Judge extends Quadriga’s creditor protection, and EY squabbles with third-party payment processor

Screen Shot 2019-04-18 at 12.45.52 PMPOSConnect, a third-party payment processor holding funds on behalf of failed Vancouver-based crypto exchange QuadrigaCX, has come up with more excuses to delay handing over the money.

Today, at a short and mostly procedural hearing held at the Supreme Court of Nova Scotia, the main topics were extending Quadriga’s creditor protection and dealing with lingering issues related to Quadriga’s third-party payment processors, mainly POSConnect.

Justice Michael Wood agreed to extend the stay until June 28, unless Quadriga’s Companies’ Creditors Arrangement Act (CCAA) proceedings are terminated before then. Quadriga officially entered into a bankruptcy earlier this month. 

The rest of the 30-minute proceeding was mostly taken up by a back-and-forth between POSConnect’s lawyer and Elizabeth Pillon, a lawyer for Ernst & Young, the court-appointed monitor in Quadriga’s CCAA procedures.

At issue, POSConnect is sitting on CA$281,000 of Quadriga funds. EY wants the payment processor to deliver CA$278,000 right away. The plan is to leave CA$3,000 to cover rolling monthly fees associated with keeping the account open. 

POSConnect recently granted George Kinsman, EY’s senior vice president, online access to Quadriga’s documents and transaction data on the platform, and EY would rather pay POSConnect CA$500 a month than risk the firm cutting off all online access.

Pillon said more than 500,000 transactions worth CA$400 million in Quadriga funds were funneled through POSConnect—and sorting all that out is going to take time.

Meanwhile, POSConnect is reluctant to hand over any funds at all. The firm argues that it is due CA$22,000 in legal fees—an amount the POSConnect lawyer called “insignificant” compared to the hundreds of thousands of dollars spent so far in efforts to put Quadriga’s financial affairs in order.

EY is running short on patience. “POSConnect has thrown out more hurdles in respect to their obligation to delivers statements and property than any other third-party payment processor,” Pillon told the judge.

As she explained, EY has been reaching out to POSConnect since February 6 to find a means to get information and funds. Yet it wasn’t until late yesterday that POSConnect put forward $22,000 for legal fees and an administrative cost of $350 an hour to provide reporting—without providing any accounting to support those fees.  

Justice Wood said he did not have enough information before him to determine what reasonable legal fees would be for POSConnect. POSConnect will be added to an existing order for other third-party processors, which will require another hearing anyway.

Wood expressed regret that he would no longer be overseeing the Quadriga proceedings. He has been promoted to chief justice of the Appeal Court of Nova Scotia.

Thanks to TheWholeTruthXX for sending me an audio of the hearing. 

 

EY recommends Quadriga shift to bankruptcy, moves to preserve Robertson’s assets and wrestles with payment processors

Ernst & Young (EY), the court-appointed monitor in Quadriga’s creditor protection procedures, filed its fourth monitor report with the Supreme Court of Nova Scotia on April 1.

In the latest twist in the ongoing Quadriga saga, EY is proposing Quadriga shift from its Companies’ Creditor Arrangement Act (CCAA) proceedings into proceedings under the Bankruptcy and Insolvency Act (BIA).

Bankruptcy offers key advantages. Namely, it would remove the need for several professionals, leaving more money to repay Quadriga’s 115,000 creditors. According to court docs, $250 million CAD ($190 million USD) in crypto and fiat were on the exchange when it collapsed, but likely only a fraction of that will be found.

In a bankruptcy, EY would become a trustee. That means Quadriga’s newly appointed chief restructuring officer (CRO) would no longer be needed. Company directors, Jennifer Robertson (the widow of Quadriga’s dead CEO Gerald Cotten) and her stepfather Tom Beazley, would also step out of the picture. (Robertson has already indicated, she doesn’t want to continue serving as a director anyway, which is why she opted for a CRO.)

Quadriga also won’t be needing a representative counsel. Last month, Stewart McKelvey,  stepped down from the CCAA proceedings over a potential conflict of interest. The firm was representing both Quadriga in its CCAA proceedings and handling Cotten’s estate. Quadriga has not hired a replacement—and it won’t need to for a bankruptcy. 

