カテゴリーアーカイブ: Law & justice

In the latest development over its security breach, cryptocurrency exchange Cryptopia has filed for bankruptcy protection in the U.S.

The New Zealand-based exchange, which has been dealing with the fallout of a January 2019 hack, went into liquidation and stopped all trading earlier this month. Cryptopia’s assigned liquidator, Grant Thornton, then petitioned the Southern District of New York’s bankruptcy court to seek recognition of this liquidation and protect exchange data stored on servers by a firm in Arizona.

Per a report from Bloomberg, the unnamed firm had terminated its agreement with Cryptopia and was seeking $2 million in compensation for its services. Cryptopia’s liquidators secured the bankruptcy order from the Southern District of New York, ensuring that the firm’s data are intact through a provisional relief that will last until June 7, 2019.

“The interim order preserves the Cryptopia data, which includes a SQL database containing all account holders’ individual holdings of cryptocurrencies and the account holder contact details,” the update from Grant Thorton reads. “Without this information, reconciling individual holdings with the currencies held by Cryptopia will be impossible.”

This development closely follows news that Cryptopia’s founder has launched a new exchange.

Attorneys for Tether and Bitfinex are hoping to get the former access to its reserves amid a legal dispute with New York Office of the Attorney General (NYOAG).

In a letter sent to the New York County Supreme Court, attorneys representing iFinex (the parent organization of Bitfinex) and Tether took issue with the restrictions that had been placed on Tether’s transactions with related parties as part of an ongoing case against them, stating that the NYOAG had no basis for disallowing tether (USDT) holders and other affiliated entities from redeeming their tokens.

The development brings yet another twist to the ongoing dispute between the parties. In April 2019, the NYOAG applied for a court order to investigate Bitfinex for “ongoing fraud” totaling $850 million, using funds from Tether to mask massive losses. As part of the case, the NYOAG had filed an injunction seeking a restriction on related parties from accessing any of their funds in Tether’s reserve for at least 90 days.

The NYOAG’s argument is simple; if Bitfinex is allowed to continue drawing funds from Tether, with no assurance of repayment, then there’s a significant possibility that these funds will never be recovered.

On the other hand, Bitfinex maintains that the NYOAG has no legal basis or authority to probe its business.

In this recent letter sent to the court, iFinex’s attorneys noted that the two sides have been unable to reach a consensus on what Tether should be allowed to do with its holdings. The respondents also expressed their concern that the injunction sought by the NYOAG could have significant effects on Tether’s operations and financial strength.

“While Tether does not anticipate that it will suddenly become unprofitable, OAG’s language would potentially require the company to cut off salary and other ordinary course payments in any given period if, for whatever reason, there was insufficient profit,” the document reads.

As a compromise, the respondents’ attorneys asked that the injunction be reduced to 45 days. They also want affiliated entities to have the ability to redeem their tokens within that period.

U.S. Attorney’s office for the Southern District of New York has charged two individuals for providing “shadow banking” services to crypto exchanges.

According to a statement by Geoffrey S. Berman, the U.S. Attorney for the Southern District of New York, published on April 30, 2019, “Reginald Fowler and Ravid Yosef allegedly ran a shadow bank that processed hundreds of millions of dollars of unregulated transactions on behalf of numerous cryptocurrency exchanges.”

The D.A. also claimed that both individuals ran an organization that managed to evade the Anti-Money Laundering (AML) laws that govern the operations of licensed financial institutions.

The Department of Justice also released court documents, claiming that the two worked for various companies that provided currency banking services to crypto exchanges and then went on to establish and operate an unlicensed money service between February and October 2018. Prosecutors believe that during that period, the two of them created and used several bank accounts with different financial institutions.

To get the banks to open these accounts, Fowler and Yousef were said to have made several misleading statements to the banks, claiming that their accounts would be used to conduct “real estate transactions,” while actually using them to transmit funds for a cryptocurrency-related money transmitting agency.

To cover up the nature of their business, they allegedly went on to falsify electronic wire payment instructions as well.

An investigation into the business, which was conducted by the U.S. Internal Revenue Service (IRS) and the FBI, discovered that the suspects operated two bank accounts under the company name Global Trading Solutions LLC with HSBC Bank USA and HSBC Securities USA/Pershing LLC.

It’s been a long and winding road with many twists and turns for the beleaguered cryptocurrency exchange QuadrigaCX and its 115,000 former users who are owed roughly $190 million.

On April 8, 2019, the case reached a critical fork in the road as a court, recognizing that attempts to restructure the exchange have failed, appointed business services firm Ernst & Young as the exchange’s Trustee in Bankruptcy to watch over bankruptcy proceedings. It will also assume control of all of QuadrigaCX’s assets.

