Growth of Quadriga (2015-2017)
The serious risks posed by Quadriga’s business practices were not disclosed to clients. They joined the platform in large numbers, especially in 2017 as crypto asset prices climbed sharply. As Quadriga’s popularity grew, Cotten consolidated his control over the company and moved assets off the platform to fund his lifestyle.
Quadriga Expands as Bitcoin Prices Rise
Quadriga’s rise to become the largest crypto asset trading platform in Canada was fueled by rising crypto asset prices. Throughout 2015 and 2016, Bitcoin prices gradually increased and Quadriga experienced steady growth in its active client base and trading volume.
Quadriga Abandons a Public Listing Effort and Cotten becomes Quadriga’s Sole Directing Mind
In 2015, Cotten and Patryn took steps to take Quadriga public and list its shares on a stock exchange. At this time, the company operated out of Vancouver under the direction of Cotten and, to a lesser extent, Patryn. In the end, the listing did not happen. Cotten found the volume of work involved to be cumbersome and abandoned the listing process in early 2016. Following the abandoned IPO, Patryn left the company, along with the CFO, legal counsel and accountants.
Following the abandoned IPO, Patryn left the company, along with the CFO, legal counsel and accountants.
From this point onwards, Cotten was Quadriga’s sole director and officer. He was indisputably Quadriga’s guiding mind, controlling and overseeing Quadriga’s operations. Cotten went so far as to tell new Quadriga contractors that Patryn was not a real person at all, and that Patryn’s existence and the stories about him online had been invented by a competitor of Quadriga to throw the platform into disrepute.
Cotten’s Chris Markay Account Trading Ramps up Risk Exposure
Cotten as Chris Markay Buys Bitcoin (December 2015 to November 2016)
In Part 1, we discussed Cotten’s fake asset trading in the Chris Markay account. Between December 2015 and February 2016, Cotten was mainly using the account to purchase real Bitcoin from platform clients with fake Canadian dollars. By the end of February 2016, Cotten had credited himself with around $1 million fake dollars and used them to buy approximately 1,700 real Bitcoin from clients. As explained previously, this exposed the Chris Markay account (and ultimately Quadriga clients) to risk of loss if the price of Bitcoin went down.
The price of Bitcoin remained relatively stable between December 2015 and February 2016, averaging between $500 and $600. Consequently, the Chris Markay account did not generate any significant unrealized profit or loss on these positions during this time. However, by the end of February 2016 these long positions remained “open”, meaning that Cotten had not sold the 1,700 Bitcoin he had purchased. Selling the Bitcoin for Canadian dollars would have closed his long positions from the original trades with the fake assets. This open position of 1,700 Bitcoin was exposed to the risk of a drop in the value of Bitcoin.
Impact of Cotten’s Open Positions
Open positions in Cotten’s accounts represented the platform’s exposure to risk. Cotten’s positions remained open until he closed them with an opposing trade (for instance, selling for real money the 1,700 Bitcoin he had purchased with fake money). As long as his positions remained open, Cotten (and ultimately the clients) remained exposed to the risk of losses resulting from crypto asset price fluctuations.
Cotten consistently increased his risk exposure on the platform by increasing his open positions, thereby increasing the risk to platform clients in the event of significant fluctuations in the price of crypto assets.
Cotten expressed at the time that Ether was “the future.”
Pivot to Ether (March 2016 onwards)
In March 2016, Quadriga started accepting a new cryptocurrency, Ether. As he had done with Bitcoin, Cotten began to purchase real Ether from clients using fake Canadian dollars through the Chris Markay account. By the end of November 2016, Cotten held an open position of about 370,000 Ether. (In other words, he had used fake funds to purchase 370,000 Ether.) This amounted to a bet that Ether prices would rise—which was consistent with the view Cotten expressed at the time that Ether was “the future.”
Risk of Rising Bitcoin Prices (June to November 2016)
Between March and May 2016, Cotten closed his open Bitcoin position by selling his 1,700 real Bitcoin to other clients in exchange for fiat currency and Ether. From June 2016 onwards, Cotten began opening new Bitcoin positions, but this time in reverse: selling fake Bitcoin to platform clients in exchange for real Canadian dollars. While previously Cotten (and ultimately the platform clients) would lose if Bitcoin prices went down, now he would lose if Bitcoin prices went up. By the end of November 2016 Cotten had sold 3,800 fake Bitcoin, thereby establishing what was in effect a large naked short position in Bitcoin—and a potentially catastrophic risk to clients if Bitcoin prices kept climbing.