Cox & Palmer and Miller Thomson LLP, the legal team representing Quadriga’s affected users, would stay on. The recently formed seven-person committee that serves as the voice for Quadriga’s creditors, would also continue with their work. 

But here is where things get interesting—as trustee, EY would be given additional investigatory powers without further relief from the court that will be of assistance in investigating the business and affairs of Quadriga, “including the right to compel production of documents and seek examination of relevant parties under oath.”

Finally, bankruptcy would allow for the potential sale of Quadriga’s operating platform.

Preserving Robertson’s assets

In late January, after Cotten’s death and before Quadriga filed for creditor protection, Robertson was moving aggressively to protect her newly acquired assets. She moved two properties into the Seaglass Trust, and Cotten’s airplane and yacht both went up for sale. EY has put a stop to any more of this by filing an “asset preservation order.”

During the course its investigations into Quadriga’s business and affairs, EY says it became aware of occurrences where the corporate and personal boundaries between Quadriga and Cotten were not formally maintained. EY notes that it appeared “Quadriga funds may have been used to acquire assets held outside the corporate entity.”

The asset protection order involves all assets held by the Cotten Estate, Robertson and the Seaglass Trust, and Robertson Nova Property Management—the company that Robertson purchased several properties under between 2016 and 2018. The order will allow EY’s investigation of Quadriga to continue “without concern that assets possibly recoverable for the applicant’s stakeholders may be dissipated,” the report said.

Likely Robertson is agreeing to the plan because, according to the report, EY “temporarily discontinued its preparation for a mareva injunction pending the negotiation and agreement of the draft Asset Preservation Order.”

A mareva injunction would have completely frozen all of the assets. Under an asset preservation order, Robertson is able to maintain control of her properties. She just can’t sell or transfer them. She has agreed to provide a list of relevant assets to EY. And she will be working with EY on monetizing some of the assets to preserve their value.

Wrestling with third-party payment processors 

Screen Shot 2019-04-03 at 12.29.10 PMQuadriga had no company bank accounts. Instead, it relied on a patchwork of third-party payment processors. As a Quadriga customer, you would send cash to one of these payment processors, and Quadriga would credit your account with Quad Bucks, which you could then use to buy crypto on the platform. When you put in a request to withdraw fiat from the exchange, a payment processor would wire you money. 

After Quadriga ceased operating on January 28, several of these third-party payment processors were left holding money on behalf of Quadriga and its users. EY mentions the following payment processors in its fourth report:

  • POSconnect 
  • VoPay  
  • Billerfy     
  • Costodian  
  • ePADregistry  
  • WB21 (now Black Banx) 
  • 700964 N.B. Inc.  
  • 1009926 B.C. Ltd. 
  • Robertson Nova Consulting Inc (RNCI)
  • Alto Bureau de Change

The monitor has been wrestling to get funds from several of these companies, a few of which weren’t exactly at arm’s length from Quadriga. RNCI was operated by Robertson — who earlier told the court she was not involved Quadriga’s operations. Apparently Cotten used RNCI bank accounts to transfer money to Quadriga customers. Robertson is cooperating though. She says RNCI is currently not holding any Quadriga funds, and she is working to get bank statements of all transfers her company made to EY. 

700964 N.B. Inc. and 1009926 B.C. Ltd. were both run by Quadriga contractors. 700964  N.B. was run by Aaron Matthews, Quadriga’s director of operations, and 1009926 B.C. was run by Aaron Vaithilingam, Quadriga’s former office manager. 

EY has in its possession 1,004 bank drafts, worth $5,824,340 CAD, written out to 1009926 B.C. It had trouble depositing those checks, because 1009926 B.C., the company, had dissolved. (This is yet another example of how sloppily Quadriga handled its affairs.) Now that 1009926 B.C. has been restored, Royal Bank of Canada (RBC) is asking for additional documents to deposit the bulk drafts. But Vaithilingam is not responding to EY’s letters.

EY has also reached out to WB21, the third-party payment processor holding on to roughly $9 million USD ($12 million CAD) in Quadriga funds. WB21 recently changed its name to Black Banx, and it has an office in Canada.  