Ernst & Young Takes Control

With QuadrigaCX moving into bankruptcy, it appears that Ernst & Young now becomes the dominant player in this ongoing drama as previously appointed Chief Restructuring Officer Grant Thornton will no longer be involved.

“EY will continue its investigation, but once it is the trustee, it will have greater powers to do so,” attorney Evan Thomas of Osler, Hoskin & Harcourt told Bitcoin Magazine. “This includes the power to examine people who have relevant information under oath.”

Critically, Ernst & Young will also have the ability to seize the exchange’s assets.

“The trustee can also sell QuadrigaCX’s assets and start lawsuits to recover property or damages,” Thomas said. “The trustee will collect whatever it can recover for eventual distribution to creditors.”

The next step is a meeting of creditors who will elect a Board of Inspectors to oversee the work of Ernst & Young and grant permission to take actions such as selling its remaining assets.

It is likely, noted Thomas, that some of the same users elected to the Users Committee — a group of seven former QuadrigaCX customers who have been representing the 115,000 left stranded by the exchange — will be elected as these inspectors.

Jennifer Robertson’s Assets Are Frozen

Ernst & Young asked the court for and was granted an “asset preservation” order, meaning that all assets held by Jennifer Robertson, the wife of late CEO Gerald Cotten, and the Cotten estate are frozen.

The preservation order prohibits Robertson from selling, removing or transferring any assets. However, it allows her to cover her legal and living expenses by granting her access to two bank accounts overseen by Ernst & Young.

A source close to the case said it appeared that Robertson continues to retain the law firm Stewart McKelvey to represent her and the Cotten estate, despite earlier reports that said the firm was withdrawing its counsel.

What’s Next?

“There will be a claims process for creditors to file claims for consideration by the trustee,” said Thomas. “Eventually, whatever money or other property that is recovered by the trustee will be distributed to creditors with valid claims.”

The Companies’ Creditors Arrangement Case (CCAA) will continue temporarily while QuadrigaCX transitions to bankruptcy. Ernst & Young has said that it will be filing at least one more monitor’s report. The CCAA will eventually terminate and court proceedings will continue under Canadian bankruptcy law.

For a detailed overview of the QuadrigaCX story, read “QuadrigaCX and the Million Dollar Questions: What We Do and Don’t Know.”

The Tokyo District Court has found Mark Karpeles, the former head of now-defunct Bitcoin exchange platform Mt. Gox, guilty of record tampering but innocent on other charges related to embezzlement and breach of trust.

Per reports in the Wall Street Journal, the court’s verdict is a massive blow to Japanese prosecutors who have maintained their stance that Karpeles was guilty of embezzlement and breach of trust at Mt. Gox.

The sentence, which was carried out on March 15, will see him serve a suspended sentence of two-and-half years in prison. He can skip jail altogether if he stays on his best behavior.

While prosecutors pushed for a 10-year prison sentence, the court rebuffed some aspects of their claims and handed down a more lenient sentence.

How Things Went Sideways for Karpeles

Karpeles was the head of Mt. Gox when the firm applied for bankruptcy protection in 2014, following a security breach, where 850,000 Bitcoin (BTC), worth about 48 billion Yen ($430 million) at the time, was stolen from the exchange’s vaults.

He was subsequently arrested in 2015, following an accusation that he embezzled 341 million Yen (about $3 million) from the accounts of customers.

Per the allegations, he was alleged to have transferred the money from the accounts of the company’s customers directly into his own, using the funds to bankroll a lavish lifestyle.

The transfers were made with the use of his personal computer, then he went a step further, covering his tracks by falsifying the company’s records.

Mt. Gox’s Poor Accounting System Might Have Saved Him

The falsification of records was a major bone of contention for the court. In its ruling, the court pointed out that by falisfying records, Karpeles acted beyond the limits of his authority and against the general interests of the company.

Prosecutors took issue with Karpeles’ decision to use a section of the supposedly embezzled funds to purchase a business that deals in 3D printers. However, the court pointed out that the acquisition could be viewed as a potential asset for the company and thus, it was seen as reasonable.

The court also pointed out that Mt. Gox lacked an efficient accounting system for when company executives borrowed money from the company, claiming that this made it impossible to determine whether the supposed funds Karpeles was said to have embezzled were from the company’s clients.

In his remarks, Presiding Judge Tomoyuki Nakayama stated that a data manipulation of this magnitude eroded the credibility of crypto exchanges. Pointing out Karpeles’ position and IT expertise, the judge asserted that there is no justification for such an abuse of information.

