The money was there — it was just locked away. At least that's what the QuadrigaCX cryptocurrency exchange had been saying, before an auditor revealed it had finally accessed digital wallets set up by Quadriga's late CEO Gerald Cotten — and that instead of holding $137 million, the wallets were empty, drained in 2018.
Six "cold wallets" Quadriga used to securely store cryptocurrency offline were expected to hold millions. But they were emptied out in April, months before Cotten's death was reported, "bringing the balances down to nil," audit firm Ernst & Young says.
The news furthers the frustrations of Quadriga's 115,000 users, who have been unable to withdraw their money — much of it in the form of bitcoin — from the troubled exchange. And in a new twist, an auditor says the company was also found to have created what look to be more than a dozen fake accounts.
Quadriga has been under debt protection from its creditors since Feb. 5, by order of the Supreme Court of Nova Scotia. The court also appointed Ernst & Young to the role of monitor, to sort out how much money the exchange still has and where it should go.
In a recently published report to the court, Ernst & Young says that only one of those wallets — which it calls "the Sixth Wallet" — stayed in regular use after April, apparently used to receive bitcoin from another cryptocurrency exchange and then transfer that bitcoin to Quadriga's "hot wallet" that's used for quick-turnaround withdrawals and payments.
When the monitor asked Quadriga's remaining representatives why the company had stopped depositing bitcoin into its cold wallets last spring, they were unable to name a reason. Ernst & Young says it's researching any external accounts Quadriga might have had on other exchanges.
In another unsettling detail, Ernst & Young also learned that 14 user accounts had been "created outside the normal process by Quadriga," apparently using aliases and bogus funding.
Those accounts "were internally created without a corresponding customer and used to trade on the Quadriga platform," Ernst & Young says, citing a company representative who also said deposits into some of those accounts "may have been artificially created and subsequently used for trading on the Quadriga platform."
Transaction histories of those accounts shows "a significant volume" of activity, the monitor said, "including trading and withdrawals of cryptocurrency to wallet addresses not associated with Quadriga."
The firm says it's still analyzing those accounts and hopes to learn whether deposits into them were somehow faked, how much was withdrawn from Quadriga's reserves — and where the money wound up.
Cotten died in early December at age 30, without sharing the password for the laptop he used to handle nearly all of the exchange's business. But it wasn't until January that Cotten's widow, Jennifer Robertson, announced his death and said the company was trying to find a way to access accounts and digital wallets holding millions of dollars.
Ernst & Young says it has hit roadblocks when it tried to analyze platform data that underpins Quadriga's exchange. That data is currently stored in the cloud with Amazon Web Services — and it's under Cotten's name, not the company's. Even with Robertson's consent as his estate trustee, the firm said, AWS wouldn't allow it to access the data. That prompted the firm to seek a court order, which was granted on Tuesday.
Last month, Quadriga was initially given 30 days of protection. But the court gave the company 45 more days on Tuesday — and that time can be extended indefinitely, as long as the monitor and the court are confident that the troubled exchange is doing its best to satisfy its creditors.
The monitor's latest filing says Robertson's lawyer has told the monitor that she agrees "all cryptocurrency found in accounts in Mr. Cotten's personal name may be transferred to Quadriga for the benefit of its stakeholders." The court documents also note that Robertson recently submitted an affidavit denying public accusations that she might try to hide assets.
But Robertson is also being criticized for seeking nearly $225,000 from the embattled company, for what Ernst & Young calls repayment for "interim funding." In Quadriga's current cash-flow forecast that was filed with the court, a payment in that amount ($300,000 in Canadian dollars) is labeled "Repayment of shareholder advances."
When Robertson announced Cotten's death, she said he "died due to complications with Crohn's disease ... while travelling in India, where he was opening an orphanage to provide a home and safe refuge for children in need."
The extraordinary circumstances around Cotten's death and his encrypted laptop have fueled torrents of conspiracy theories, from claims that Cotten faked his own death to the possibility that his untimely death merely exposed a sort of Ponzi scheme. A Reddit section that's devoted to the scandal has drawn thousands of subscribers; the site also has served as a way for both the company and the court system to post updates on the case.
Speculation about what happened to Quadriga's bitcoin holdings has now reached a fever pitch. Even before Ernst & Young concluded that wallets that were purported to be Quadriga's key bitcoin reserve were actually empty, Canada's Globe and Mail newspaper published a story last week asserting that Quadriga co-founder Michael Patryn has used an alias to cover up his true identity as "a convicted felon who served time in the United States for his role in an online identity-theft ring."
Citing court records in the U.S. and Canada, the Globe and Mail reported that it believes Patryn's true name is Omar Dhanani, who served time in a U.S. prison after the Secret Service arrested him in California as part of an identity theft, credit card fraud and money-laundering ring in 2004. Dhanani, who court records said had used the name Omar Patryn as an alias, was later deported to Canada.
A month ago, Patryn told the newspaper that he had split with Quadriga more than three years ago, after disagreeing with Cotten's decision not to take the company public.
When the Globe and Mail asked Patryn about its reporting on his identity, he replied that they were incorrect. But he didn't provide any new details, citing a need to speak to an attorney first.
Copyright 2020 NPR. To see more, visit https://www.npr.org.