EY wrote to Michael Gastauer, the sole director of WB21, in February, requesting the company return any Quadriga funds to EY. WB21 responded by saying that Quadriga’s account was was closed in December 31, 2018, and it was entitled to withhold funds if there was “reasonable doubt that the end user has engaged in fraudulent activity.” On March 9, EY wrote again requesting copies of the agreements. WB21 wrote back saying it was only holding $11.77 CAD and $5.53 USD and that it “might be able to provide further information” upon conclusion of an internal investigation.

EY is not buying it, and you can bet it’s probably had enough of these shenanigans. The monitor is convinced WB21 is holding “a significant amount of funds.” The monitor also writes that WB21 has been uncooperative and has not provided “even basic info” and that it is inappropriate for WB21 to continue holding funds pending some investigation.

(Related story: “Diving into WB21—the company holding $9 million of Quadriga money“)

Here is another surprise—EY just discovered that Jose Reyes, who runs Billerfy and Costodian, operates yet another third-party processor, which has also received funds from Quadriga. Despite all the work Reyes has done with EY trying to sort out the $26 million in Bank of Montreal (BOM) drafts, he neglected to mention his other company ePAD also held Quadriga money. EY sent letters requesting account information, but so far, Reyes has not responded. (Read the interpleader order for more history on Reyes.)

EY also wrote to POSconnect who is supposedly holding $331,764 CAD in Quadriga funds. POSconnect followed up stating that it only owed $300,000, but that under the terms of its agreement with Quadriga, it would continue holding the funds until April 28. The monitor wrote again requesting immediate return of the funds.

VoPay is supposedly holding $217,000 CAD on behalf of Quadriga. In February, VoPay told Quadriga’s counsel that it was not in a position to return the funds, because it had gotten legal threats from Quadriga customers. VoPay confirmed it is holding $116,262 CAD for Quadriga and requested indemnity from EY, which EY says it can’t provide and again requested VoPay give back the money asap.

Alto Bureau de Change is a currency exchange shopfront in Montreal. Alto believed it had never done business with Quadriga, but EY noted a transfer from Quadriga to Alto of $160,000 CAD worth of bitcoins and $30,000 CAD processed on behalf of Quadriga by NB Inc. EY believes that Alto currently holds either $20,876 or $36,213 of Quadriga funds.

EY is seeking a court order to get several of the third-party payments processors to hand over funds and/or any documentation related to Quadriga.

The monitor’s research into Quadriga’s missing funds is winding down. It plans to file its final monitor report in a few weeks. Oddly, this report did not mention anything about recovery of the platform’s historical data on AWS—a big issue in the third report.

The next hearing is scheduled for April 8.

 

News: Quadriga’s law firm steps down, WB21 bullies another reporter, and Tether admits it’s running a fractional reserve

Travel has been a bit exhausting lately, but my talk on QuadrigaCX at the MPWR Crypto Mining Summit in Vancouver, B.C. went well. If anyone wants to learn more about the events leading to the collapse of Canada’s largest crypto exchange, I’m told the video should be up within 30 days. I’ll post as soon as it’s available.

I’m also quoted in a BBC radio documentary on Quadriga. David Gerard and Frances Coppola are in there, too. I’m available for more talks on Quadriga and Bitfinex/Tether. If you are interested, send me an email, so we can line something up. 

I depend on reader support for the work I do. If you benefit from my stories and the resources I make available for free, please take a minute to subscribe to my Patreon account. Every little bit counts.

Now onto the news—first Quadriga. 

Stewart McKelvey, the law firm representing Quadriga in its Companies’ Creditor Arrangement Act (CCAA) has withdrawn amid concerns of a conflict of interest. What’s weird is that nobody outside of Ernst & Young (EY), the the court-appointed monitor, knows what the “potential” conflict of interest is exactly. 

The firm was also representing the estate of dead Quadriga CEO Gerald Cotten and his wife Jennifer Robertson. In and of itself, that does not necessarily represent a conflict of interest. I mean, EY would have known about this from the beginning, right? But some new info appears to have surfaced. I suspect the details will emerge eventually. We just have to keep waiting for those monitor reports to come out. 