Karpeles Isn’t Going to Jail, But There’s Still Trouble Brewing for Him

While Karpeles seems to have scored a win here, things could still go sour for him.

Earlier this week, a court in Illinois ruled against his attempt to dismiss a class action lawsuit against him and the exchange.

The suit, which was brought up by some victims of the exchange’s hack, was upheld by Judge Gary Feinerman because it was filed within the appropriate jurisdiction; even though the exchange was based in Japan.

The plaintiffs accused Karpeles of painting an untrue picture of the exchange’s stability and security, as well as demonstrating negligence that led to their funds being stolen.

If found guilty, Karpeles could be compelled to make compensation and damages payments.

QuadrigaCX Exchange’s founder, Gerald Cotten, passed away more than two months ago, and with his death, the keys to the exchange’s cold storage allegedly went to the grave with him.

This is the story that QuadrigaCX is sticking to in the posthumous mess that has followed its founder’s death. The situation has been likened to a second Mt. Gox, with some of the biggest differences being that we don’t know whether or not QuadrigaCX is solvent and there’s no hard evidence of foul play on behalf of the exchange. But there are also more questions than answers, and lack of hard evidence or transparency in the situation (including, whether or not there are cold wallets and whether or not QuadrigaCX is being honest about not having access to them) is the exchange’s closest resemblance to Mt. Gox: no one’s completely sure of what happened and what’s going on.

This has led media, social media commentators and other community voices to see the facts of the case through different lenses. Some have argued that QuadrigaCX has no cold wallets, others have said they must be lying about not having access to these funds. One bold camp has even called the likelihood of Cotten’s death into question. This conspiracy is tenuous, as death certificates are public (even if Cotten’s name is misspelled as “Cottan” on the certificate, likely an honest mistake made by crossing the language barrier); Globe and Mail reporters even traveled to Jaipur and spoke with doctors who verified his death.

Those doctors, the accounts recall, also signaled that Cotten’s death was unconventional, as was how the body was handled — but more on that later.

QuadrigaCX would keep Cotten’s death from the public and its clients for about a month, enough time for his widow, Jennifer Robertson, to transfer the contents of her husband’s estate as set out in his will — a document updated two weeks prior to his death — into her name. All the while, customers complained about their perpetual struggle to withdraw cash and coins from the exchange. It has since ceased operations due to its self-proclaimed inability to access cold wallets to address these liquidity issues.

Plenty of affected users think the funds are gone and the wallets don’t exist, and evidence — some hard, some soft — is piling up to suggest that there’s something amiss with how things stand now.

After corresponding with multiple persons who either knew Cotten well, were QuadrigaCX customers or who were associated with the exchange’s business, Bitcoin Magazine learned that questions have surrounded QuadrigaCX’s operations for some time — enough to warrant skepticism about the story it’s been presenting.

This account will give an overview of what we know so far. It attempts to be thorough but not exhaustive and to treat conspiracies with skepticism while not ignoring them.

Trouble Brewing

Gerald Cotten died unexpectedly on December 9, 2018, while vacationing in India. His sudden death has been framed as the culmination of Cotten’s seven-year battle with Crohn’s disease, though Cotten’s death at the age of 30 is rare for people with the disease. He passed away while under care at Fortis Escorts Hospital in Jaipur, India, where he was reportedly honeymooning with his newly wedded wife, Jennifer Robertson, when he had some extreme gastrointestinal pain.

Though Dr. Sharma originally diagnosed traveler’s diarrhea on Cotten’s first visit to the hospital, Cotten’s condition quickly deteriorated. Twenty-four hours later, after being readmitted, Cotten died of cardiac arrest induced by septic shock when his intestines were perforated, the death report notes.

The doctor told the Globe and Mail that Cotten’s death was “medically unusual,” particularly the way his condition dramatically worsened so rapidly. He and his staff are even a bit “[unsure] about the diagnosis.”

No autopsy was performed, and the apparent mysteries surrounding Cotten’s death become more complicated as he was prepped for burial. Dr Semmi Mehra, an embalming specialist at Mahatma Gandhi Medical College & Hospital, whom Robertson attempted to employ for Cotten’s embalming, refused because the body came from the hotel the couple were honeymooning at instead of from the hospital where Cotten passed.

“That guy 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’,” Dr. Mehra told the Globe and Mail.

She would direct them to a public medical college in the area who would ultimately embalm the deceased crypto tycoon, the Globe and Mail reports.

