clients. Cotten and Robertson also returned assets that are estimated to be around $22 million CAD ( $16,257,010 USD).