Screen Shot 2019-03-18 at 2.58.12 PMYou recall my story on WB21, the payment processor holding $9 million in Quadriga funds? It seems like every reporter who has written about WB21 has received some type of threat—usually, a legal threat. (My story was also followed by threats on social media and email.)

Now a reporter has come forward saying that after he wrote a story on WB21, a thug appeared at his door. Totally unrelated, I’m sure. 

I’m surprised more media outlets have not covered WB21 in relation to Quadriga. But I suspect that will change soon—after all, $9 million is no small change. What I still don’t get is why Quadriga did not do due diligence before partnering with the firm. The internet is littered with people claiming to have lost money on WB21. This is one more example of how irresponsibly Quadriga conducted its business.

EY should be coming out with a fourth monitor report soon. I’ll be curious to hear if they’ve gained access to Cotten’s AWS account, which contains the platform’s historical transaction data. According to court docs, the Quadriga database was backed up hourly. (You would expect a lot more frequent backups for an exchange handling hundreds of millions of dollars in customer funds.) Also, I’m curious to learn more about the role of Quadriga’s new chief restructuring officer—and what his hourly rate is. (I’m almost certain I’m in the wrong business.) And has the representative counsel pulled together a committee of jilted Quadriga users yet? Until that happens, they have no voice to represent.

In a written statement on March 13, Robertson said that Cotten had mixed his private funds with those of the exchange’s. She wrote: “While I had no direct knowledge of how Gerry operated the business, he told me that he had been putting his own money back into QCX to fund user withdrawals in 2018 while the CIBC money remained frozen.” 

This is not new information. Robertson already mentioned this in her first affidavit, filed with the court on January 31. “Gerry told me that he was advancing his own personal funds in order to ensure that payments were made to Quadriga users,” she wrote. I can’t say what this means, other than more sloppy bookkeeping for EY to sort out. 

Reddit users claim that the Royal Canadian Mounted Police (RCMP) is collecting info on Quadriga. “They are suspicious and are coordinating with the FBI,” Reddit user “u/e_z_p_z-” wrote in quoting someone on Telegram. I contacted RCMP to verify, but they were tight lipped on the matter. “The RCMP is aware of the allegations against QuadrigaCX. We will not be providing any further information,” a spokesperson told me.  

Amidst the backdrop of the Quadriga fiasco, two Canadian financial authorities have published a consultation paper. The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIRO) are seeking input from the fintech community on how to shape regulatory requirements for crypto platforms. If you want to share your ideas, submissions are open until May 15.

I don’t think bitcoiners realize how broad of an impact the Quadriga mess will have on crypto markets. Exchanges are key to bitcoin’s liquidity, and exchanges need banking. If Canadian banks were leery of crypto-related funds in the past, now they will completely steer clear of the stuff. And my guess is regulators will do their utmost to make sure what happened at Quadriga (one guy managing gobs of other people’s money on his laptop from wherever he happened to be) never happens again—not on Canadian soil, at least.

In other crypto-exchange-related news, Tether, the company that issues the stablecoin of the same name, admitted that it is operating a fractional reserve. This has been widely suspected for a long time. Tether parted ways with its accountant in January 2018 (never a good sign), and it has never had a proper audit. Amazingly, despite this news, tether has not lost its peg and the price of bitcoin has remained unaffected.

David Gerard wrote a hysterical piece on Tether for DeCrypt“Every 24 hours, the entire $2 billion supply of tethers sloshes around 3.5 times, performing vital work for the market: completing the Barts on the price charts, burning the margin traders, and keeping the game of musical chairs going just that little bit longer,” he writes.

Bitfinex’ed, the pseudonymous tweeter and persistent critic of Bitfinex, unlocked his twitter account, so you can now retweet his tweets again.

[Read my Tether timeline to learn the full history of Tether and Bitfinex, the crypto exchange that it is linked to.]

Mark Karpeles, the former CEO of Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014, was sentenced in Japan. Judges found him innocent of the major charges of embezzlement and breach of trust, but guilty of improper management of electronic funds. They gave him a suspended sentence of four years. Essentially, that means, as long as he stays out of trouble, he won’t go to jail and is a free man.