Cotten’s death left the company’s leadership without a clear successor, as Cotten left no directions for appointing a new CEO, an oversight that complicates the exchange’s apparent inability to access cold wallet funds. An emergency shareholder meeting was called on January 25, 2019, to appoint new directors. The meeting resulted in Jennifer Robertson, her stepfather Thomas Beazley and Jack Martel being elected to the board. The meeting supposedly took place over a conference call, according to a conversation Bitcoin Magazine had with Michael Patryn, the exchange’s co-founder who claims to have distanced himself from the exchange since March 2016.

Two sources who knew Cotten told Bitcoin Magazine that they were shocked to hear that Cotten hadn’t put contingency plans in place for his sudden passing, saying that this was out of character for a man who always had security at the forefront of his mind.

“This is the part that gets a little bit hairy,” Michael Perklin, Shapeshift CISO, told Bitcoin Magazine. “For a business to operate for six years and not have a business continuity plan? That’s reckless. I was incredibly shocked to learn that they couldn’t access the wallet. Gerry was a very smart man. It was inconsistent with his personality to not have a backup if he was hit by a bus. We’re definitely missing important pieces of this,”

He added, “Gerry updated his will two weeks before his death. That proves that he is thinking about these things.”

QuadrigaCX waited more than a month to make Cotten’s death public, and they waited longer still to admit that the company was having trouble mustering up the liquidity to honor withdrawals.

By the time the exchange shut down, Jennifer Robertson had gone through probate to transfer the assets in Cotten’s estate to her name. During this in-between period, she listed (and allegedly sold) Cotten’s sailboat/yacht and placed four properties in a trust called the Seaglass Trust, reportedly taking out a second mortgage on two of these. One of these properties, Cotten and Robertson’s former home at 71 Kinross Court, Nova Scotia, has been sold, while another property in Kelowna, British Columbia, has also been sold, an anonymous source told Bitcoin Magazine.

Liquidity Issues

Before Cotten’s death, users embattled in months-long withdrawal issues aggravated the exchange’s reputation and troubled history. Even as early as March 2018, bad press plagued the exchange for a delayed withdrawal of over $100,000. This issue could be the consequence of the exchange’s tenuous relationship with its Canadian banking partners, a struggle that culminated in November 2018 as the Canadian Supreme Court ruled to take control of $21.6 million after the Canadian Imperial Bank of Commerce (CIBC) froze accounts related to QuadrigaCX’s business. It also lost a not-insignificant sum of ether to a smart contract bug in June of 2017, worth $17 million CAD at the time.

QuadrigaCX’s banking difficulties have been a recurring theme in the exchange’s five-year history, according to multiple Bitcoin Magazine sources, all of whom asked to remain anonymous due to the sensitivity of the ongoing case.

One long-time QuadrigaCX user filed a ticket on August 14, 2018, after attempting to withdraw cash in late July. QuadrigaCX support’s initial reply oddly claims, “Both have been processed and arrive in a few years [sic].” After the user continued to complain about not receiving their funds, a follow-up email stated, “There is no issue, just ongoing issues … with the banks,” — the exchange’s familiar mantra in response to withdrawal issues.

After going round-for-round over email with QuadrigaCX support for weeks, this customer received his funds nearly two months after he requested them and a month after he opened a support ticket.

This experience seems par for the course, as another user complained that withdrawal requests for himself and others have been marked as complete after a similar, month-long, back-and-forth exchange with QuadrigaCX, but the funds have still not been deposited into their accounts.

“They stopped replying to my emails after January 11,” this user told Bitcoin Magazine. He said that he’d initiated a withdrawal request on December 8, 2018, which was marked as completed on December 22, 2018, despite no funds hitting the user’s bank account. This particular individual has $2,000 tied up. We’ve spoken to an individual with a similar experience who is missing $1,100 and another who has lost more than $1 million CAD after failing to have withdrawals satisfied.

A Canadian business strategies and best-practice professional, who asked to remain anonymous, also attested to Bitcoin Magazine that QuadrigaCX’s relationships with banks were a stressed and constant “struggle.” They even introduced Cotten and QuadrigaCX to a potential banking partner, but, after the company failed to provide “beneficial ownership information,” the bank refused to do business with the exchange (QuadrigaCX’s failure to provide this information, the source said, may have to do with the connections between Michael Patryn and ex-con Omar Dhanani, something we’ll go over more in the “Loose Ends” section of this article).

These issues, the source believes, are a plausible reason behind QuadrigaCX’s multiple shell companies (QuadrigaCX Fintech Solutions Corporation and Whiteside Capital Corporation).

The death of the exchange’s CEO seems to have either exacerbated these banking problems or exposed them to the public more thoroughly. And while Perklin called QuadrigaCX ’s money transfer issues unsurprising, some aspects of the exchange’s withdrawal process were anything but — specifically, offering hard cash withdrawals in the mail or in-person as a preferable option.

