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. The 50-page report can effectively be boiled down to, “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 the exchange had 115,000 affected users, so apparently, a more accurate count is available.)

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 complete mess, and EY will probably never be able to sort everything out. The firm says “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

The majority of EY’s report rehashes what we already know, but it is still worth a read, especially the first 14 pages. The rest is mostly appendixes.

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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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.

Diving into WB21—the company holding $9 million of Quadriga money

Screen Shot 2019-02-27 at 5.51.35 PM

A “bitcoin friendly” payment processor with a reputation for accepting bank wires and not actually processing them, is sitting on $12 million CAD ($9 million USD) of Quadriga funds.

WB21 is not showing any sign of wanting to hand over those funds either. That has some Quadriga creditors worried that more of their money has vaporized.

When Quadriga, the largest crypto exchange in Canada, went belly up earlier this year, it owed its customers $250 million CAD ($190 million USD). Two thirds of those funds are in the form of cryptocurrency stuck in cold wallets that only the company’s dead CEO Gerald Cotten held the keys to.

Meanwhile, Ernst and Young (EY), the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA), is trying to round up any funds that remain. EY has contacted nine third-party payment processors that may be holding money on behalf of Quadriga. Two of them, Billerfy/Costodian and 1009926 BC LTD, are in the process of signing over $30 million CAD ($23 million USD).  

But according to an affidavit filed by Cotten’s widow Jennifer Robertson on January 31, WB21 has another roughly $9 million CAD and $2.4 million USD “but is refusing to to release the funds or respond to communications from Quadriga.”

After this story was published, Amish Patel, WB21’s global head of litigation, said in an email that the balances stated by Robertson “are not confirmed,” and that the account is “under investigation.” Patel also accused me of defamation and threatened me with legal action if I did not make several updates to my story.

So, who is WB21?

WB21 stands for “web bank 21st century.” Launched in Switzerland in late 2015, the company touts itself as a virtual bank that lets you “streamline” opening up a bank account from 180 countries. But it is really a payment processor with a shady past that Quadriga got involved with—another shady business partner, what are the odds?

In June 2016, WB21 announced that it was accepting bitcoin deposits. Send in your bitcoin, and WB21 will credit your account in fiat—though it relies on payment service BitPay to convert the bitcoin to fiat. “The funds are instantly available on the account and can be sent out by wire transfers or spent with a WB21 debit card,” WB21 says. 

The startup went on to launch a PR campaign that consisted of mainly, well, making stuff up. After 10 months of doing business, WB21 claimed it had 1 million customers and that it had sent cross-border payments totaling more than $5.2 billion.

Those number don’t really add up, especially when you consider it took Transferwise, one of the biggest London-based fintech companies, four years to get a comparable $4.5 billion in transfer money. Also, as Gruenderszene points out, in September 2016, WB21’s official app had only 100 downloads on Google’s Play Store.

In defense, WB21 CEO Michael Gastauer told Gruenderszene that WB21 doesn’t rely on its mobile app. A few hours after the conversation, Gruenderszene noted that the app disappeared from the store. 

Boasting a $2.2 billion valuation, WB21 also claimed that Gastauer sold Apax Group, a previous payments business, for $480 million, and that WB21 turned down a $50 million funding round after Gastauer invested $24 million of his own money. Kadhim Shubber at the Financial Times did some digging and found no evidence of Apax being sold.

Yet Forbes (wait, did Forbes pull that story? Try this link), The Huffington Post and Business Insider all wrote about WB21’s incredible success. Though to its credit, Business Insider later added it was “unable to independently verify these numbers.”

In late 2017, WB21 even got itself in the Wall Street Journal after announcing that it was moving its European head office from London to Berlin after the Brexit vote.

How did WB21, a company spewing so many questionable facts and figures, manage to get all this media coverage? Like another company that we’ve been hearing about lately, the payment processor leveraged the power of social media. WB21 has a Twitter account with 65,000, mostly fake, followers.

Screen Shot 2019-02-28 at 2.34.44 PMGastauer, a man in his mid-40s who hails from Germany, also appears in an impressive Youtube video at an unheard of “Global Banking Award 2018” event in Frankfurt, where he apparently won the award. Dressed elegantly in a tux, with a fog machine in the background, he gives a speech on the future of banking. “How do you come up with an idea like this?,” he says. “Do you wake up one morning thinking you want to revolutionize an 80 trillion dollar industry?”

But the truth has a way of catching up. In October 2018, the U.S. Securities and Exchange Commission (SEC) revealed a civil lawsuit accusing Gastauer of aiding and abetting the fraudulent sale of $165 million USD worth of shares in microcap stocks.

“In reality, WB21 Group was not a registered bank, and Gastauer’s ‘solution’ was actually a circumvention of banking regulations designed to disguise his clients’ [ . . .] identities,” the SEC said.

As it turns out, this was not Gastauer’s first run in with authorities. Writing again for the Financial Times, Shubber notes:

“In 2010, [Gastauer] was given an 18-month suspended sentence by a court in Switzerland for commercial fraud and counterfeiting. Around the same time, a British gambling company sued him in London for allegedly taking millions of pounds from it. He had set up a payments processor, the company claimed, but kept the payments.”

Shubber goes on to comment:

“The story of Mr Gastauer is not just about alleged wrongdoing in the financial markets; it shows how an accused fraudster might sell himself and his fantastical story using the modern tools of the internet age.”

A Google search finds the Internet littered with WB21 customers claiming the company stole their money.

In August 2018, “bitcoinjack” wrote of WB21 on Reddit, “They will accept incoming funds and credit your account but you will never be able to get it out. They will lie about outgoing payments until you give up.”

Consumer review website Trustpilot has a long list of people complaining that WB21 has taken their money and gone silent.

Quadriga customers began having trouble with WB21 about a year ago. They complained on Reddit that their bank wires were either not coming through or delayed. In response, Quadriga covered for WB21, blaming the delays on a bank in Poland that it was using:

“We used WB21 for about a week, but the vast majority of delays related to wires comes from the fact that the intermediary bank that handled CAD wires for the Polish bank cut them off due to the association with Bitcoin. We had to reissue all of these from other payment processors, all manually, which has caused delays.”

(This story was updated on March 5 to include a statement from WB21.)

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News: Quadriga, Quadriga, Quadriga

The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.

On February 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 bitcoin to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young (EY).

When Quadriga CEO Gerald Cotten died in India on December 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—oops, make that $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.

You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth $434,068 CAD. So, yes, basically, more than half the money in the hot wallets is now gone.

[To get the full details on the history of the exchange, read my article How the hell did we get here? A timeline of Quadriga events.]

EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”

Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on January 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”

A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And, surprise, surprise, it also turns out, the U.S. Securities and Exchange Commission (SEC) is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)

Quadriga’s 115,000 creditors need proper representation. On February 14, three legal teams appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.

All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not or sooner.

After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.

Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc. The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.

Screen Shot 2019-02-15 at 9.04.16 PMDid you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service (archive) Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.

Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.

But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks. 

“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.” 

Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.

Finally, the Globe and Mail (outline) sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.

But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.

She told The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”

The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.

The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.