CBOE Futures Exchange (CFE), the first U.S. exchange to introduce a bitcoin futures product in December 2017, has decided to pull the plug on bitcoin futures trading.

Bitcoiners have long counted on a flood of institutional money to prop up the price of bitcoin—but it is just not happening. As the crypto markets began to tumble in 2018, CBOE saw scant trading volume on its bitcoin futures product. It also lost market share to Chicago Mercantile Exchange (CME) bitcoin futures, which launched the same month.

Trading volumes for bitcoin futures on both these exchanges pale in comparison to BitMEX, an unregulated exchange in Hong Kong, where you can gamble your bitcoin away at 100x leverage. (I wrote a story on BitMEX for The Block in January.)

More than six months since Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, revealed its plans for a bitcoin futures market, Bakkt is still awaiting regulatory approval.

Elsewhere, the bear market continues to take its toll on crypto exchanges.

Trading volumes on Coinbase are dropping precipitously. The Block estimates that the U.S.-based exchange will make less than half the amount on trading commissions in 2019 than it did the prior year—if market conditions remain the same.

To make up for that, Coinbase is raising some of its trading fees. It is also listing more coins, the latest being Stellar Lumens. Stellar was started by Ripple co-founder Jed McCaleb, with lumens aimed at being part of a low-cost payment network. A bit of history here: McCaleb was the creator of Mt. Gox, which he later sold to Karpeles.

Bithumb, the largest cryptocurrency exchange in South Korea, plans to shed 150 of its 310 employees, according to CoinDesk.

And Hong-Kong based crypto exchange Gatecoin (not to be confused with crypto payment processor CoinGate) is facing liquidation. The story of Gatecoin reads like a series of Mr. Bill episodes. (Terrible things always happened to Mr. Bill.) After losing $2 million worth of crypto to a hack in 2016, the exchange hopped from three different banks only to have its bank accounts frozen at every one of them. Gatecoin gave up on the traditional banking system and turned to an unnamed French-regulated payment processor in September 2018. The firm returned the favor by keeping a large portion of Gatecoin’s funds. Now, a court has ordered the exchange to shut down.

You have to wonder if there isn’t more to this story. Why was this exchange booted off so many different platforms? Who was the payment processor that kept its money?

 

News: I’m speaking in Vancouver, Kraken’s obsession with Quadriga, and Patryn may have been trading on BitMEX

Hello new readers! If you enjoy my crypto meanderings and paywall-free Quadriga resources, please subscribe to my Patreon account. I’m an independent writer, and I need your support. You can subscribe for as little as $2 a month.  

I will be giving a presentation on Quadriga at MPWR Crypto Mining Summit in Vancouver, B.C. on March 12 at 4:15 p.m. local time. If you lost money on Quadriga, you can get into the event for free. Simply send an email to community@biresearch.ca.  

I’m obviously insane to have driven to the Quadriga hearing in Halifax on March 5, given the weather conditions. I went with fellow crypto-skeptic Kyle Gibson. We spun off the road twice. It was horrifying. Apparently, my car was burning oil the entire way.  

On the upside, seeing the hearing live at the Nova Scotia Supreme Court was really cool. Also, while in Halifax, I interviewed with Sheona McDonald, who is working on a Quadriga documentary. I hope to see her again in Vancouver, where she is based. 

As far as the hearing goes, the big news is that Quadriga was granted a 45-day stay and the judge gave a thumbs up to the appointment of Peter Wedlake, a senior vice president and partner with Grant Thornton, as a chief restructuring officer (CRO) for the firm.

I was struck by the number of paid professionals sitting before the judge—somewhere between eight and nine, and a few others in the back of the room. What is the hourly rate for a lawyer? And some of them had to fly in, too. 

And now, one more mouth to feed: the CRO. According to court documents, Quadriga needs a CRO for “ongoing direction” related to its affairs during its Companies’ Creditor Arrangement Act (CCAA) and in the event of an “anticipated sales process.”  

This talk of selling Quadriga is a recurring theme, so watch for it to come up again. The biggest value in the sell would likely be Quadriga’s user base. A similar effort is being made to revive Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014.