Multiple clients have reported receiving thousands of dollars via Canada Post. Speaking to a few of these users, Bitcoin Magazine verified these reports: One of these individuals told us that, while the three packages they received listed QuadrigaCX, Vancouver, as the return address, Canada Post’s tracking information lists the packages’ origin as Richmond, British Columbia; Calgary, Alberta; and Sherwood Park, Alberta.

Besides using Canada Post, QuadrigaCX offered hard cash withdrawals via in-person pickups. This practice, while not totally unheard of in the cryptocurrency industry, is virtually non-existent for retail exchanges (Coinsquare, one of the only legitimate exchanges to have offered it, no longer does). More than just unconventional, the makeshift, lax nature with which the exchange went about processing these withdrawals is suspect.

One of Bitcoin Magazine’s sources recalled driving six and a half hours to the Laval pickup location in late January, after “getting the runaround” since November, wherein each attempt to transfer cash ended in its being processed and cancelled. This process went on for weeks; the client even attempted to transfer the money into ether to withdraw to another exchange but hit the same dead end. When the users tried to get answers, their queries were met by silence on social media, support tickets and calls to QuadrigaCX’s offices.

“We had enough after Christmas and chose to pick up our cash at the location in Laval. They sent us an email confirming it was processed and would be available on Jan 21 at 10am,” the source explained. “We drove 6.5 hours to that location, only to find a nonexistent office suite with a mailbox drop there. No person. No one in the building knew of that company either. We called and left messages on that number provided and drove home. He finally called us a week later saying QuadrigaCX wasn’t giving him the cash to hand out but if they did give him our cash (they were supposed to give him 5k) he would reserve our amount out of that and text us to come pick it up. Two days later he texted us and said they aren’t giving him the money and he will be in touch.”

That was the last time they heard from QuadrigaCX’s cash lackey, who, judging by his responses, had little connection to the exchange besides being an intermediary for cash payments. Days later, the exchange would announce Gerry’s death and its likely insolvency.

As noted earlier, QuadrigaCX’s banking relationships were non-existent, and Robertson admits in her affidavit that the exchange “had no corporate bank accounts.” Cash would likely be hard to come by for an exchange with no corporate account with a licensed bank or fiduciary partner. Instead, the exchange had to rely on a patchwork banking system which consisted of nine or so payment processors, including the Canadian-based Bylls and Billerfy.

Billerfy CEO Jose Reyes was involved in the November 2018 proceedings that ended in the Canadian Supreme Court freezing $25 million CAD tied to the exchange’s business. According to court documents, he had three personal accounts frozen along with two corporate accounts for Costodian Inc., another payment processor QuadrigaCX used for its business, for which Reyes is the sole director and officer. Reyes had transferred some $1 or 2 million CAD to his personal account from Costodian’s corporate accounts, making it unclear to the court as to the ownership of the millions in deposits from 388 users.

“CIBC has not been able to determine to what extent the Depositors, Costodian, Reyes, QuadrigaCX and/or Billerfy Labs Inc. (“Billerfy”) are entitled to the Disputed Funds,” the court order states.

The $25 million is still stuck in limbo, along with $5 million more in CAD that the exchange holds in bank notes for funds held by other payment processors. Ernst & Young (EY), as monitor over the legal proceedings, has contacted the processors to collect this debt. In its second report, the monitor revealed that it had received $20 million in bank draft notes from Costodian, though it must wait for the approval of the Royal Bank of Canada (RBC) to clear wires for the bank drafts to be deposited into a disbursement account that the monitor oversees.

In its second report, EY also indicated that Robertson and QuadrigaCX ’s litigation coffers are running low, insinuating that they are not far off from running out of funds entirely. If the RBC clears the bank draft wires into the disbursement account, this will keep the exchange’s legal operations afloat amidst the courtroom proceedings and restructuring.

Entering the Courtroom

After going offline on January 28, 2019, for reported maintenance, the exchange came out publicly to say that it did not have access to its cold storage, as Cotten had been the sole guardian of the wallet’s keys. In a sworn affidavit filing with the Nova Scotia Supreme Court, Cotten’s widow Jennifer Robertson said that the funds are likely lost.

“QuadrigaCX’s inventory of cryptocurrency has become unavailable and some of it may be lost.”

On February 5, 2019, the exchange filed for investor protection with the Nova Scotia Supreme Court. EY was appointed as monitor over the case, giving the firm legal rights to oversee a compensation account for QuadrigaCX users as well as monitor the exchange’s current cryptocurrency balances and any hardware that may contain company information (namely, keys/seeds for the alleged cold storage).

