QuadrigaCX Trustee’s Preliminary Report: “Yup, looks like your money’s all gone”

Screen Shot 2019-05-20 at 9.24.58 PMErnst & Young (EY) has issued a Trustee’s Preliminary Report for failed Canadian crypto exchange QuadrigaCX. Essentially, the message to Quadriga’s creditors is: “Most of your money is gone, and we’ll probably never find it again.”

According to the report—filed on May 1, and published on EY’s website on May 10—Quadriga owes a total of CA$215 million, but it only has about CA$29 million to distribute to its 76,319 affected users. (Earlier court docs estimated 115,000 affected users. Apparently, a more accurate count is now available.)

The lengthy 50-page report mainly rehashes what we already know. But it is worth a read—especially the first 14 pages, the rest is mostly appendixes—if you need a refresher on what has happened so far. I’ll try and summarize the important bits. 

Three legal entities

The report addresses assets and debts for three legal entities: 0984750 BC Ltd (operating as QuadrigaCX) and parent companies Quadriga Fintech Solutions and Whiteside Capital Corporation. The breakdown gets a little confusing, because some of the numbers overlap, but as of April 12:

  • 0984750 BC Ltd—had CA$28,649,542 and owed CA$215,697,147.
  • Quadriga Fintech Solutions—had CA$254,180 and owed CA$214,873,113.
  • Whiteside Capital—had zero assets and owed CA$214,618,937.

Quadriga’s financial affairs are a total mess, and EY will probably never be able to sort everything out. “A complete and fulsome review of Quadriga’s financial affairs will take considerable time and effort to pursue and may not be possible or cost effective to complete.” It is relying an unaudited information for this report.  

Tracking down the funds

To note, Quadriga filed for creditor protection under the Companies’ Creditors  Arrangement Act (CCAA) on February 5. It is currently transitioning into bankruptcy, a process that will be completed by June 28. EY is the court-appointed monitor in Quadriga’s CCAA procedures and the trustee in its bankruptcy procedures. 

Costodian: the frozen bank accounts

Most of Quadriga’s cash on hand comes from third-party payment processor Costodian. In January 2018, Costodian’s bank froze about CA$25.7 million in funds that Costodian was holding on behalf of Quadriga. Costodian later got the money back in the form of bank drafts, which it was unable to deposit because no bank would touch the funds. When Quadriga applied for creditor protection, Costodian signed over the drafts to EY, who worked with Royal Bank of Canada to accept the drafts. EY put most of that money into a “disbursement account.”

Related to the Costodian bank drafts, there are CA$778,214 in disputed funds. Costodian claims it is entitled to unpaid processing fees. According to EY, “Quadriga takes the position that no additional fees are payable.” EY is working with Costodian’s lawyer to resolve the issue. If the parties can’t reach a compromise, they will return to court.

EY has put CA$720,000 of Quadriga’s money into a reserve account to address any final CCAA obligations. Any funds remaining in this account after the accountants and lawyers get paid will be transferred into Quadriga’s bankruptcy account. EY will include a final accounting of the CCAA’s administration in its final monitor’s report.

Hot wallet funds

Quadriga also held some crypto in its hot wallets. Those funds have been safely moved into offline cold wallet storage under EY’s control. The funds include approximately BTC 61.33, BCH 33.32, BTG 2.66, LTC, 851.73, ETH 960.36. In its report, EY estimates these funds are worth CA$500,000, but crypto prices fluctuate, so they are worth more now, and could be worth less in the future.

On February 6, before EY took control of the funds, Quadriga inadvertently sent 104 BTC from its hot wallets to its cold wallets. Those funds are as good as gone. Nobody can access Quadriga’s cold wallets, because only the company’s CEO Gerald Cotten held the keys, and he is dead.  

Bulk bank drafts

Remember the photo of 1,004 checks sitting on a stovetop? Those were known as the “bulk drafts,” worth CA$5,838,125.92. The checks were written out to 1009926 B.C. Ltd., a “third-party” (I say that tongue in cheek) payment processor run by Aaron Vaithilingam, Quadriga’s former office manager. The company had dissolved, so it was impossible to cash the checks. They apparently just sat on a stove.   

EY re-instated 1009926 B.C. Ltd., and the checks were signed over and deposited into the disbursement account on April 18. (What a surprise for this trader to learn the money was freshly sucked out of his bank account two years later!) EY held the money in the disbursement account for 30 days—in the event of any “bank recourse issues”—before sending it to Quadriga’s bankruptcy account.

Payment processors and other crypto exchanges

There is still a chance more Quadriga funds could be recovered. Quadriga money is still being held by several third-party payment processors, mainly BlackBanx (formerly WB21), which is allegedly holding CA$12 million of Quadriga funds. EY says it is continuing to work on the matter, but it doesn’t know how much it can recover.  

EY is also investigating other crypto exchanges where Quadriga supposedly stored some of its crypto. The accounting firm notes, “many of the cryptocurrency exchanges have not cooperated with the monitor’s requests to date.” EY is going to keep after them, but says it may need to seek help from law enforcement.  

Jennifer Robertson and all her properties

During the course of its investigations, EY learned that “Quadriga funds may have been used to acquire assets outside the corporate entity.” Cotten and his wife (now widow) Jennifer Robertson purchased a number of assets, including an airplane, a yacht and several properties. As a result, EY negotiated a voluntary preservation order on Robertson’s estate. EY says her assets may be worth CA$12 million. 

Robertson herself is a secured creditor, after putting up a total of CA$490,000 in pre- and post-CCAA filing advances, according to EY’s report. (The money was needed initially to kick off the CCAA process.) EY anticipates the debt will be challenged. Of course it will!

Fintech and Whiteside

A few months back, EY learned about CA$254,180 that Quadriga had tucked away in a Canadian credit union and totally forgot about—it’s only money, after all. The account, which had been frozen since 2017, was held under Quadriga Fintech Solutions, but the money pertained to Quadriga’s (0984750 BC Ltd.’s) operations.

EY writes, “The estimated net realizable value of the account receivable from the Fintech Account is net of Fintech’s estimated bankruptcy administration costs.” Bankruptcy is  apparently an expensive ordeal. As for Whiteside, it had no assets, so CA$25,000 was taken out of Quadriga’s disbursement account to fund its bankruptcy costs.

There are still questions as to what happened to CA$190 million of funds, mostly crypto, that has seemingly vanished from Quadriga. EY says it intends to file an investigative report by the end of June. Hopefully, that report will reveal more clues. 

# # #

Related stories:
How the hell did we get here? A timeline of Quadriga events
Diving into WB21, the company holding $9 million of Quadriga money
EY recommends Quadriga shift to bankruptcy, moves to preserve Robertson’s assets, and wrestles with payment processors

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