The law firms for Quadriga’s affected users have so far heard from 800 creditors—not a lot, when you consider there are 115,000 affected users. But keep in mind there is no formal claims process at the moment.   

How will customer claims be evaluated? Court-appointed monitor Ernst and Young (EY) is working to gain access to the exchange’s platform data in AWS, where all the customer trades are located. (EY had to get a court order at the hearing to do so.) It will be interesting to see what the monitor finds when it cracks that egg—maybe nothing. Other trails have already been wiped clean. Quadriga has no books and six identified bitcoin cold wallets were found empty, except for an inadvertent transfer reported earlier. 

I recently wrote about WB21, the shady third-party payment processor that is holding $12 million CAD ($9 million USD) in Quadriga funds, according to court documents submitted in January. After I published the story, WB21, threatened me with legal action. I responded by posting the documents they sent. Since then, I’ve been getting anonymous threats via social media and email, telling me to stop talking about Quadriga.  

Kyle Torpey wrote how bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (CDA). It is possible this could deter some affected Quadriga users from registering their claims, particularly if they are worried about anyone finding out about their crypto investments. 

Elsewhere in the news, Kraken is offering a reward for any info leading to the finding of Quadriga’s lost coins. The US-based crypto exchange writes:  

“It is up to our sole discretion which tips warrant a reward, if any. The total of all rewards will not exceed $100,000 USD. Kraken may end this reward program at any point in time. All leads collected by Kraken will be provided to the FBI, RCMP or other law enforcement authorities, who have an active interest in this case.”

Screen Shot 2019-03-10 at 4.11.20 PM.pngKraken’s CEO Jesse Powell has done two podcasts talking about Quadriga. Why is he so interested? If you recall, Kraken acquired Canadian crypto exchange Cavirtex in January 2016, so it has some Canadian customers. A few people I spoke with speculated that Kraken may have an interest in acquiring Quadriga’s user base. Otherwise, $100,000 USD seems like a lot of money to throw around for an exchange that let go of 57 people in September.

After this post went live, Powell sent me a few comments via email. He assured me the only purpose of Kraken’s reward was to help locate more assets for the Quadriga creditors and uncover any potential foul play. I reminded him that EY is already doing its own investigation into the lost funds. As of yet, Quadriga is not a criminal case.

As for acquiring the Quadriga platform and its user base, Powell thinks the platform is worthless and the user base probably significantly overlaps with Kraken’s already. “We would be open to acquiring the client list, but it wouldn’t be for much,” he said.

He also pointed out that “a lot of money” is relative and unrelated to his firm’s earlier layoffs. “Kraken increased its profitability in September,” he said. “Would you think $100,000 USD was a lot for Amazon, who let go a few hundred people last February?”

Lest there be any lingering doubt, Globe and Mail posted convincing evidence linking Quadriga cofounder Michael Patryn to convicted felon Omar Dhanani. The two appear to be one and the same. I think we can lay that one to rest now. 

Meanwhile, The Block wrote about Patryn allegedly trading large positions on BitMEX, an unregulated exchange that lets you bet on whether the price of bitcoin will go up or down. You place all your bets in bitcoin, and you can leverage up to 100x. It’s a great way to risk losing all of your money. (I wrote about BitMEX for The Block last year.) There’s been speculation as to whether Patryn was gambling with Quadriga’s customer funds.

Earlier, Coinbase also brought up the possibility that Quadriga was operating a fractional reserve after the exchange suffered multimillion dollar losses in June 2017 due to a smart contract bug.

Bottom line: anything is possible. Nobody knew what was going on inside Quadriga — and they still don’t. The exchange had no official oversight and as of early-2016, only one person was in charge of that platform and all the money it held, and that was Gerald Cotten, the exchange’s now deceased CEO.  

More information will come out as EY continues with its work. I can only imagine the private conversations occurring between the accountants (and lawyers) as more details in the CCAA process emerge. Welcome to crypto!

Read “How the hell did we get here: a timeline of Quadriga events” for the full story.