In its first report as legal monitor, EY reported that it had begun funding the debtors’ compensation account with $150,000 CAD which Robertson supplied out of her own personal finance. More notably, the firm reported that QuadrigaCX “inadvertently” sent some $460,000 CAD worth of bitcoin to the cold wallets its employees reportedly can’t access. Perhaps in response to this blunder, the firm has taken control of QuadrigaCX’s remaining hot wallet funds, as well as the funds that were accidentally transferred, and placed them in their own cold storage, the monitor’s second report reveals.

As with other exchange scandals in the industry, it didn’t take long for QuadrigaCX to rack up an adversarial list of investor-led reclamation suits. With funds for more than 100,000 users so far unaccounted for, Canada’s premier law firms lined up to represent the thousands who have come forth to challenge the company in court. These lawyers had a court date on February 14, 2019, to determine who would win the right to represent aggrieved clients in the legal proceedings looming ahead.

After delaying the decision a week due to the strength of the competing firms, presiding Nova Scotia Court Justice Wood ultimately gave the bid to Miller Thompson and Cox & Palmer for its apparent expertise with the Companies’ Creditors Arrangement Act (CCAA), a piece of Canadian litigation that affects insolvency cases, and digital assets.

“Miller Thompson has additional depth in certain areas, including larger CCAA proceedings and cryptocurrency … The relationship between the two firms has been thought out carefully with a view to minimizing costs. Cox & Palmer will deal with their areas of expertise, including local litigation practice and court appearances. Miller Thompson will provide expertise in dealing with large creditor groups and cryptocurrency technology,” the judge wrote in a court order.

The case will re-enter the legal arena on February 22 for the next round of proceedings.

Where’d the Funds Go?

QuadrigaCX claims that the funds are inaccessible, but some creditors and blockchain professionals alike are starting to think the funds aren’t actually there.

For starters, QuadrigaCX has refused to attest to their cold storage reserves by making the public address for these wallets public. One Reddit user, dekoze, claims to have tracked funds from a hot wallet address listed in Robertson’s affidavit to five wallets that could constitute part of the exchange’s cold wallets. These wallets recently had 104.365 BTC sent and split between them, an amount nearly on par with the 103 BTC that QuadrigaCX “inadvertently” sent to its cold wallets on February 6, 2019.

Other blockchain transaction analysis suggests that QuadrigaCX has been cycling funds through competing exchanges, and they’ve also found little evidence that any cold wallet reserves exist.

James Edward (@ProofofResearch) first dropped this bombshell. Taking deposit addresses provided by QuadrigaCX customers, his transaction analysis of the Bitcoin blockchain found no trace of cold wallet reserves. Instead, it found a dizzying trail of transactions to and from popular exchanges like Kraken, Bitfinex and Poloniex, something he reinforced with later research using the wallets unearthed by dekoze (which Edward, in this newest research, actively disputes are cold wallets).

Taylor Monahan, the CEO of Ethereum wallet MyCrypto, corroborated Edward’s findings with her own analysis of the Ethereum blockchain. Like Edward, she found no convincing evidence that QuadrigaCX operated with cold wallet storage, and she also followed a tortuous trail of transactions that led to other exchanges like Bitfinex and, most notably, ShapeShift.

“It’s just bizarre,” she told Bitcoin Magazine.

“Totally hypothetical, it’s possible that QuadrigaCX has some hidden cold storage somewhere if, and only if, instead of going between a hot and cold wallet, they went directly from user deposit addresses to the cold wallet. Now, I went through their transactions for over three years, and it’s very hard for me to imagine that … with all the practices I’ve seen and how they operate and how often they move funds that they have a mechanism to put funds into the cold wallet that no one noticed.”

Hidden or not, she’s not convinced that the cold wallets are there, though, because she only found one instance of a cold wallet holding some 4,000 ether for more than a year, after which portions of these funds were sent to hot wallets for QuadrigaCX or competing exchanges. For the rest of the wallets that Monahan tracked, she believes that QuadrigaCX could have been market making to improve the appearance of exchange liquidity.

“This would mean having to source coins from an external source in order to fulfil withdraw requests because they’re playing with their own money,” she qualified. “Even if that’s the case, I cannot imagine why they would exchange ether through ShapeShift. This was something they did consistently over the years.”

Now, an exchange sending funds to another exchange isn’t anything new; exchange-to-exchange arbitrage and inter-trade is common in the industry. But QuadrigaCX ’s activity doesn’t make much sense, Monahan told Bitcoin Magazine, especially the millions in ether that was sent to ShapeShift, which charges higher fees than other exchanges for the convenience of instant cryptocurrency swaps.

