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| - Canadian cryptocurrency exchange Quadriga CX was operated as a Ponzi scheme, Canadian securities regulators have concluded, blaming the fraud for its demise. Gerald Cotten, the founder of the Vancouver-based company, which collapsed last year following his sudden death, siphoned millions of dollars from unwitting clients to cover trading losses, as well as lavish spending on himself and his wife. Seventy-six thousand investors from Canada and around the world collectively lost at least $169 million. In a statement Thursday, the Ontario Securities Commission said it "determined that Quadriga collapsed due to a fraud committed by Cotten." It alleges that he "opened accounts under aliases and credited himself with fictitious currency and crypto asset balances, which he traded with unsuspecting Quadriga clients." Cotten covered a shortfall in funds available for client withdrawals with other clients' deposits, "in effect, operating a Ponzi scheme," the OSC said in a statement. A typical Ponzi scheme generates returns for early investors by acquiring new investors. Cotten's widow Jennifer Robertson said in a 2019 affidavit that the company had been unable to access encrypted computers that her late husband was believed to have used to store the cryptocurrencies, putting millions of dollars out of reach. The files, for which Cotten alone had the passwords, were referred to as cold wallets. Court-appointed monitor Ernst & Young noted that the couple had "acquired significant assets including real (estate) and personal property" and "frequently travelled to multiple vacation destinations often making use of private jet services." The auditors also found that monies were transferred from the Canadian cryptocurrency platform to competitor exchanges and into personal accounts controlled by Cotten. But they were unable to confirm the identity of several wallet holders. The OSC panel during a 10-month investigation reconstructed the affairs of Quadriga CX, which did not maintain proper financial records, by analyzing records from third-party payment processors and banks. It went through more than six million transactions linked to more than 368,000 client accounts, and thousands of emails. The bulk of the missing funds, or about $115 million, "arose from Cotten's fraudulent trading," the regulator concluded. Millions of dollars, it said, were also misappropriated "to fund his lavish lifestyle." Cotten died of complications from Crohn's disease in December 2018 during a trip to India. He was 30. amc/dw
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