Third EY monitor’s report on Quadriga reveals empty bitcoin cold wallets and a dribbling of new funds

Screen Shot 2019-03-02 at 3.33.35 PMErnst and Young (EY), the court-appointed monitor in Quadriga’s Companies’ Creditor Arrangement Act (CCAA), has filed its third report in Nova Scotia Supreme Court.

The defunct crypto exchange was holding $250 million CAD ($190 million USD) in crypto and fiat at the time it went bust. EY has been trying to track down any recoverable funds—and it’s not finding much.

The majority of the recoverable money will likely come from Quadriga’s third-party payment processors. The monitor has written to 10 known payment processors requesting they hand over any funds they are holding on behalf of Quadriga. (Previously, EY identified nine payment processors. Now it has added one more, though it does not reveal the name.) Here is the grim news: since its last report filed on February 20, EY has only recovered an additional $5,000 CAD ($3,800 USD) from the payment processors. 

This is in addition to the $30 million CAD ($23 million USD) EY has already recovered from the two payment processors Billerfy/Costodian and 1009926 B.C. Ltd. 

More money is out there, but getting at it may be tough. As I wrote earlier, WB21 is sitting on $12 million CAD ($9 million USD), which it is refusing to relinquish. EY notes that “further relief from the court may be necessary to secure funds and records from certain of the third party processors.”

So negligent was Quadriga in its bookkeeping that it appears to have lost track of some of its money altogether. EY located a Quadriga bank account at the Canadian credit union containing $245,000 CAD ($184,000 USD). The account had been frozen since 2017.  

EY also reached out to 14 other crypto exchanges looking for accounts that may have been opened by Quadriga or its dead CEO Gerald Cotten. EY did not name any of the exchanges, but four replied. One of them was holding a small amount of crypto on behalf of Quadriga, which it has handed over to EY.

I don’t know this for sure, but it is possible the exchange that returned the funds may have been Kraken. 

[Update: I was wrong. Kraken CEO Jesse Powell says, “Nothing recovered from Kraken. So far, we have not discovered any accounts/funds believed to belong to Quadriga.”]

Two thirds of the customer funds ($180 million CAD or $136 million USD) that Quadriga held at the time of its collapse were said have been in the form of crypto located in cold, or offline, wallets that only the exchange’s dead CEO had access to. However, it is looking more and more like those funds may have never existed. 

EY identified six cold wallet addresses that Quadriga used to store bitcoin in the past. Other than the sixth wallet, there have been no deposits into the identified bitcoin cold wallets since April 2018, except for the 104 bitcoin inadvertently transferred to one of them from Quadriga’s hot wallet on February 6, 2019. 

Post April 2018, the sixth wallet appears to have been used to receive bitcoin from another crypto exchange account and subsequently transfer the bitcoin to the Quadriga hot wallet. The sixth wallet is currently empty. The last transaction from the sixth wallet was initiated on December 3, 2018, days before Cotten died.

The monitor also identified three other potential Quadriga cold wallet addresses used to store cryptocurrency, but provided no detail.

Quadriga apparently created 14 fake accounts on its own exchange for trading fake funds. Deposits into some of the accounts “may have been artificially created and subsequently used for trading” on the platform, the report said.

A few other items in the monitor’s report caught my attention.  

Quadriga’s platform data is stored in the cloud on Amazon Web Services (AWS). But because the account was in Cotten’s personal name and not the company’s, EY is seeking a court order to authorize access. Here is where that gets weird: EY notes that there is possibly another AWS account in the name of Jose Reyes, the principal of Billerfy. Why would a payment processor need access to Quadriga’s transaction data?  

Also buried in the monitor’s report are signs EY may be getting frustrated in its dealings with Robertson and her stepfather Tom Beazley. They are the only two directors left at Quadriga. A third director, Jack Martel, resigned last month.

Recall that in her second affidavit, Robertson sought the appointment of a chief restructuring officer (CRO) for Quadriga. EY states that it “continues to see some benefit” of having someone independent of Robertson and Beazley making decisions at Quadriga.

The wording is careful, but the report goes on to say that in order for EY’s investigation “to proceed appropriately, without any conflict or appearance of any conflict,” EY needs to communicate with Quadriga “in an appropriate manner and at an appropriate time.”