The movement of funds could be customers depositing of their own volition, something that Monahan takes into account in her analysis. She says that those withdrawals are likely denoted by multi-numerical values, while funds QuadrigaCX was sending itself may be represented by rounded off numbers.

“When you look deeply into how an operation does something … everyone has their little quirks. For Quadriga, for example, they love to send exact amounts.”

The rationale for cycling funds through different exchanges amounts to a fractional reserve system, the same practice banks use today to shuffle credit. Basically, if QuadrigaCX did not have enough in their wallets to cover a massive withdrawal in bitcoin, they would send ether to something like ShapeShift to convert these funds to bitcoin to honor the withdrawal.

Coinbase CEO Brian Armstrong believes this is the most likely scenario. In a Twitter thread, citing the exchange’s own internal transaction analysis, he speculates,“Patterns of sends from cold storage suggest they tried keeping [the] exchange afloat, and maybe attempted to trade their way out of a hole” — a hole that was in part dug by the exchange losing roughly 67,000 ether to a contract bug. That was in June 2017, after which time the exchange began draining their “cold wallets,” Armstrong holds.

Couple this with the 2018 bear market and you have a solvency crisis.

“This implies that at least a few people inside QuadrigaCX knew that they were running fractional. If so, then it’s possible that untimely death of their CEO was used as an outlet to let the company sink,” he concludes.

In our conversation, Monahan noted decreasing transaction volumes following 2017, something that could either be attributed to Armstrong’s conclusion or to the anemic nature of the market in the bearish slump that began in 2018.

“You can definitely tell that the amount of money being moved around was very high in 2017 and has been dwindling, and previous to 2017, you see less activity. Whether that indicates something on QuadrigaCX’s end is hard to say because every exchange is going through this [after the 2017 bull run].”

When asked about the strength of such transaction analyses, Perklin cautioned that “the only way to get a map of all of QCX movements would be to get all the deposit addresses.”

Loose Ends and Conspiracy Theories

For all that we do know about QuadrigaCX, there’s also plenty we don’t know — as well as lots of unsettling middle ground between the two.

Take, for instance, that a multitude of users who report receiving payroll deposits from RNC Inc., a company believed to be Robertson Nova Management Inc., a real estate management company registered in Robertson’s name. In the reply-to lines of emails confirming these deposits are listed one of two emails tied to Robertson. These deposits contradict Robertson’s sworn affidavit that she was not involved in the company’s business when Cotten was alive.

Questions also loom over the identity of Michael Patryn, QuadrigaCX ’s co-founder, who told Bitcoin Magazine that he cut ties with QuadrigaCX in March 2016. He left amidst a wider company exodus which gutted the shareholders sitting on the company’s board of directors. These directors, Patryn claimed, were upset with Cotten’s decision not to take the company public on the Canada Stock Exchange, a promise he made a year prior in 2015 which helped lead to the company raising $850,000 CAD in a private fundraising round. That same year, the exchange published its last financial audit, posting revenues of barely $80,000 CAD.

Patryn, who owns roughly 17 percent of the company’s shares, bought many of the shares off these individuals because “he wanted to make things right,” claiming that many of these shareholders were personal friends and invested because they “trusted” him.

Meanwhile, some skeptics don’t trust that Patryn is being honest about his identity. Critics and internet sleuths have argued that “Michael Patryn” is an alias for “Omar Dhanani,” an ex-con from California who was pegged for identity theft and fraud in 2004 after a sweeping bust of members involved in the cybercrime syndicate ShadowCrew. Omar Dhanani allegedly began using the alias Omar Patryn in 2005, according to a forfeiture case, and he was deported back to Canada in 2008.

The connections between Michael and Omar rest on the shared surname, as well as the presence of Dhanani’s relative, Nazmin Dhanani, on a company filing for MPD advertising that Michael Patryn made in 2009. Michael Patryn would start the Midas Gold Exchange, an online e-currency exchange that had ties with the Liberty Reserve in 2009, a private e-currency enterprise that was shuttered in 2013 by U.S. officials for money laundering and whose founder was sentenced to 20 years in federal prison. Midas Gold racked up a notorious reputation for fraudulent activity during its short lifespan.

The conspiratorial web connecting Omar/Michael is documented elsewhere, so we won’t indulge it any further here. If the connections hold true, though, it paints a poor picture for the moral constitution of at least one of the company’s founding members.

And it could explain the suspicious structure of the company’s operations. Amber Scott, the founder of Canadian Outlier Solutions, an anti-money laundering consulting firm, told Bitcoin Magazine, “QuadrigaCX was always ‘outside of my risk tolerance.’ Like many others in the community, I’m left wondering what I could have done differently to warn people when I saw red flags.”

