QuadrigaCX Saga Continues

Last time I wrote about QuadrigaCX, courts had just ordered a 30-day stay to allow the company some breathing room. Meanwhile, Gerald Cotten’s laptop is being dissected in hopes of opening up the cold wallet that stored passwords to the QuadrigaCX fortunes.

Flash-forward two months and the dark and strange tale has taken a few more dark and strange turns. Still, Quadriga victims may have a reason for hope.

Quick Review

In case you missed my last piece on the QuadrigaCX mystery, here’s a 30-second recap:

  • QuadrigaCX was a Canadian cryptocurrency exchange registered in Vancouver — a significant player in the market and one of the largest in Canada. It was not regulated and no enforcement measures were ever taken by the Canadian Securities Administration (CSA). It operated without transparency: there was not even any information on its founders on the website). It generated almost $9 million in daily trading.
  • CEO Gerald Cotten and his new wife took a luxury honeymoon in Jaipur. He dies suddenly of Crohn’s Disease. Details are sketchy and mysterious. She returns home and begins selling off assets, keeps death a secret.
  • QuadrigaCX customers can’t get their money out. Collectively, they are owed $260 million (CAD).  They have no recourse since administrator access QuadrigaCX accounts is no longer impossible. This is due to the fact that Gerald Cotten was the only person who had the passwords.
  • Courts have seized Cotten’s laptop, where the passwords were stored, in hopes of having digital forensics teams unlock the codes.
  • Meanwhile, oddities surrounding the case continue to emerge…

New Details: QuadrigaCX Co-Founder Has a Criminal Past

The story gets even shadier. Gerald Cotten’s business partner and co-founder of QuadrigaCX spent 18 months in U.S. federal prison and was then deported to Canada. That was the culmination of several past crimes committed while he lived in the U.S.

Seems Omar Dhanani had experience with running online platforms to commit fraud.

  1. Stolen credit card marketplace. He operated, which was essentially an eBay platform for people dealing in stolen credit card and bank account numbers.
  2. Computer fraud. In 2007, he admitted guilt to computer fraud in the State of California.
  3. Other criminal cases. In 2007, he admitted guilt to two other separate cases: grand larceny and burglary.

After serving his time and arriving in Canada, he changed his name (twice). This allowed him to slip easily into a new career: Bitcoin Entrepreneur. Operating first as Omar Patryn and then as Michael Patryn, he hired a firm to clean up his online presence.

That’s when Cotten and QuadrigaCX came into the picture. Whether Cotten fell victim to this 21-century snake oil salesman or he recognized in Patryn the perfect business partner whose values aligned with his own remains a mystery for now.

New Insight: QuadrigaCX’s Former Lawyer Speaks Out

At first, Cotten and Patryn/Dhanani took all the right steps that a real company would take in order to properly set up a legitimate financial enterprise. They hired a financial/legal team to get them through the required regulatory steps. Once trust factors were in pace and the company well into the listing process, however — a process that took six months — the auditor, the accountant, and the regulatory attorney were immediately fired. That was in 2016.

After that, the company was operated solely through Mr. Cotten, working from his soon-to-be-infamous laptop. Patryn also left the company that year (2016), stating that he left over a disagreement over Cotten’s decision to stop the listing process for the company.

“From that moment onwards, Mr. Cotten solely took over QuadrigaCX and operated the exchange as if it had no investors, no shareholders, no regulatory agencies and no law that applied to it -– no corporate law, no securities law, no anti-money-laundering law and no contract law.”

~Christine Duhaime, former regulatory attorney for QuadrigaCX

New Report: Ernst & Young Makes Some Laptop Discoveries

Ernst & Young was appointed as monitor in early February 2019 when Quadriga was placed under creditor protection. Their report was released earlier this Spring but there’s not much more clarity.

Using public blockchain records, they were able to discover that the cold wallets stored on Cotten’s laptop had been empty since April 2018. They also found that user accounts were created with bogus deposits and then used for trading.

So, Where is the Hope for Investors in All This?

At the outset, I stated that maybe there’s hope for the Quadriga victims. It’s hard to see where that hope might come from since Quadriga coffers seem to have been empty since well before many of the events of this strange tale even began to unfold.

The hope stems from Ernst & Young’s report, which suggests that QuadrigaCX should file for bankruptcy. In their report, they suggested that this would bring relief to the victims, who would benefit more from a process under the Bankruptcy and Insolvency Act (BIA) than they would from a “restructuring process”.

“Transitioning from the CCAA to the BIA will streamline the administration of the proceedings, reduce the level of professional involvement and provide enhanced investigative powers for the Trustee,”

Five days after the EY report, QuadrigaCX did indeed file for bankruptcy.

And here’s the second piece of hopeful news for Quadriga investors: EY has tracked down the third parties that are holding Quadriga’s funds and a court order may in the works to seize the funds. In addition, WebBank21 is also reported to be holding some $6.7 million in Quadriga funds.

Now that Quadriga has transitioned into bankruptcy, it will be interesting to watch those “enhanced investigative powers” jump start into action and produce the next chapter of the Quadriga story.