Finally, less than one month in, the cost of Quadriga’s CCAA procedures now sits at $410,000 CAD ($309,000 USD).  

‘Platform error’ blamed for BTC being sent to Quadriga’s dead CEO’s cold wallet

Screen Shot 2019-02-21 at 3.02.45 AMThe 104 bitcoin (worth $468,675 CAD) that Canadian crypto exchange QuadrigaCX “inadvertently” sent to its dead CEO’s cold wallets on February 6—a day after the company filed for creditor protection—was due to a “platform setting error.”

That and other news was included in Ernst & Young’s (EY’s) second report, released on February 20. EY is the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA). At least now we know that the bitcoin wasn’t sent by somebody clumsily pushing a wrong button. Still, that single automation wiped out more than half of Quadriga’s hot wallet funds.

The rest of the hot wallet funds, worth $434,068 CAD, are now safe from Quadriga. On February 14, EY transferred the coins into cold wallets that it controls. The funds include 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether. But all of this is a mere drop in the bucket compared to the $250 million CAD owed to Quadriga’s 115,000 creditors—most of which is presumably lost forever.

Also in the report: Recall that Quadriga elected a new board following the death of its CEO Gerald Cotten on December 9. The new directors included Cotten’s widow Jennifer Robertson, her stepfather Thomas Beazley and a man named Jack Martel, who nobody knew too much about. Apparently, Martel stepped down on February 11.

And more money is needed to fund Quadriga’s CCAA process. EY and Quadriga’s law firm Stewart McKelvey have already burned through the nearly $300,000 CAD Robertson put up to initiate the process in January.  

Additional money for the CCAA process—and ultimately for Quadriga’s creditors—will come from Quadriga’s payment processors, once they hand the money over to EY in the form of bank drafts. EY also has to get a bank to agree to accept the bank drafts, which is not an easy thing to do. Most banks want nothing to do with Quadriga’s money. 

Costodian, a company created by payment processor Billerfy specifically to manage Quadriga’s funds, is holding $26 million CAD in bank drafts. After the Canadian Imperial Bank of Commerce froze those funds in January 2018, the Ontario Superior Court of Justice took control of that money, and in December, released the funds back to Costodian in the form of bank drafts issued by the Bank of Montreal (BOM).

According to EY, Costodian has so far handed over four BOM bank drafts totaling $20 million CAD. But it is waiting for a court order before releasing two more bank drafts.

One of those is for roughly $70,000 USD. These are personal funds belonging to Costodian’s principal Jose Reyes. EY has determined that those funds do indeed belong to Reyes, but he still needs to sign the check over to EY for disbursement.

The other BOM bank draft in question is for $5 million CAD. Of that amount, Custodian claims that $61,000 CAD also represent Reyes’ personal funds, and that $778,000 CAD is due to Custodian for unpaid processing fees.

Quadriga creditors don’t agree that Costodian should be paid these fees. To resolve the issue, EY notes that “a separate dispute resolution mechanism will be required during the course of these CCAA proceedings.”

In addition, Stewart McKelvey is holding 1,004 in bulk drafts totaling $6 million. These drafts were issued to 1009926 BC LTD, a payment processor run by a former Quadriga contractor. The problem is 1009926 BC LTD was dissolved in January 2018 for failure to file an annual report, so EY is looking to potentially restore the company.

EY is currently negotiating with the Royal Bank of Canada (RBC), where it hopes to deposit most of these checks. RBC is proceeding with caution, however.

According to EY, “a stranger to the CCAA proceedings, RBC has expressed hesitation to accept and disburse the BMO drafts, bulk drafts and future amounts, without direction and relief from the court.”

A hearing is scheduled for February 22 to give direction to the banks and to the third-party payment processors, so the funds can be freed up.

After that, another hearing to extend the stay of the CCAA proceedings is scheduled for March 5 in Halifax, where angry Quadriga creditors are looking to stage a protestThe protesters are urging the court to discontinue the CCAA proceedings and launch a criminal probe into Quadriga.  

Update (February 21, 12:30 ET): I made some changes to clarify the amount of personal funds that Custodian principal Jose Reyes claims belong to him in two BOM bank drafts.