Crypto Boom of 2017
As 2017 progressed, the crypto asset market as a whole saw surging prices and trading volume. A flood of new client requests hit the platform and account verification requests piled up as the small team of Quadriga contractors struggled to keep up with demand. Cotten hired additional contractors to deal with the ever-growing backlog of new account requests.
The following chart identifies the price movements of Bitcoin (on the left axis) compared to the price movements of Ether (on the right axis) between 2014 and early 2019 represented by month end prices.
Price of BTC and ETH in Canadian Dollars
Throughout 2017, Cotten's trading on the Quadriga platform was dominated by: (i) purchases of Ether with fake Canadian dollars and fake Bitcoin that Cotten had credited to his Chris Markay account; and (ii) sales of fake Bitcoin that Cotten had credited to his Chris Markay account in exchange for real Canadian dollars.
By the end of December 2017, Bitcoin and Ether were valued at $18,000 and $900 respectively (compared to $1,300 and $11 in December 2016).
As of December 2017:
- Cotten had purchased 825,000 Ether with fake assets, including $85 million fake ; and
- 20,000 of the fake Bitcoin Cotten had sold in exchange for real assets remained owing to clients.
Cotten did not own 825,000 Ether at this time because he had been steadily moving large amounts of Ether off the Quadriga platform and onto external platforms. By this time, he had converted most of this Ether into Bitcoin, American dollars and Canadian dollars to fund withdrawals.
Technical Glitch Results in Ether Loss (2017)
Quadriga experienced a setback in June 2017 when a coding error cut off access to approximately $10 million in Ether (based on current Ether values) held in a Cotten-controlled wallet. It remains inaccessible today.
Cotten credited the Chris Markay trading account with the largest single fake amount ever—a fake $100 million.
Cotten claimed to be unconcerned about the loss, telling a Quadriga contractor: “A few months ago, monthly revenue was $200k in one month… last month we did a million. Current trajectory, we see $5 [million] soon and the trapped ETH contract is a small side project.” Yet it was around this same time that Cotten credited the Chris Markay trading account with the largest single fake amount ever—a fake $100 million.
Cotten Struggles to Keep up with Withdrawals (2017)
He was stripping the platform of the assets that were backing clients’ account balances and digging Quadriga into an ever-growing financial hole.
As described previously, Cotten purchased significant Ether positions with fake Canadian dollars through the Chris Markay account. As a result, Cotten had to find real Canadian dollars to satisfy Canadian dollar withdrawal requests. Cotten addressed this Canadian dollar shortage in two main ways. First, he moved crypto assets off the platform, (i.e. out of Quadriga-controlled wallets) and into accounts on other platforms under his own name, then traded the assets for cash or other types of crypto assets, often at a loss. He thereby drained the Quadriga platform of assets and worsened the asset shortage. In addition, as crypto asset prices rose during the second half of 2017, Quadriga received hundreds of millions in Canadian dollar deposits from new clients. Cotten used these deposits to fund Canadian dollar withdrawals. While Cotten kept the platform afloat with these measures, it was a short-term fix. He was stripping the platform of the assets that were backing clients’ account balances and digging Quadriga into an ever-growing financial hole.
Cotten Diverts Funds for Personal Use
Cotten made things worse by syphoning assets off the platform to finance his lifestyle. Between May 2016 and January 2018, he transferred approximately $24 million of client funds to himself and Robertson. This was despite the fact that Cotten’s salary was set at $65,000 per year according to his January 2015 employment agreement. Cotten bought a Tesla, a Lexus, a luxury yacht, a plane, a share in a private jet and multiple properties. Cotten and Robertson travelled frequently, and by mid-2018 Cotten boasted to another Quadriga contractor that “in total, I’m up to 56 countries… 37 with Jen”. This lavish lifestyle was funded with Quadriga client assets that, in our assessment, Cotten fraudulently misappropriated.
In the months prior to his death, Cotten transferred approximately $10 million in client funds that he had previously appropriated back to Quadriga, which was then distributed to clients.