A look into the company’s structure would be enough to give one pause. In her affidavit, Robertson revealed that, after 2016, “most of the business … was being conducted by Gerry wherever he and his computer were located.” The rest of the company’s employment base consisted of seven contractors, one of which, Alex Hanin, acted as the exchange’s sole developer, while the rest were a mixture of customer service representatives, social media managers and client verification employees.

One of these alleged employees hosted an AMA on the QuadrigaCX subreddit, which has since been deleted after the contractor reported that he was facing legal action from Jennifer Robertson’s legal council. Among other unverified claims, he alleged that QuadrigaCX was fraudulent from the start and that Jennifer and Gerry’s involvement from 2016 onward should be the chief area of concern for investigators, insinuating that Patryn and Lovie Horner, Patryn’s supposed partner, are no more than red herrings.

To attest to the veracity of his insider status, the contractor posted screenshots of the company’s Rocket Chat, as well as a photo of the funeral pamphlets used for Cotten’s funeral. Community members immediately raised questions as to why JA Snow Funeral Home, who hosted the burial, was misspelled as JS Snow on the pamphlet (though this could feasibly be a typo given the placement of “a” and “s” on a QWERTY keyboard).

A source with a computer science background shared an IP analysis of the image provided with Bitcoin Magazine, pinpointing the photo to a Halifax airport IP on the day following the funeral.

This IP tracking and the contractor’s testament is not conclusively hard evidence of foul play, but the threat of legal action and the deletion of the AMA and the contractor’s Reddit account adds to the pile of questions surrounding the case.

As legal proceedings progress, we will update this article with further information.

Reporter Jessie Willms contributed additional notes and research to this story.

According to a recent report, Joel Ortiz, the 20-year-old student from Boston who was indicted by prosecutors in Santa Clara, California, has been sentenced to 10 years in prison in what is believed to be the very first SIM swapping conviction in the United States.

Ortiz was charged last year on 28 counts involving various computer-related violations and crimes concerning information law. Ortiz took control of the identities of over 20 people, stealing a total of $5 million in cryptocurrencies with his SIM swapping technique. He pleaded guilty and accepted the plea deal of 10 years jail time.

How SIM Swapping Works

SIM swapping is a technique that involves a criminal contacting the service provider of a target victim. The hacker will then use personal information acquired about a potential target to persuade the service provider to effect a phone number transfer from the current SIM card to one owned by the hacker. As soon as the swap has been executed, the hacker can request sensitive information including verification codes, one-time passwords and two-factor authentication entries, which are usually sent to a user’s mobile phone as part of a successful porting process. SIM swappers are known to target high-security online domains such as social media accounts, email addresses, bank accounts and cryptocurrency wallets.

Other High Profile SIM Swapping Cases

Various SIM swapping cases have been reported lately, including Dawson Bakies, a tech-savvy criminal who used the same technique to make off with thousands of dollars in cryptocurrencies from over 50 victims across the U.S.

Per a press release from the Manhattan District Attorney’s office, Bakies has been charged by a grand jury in the state of New York, and he currently faces a 52-count charge, including computer tampering, grand larceny, and identity theft. Bakies pleaded not guilty to the charges leveled against him, and he was subsequently released on a $100,000 bail.

Last year, American crypto investor and businessman Michael Terpin sued AT&T for $233.8 million over fraud and gross negligence on the part of the service provider which resulted in a SIM swapping operation that cost him millions of dollars in digital assets.

Three million tokens were stolen from Terpin’s crypto account, with a total worth of $23 million, at the time. He is also seeking an additional $200 million in punitive damages.

Today, February 5, 2019, a court in Nova Scotia, Canada, granted bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA) to the embattled Vancouver-based cryptocurrency exchange QuadrigaCX. The court appointed Ernst & Young as monitors to help the exchange locate any funds it could use to reimburse users and ordered a 30-day stay of proceedings.

The exchange initially made the news on January 14, 2019, when the company announced its CEO Gerald Cotten had died in India on December 9, 2018, from complications from Crohn’s disease. News website CoinDesk obtained what appears to be a copy from the Indian government of Gerald Cotten’s death certificate, although his name is misspelled.

On January 31, 2019, the exchange went offline posting a statement that they had filed for creditor protection.

More than a month after Cotten’s death, the exchange announced that he had the only access to the exchange’s cold storage, effectively locking up the exchange’s funds in offline wallets that, allegedly, no one else at the company has access to. Cotten’s widow, Jennifer Robertson, has reportedly hired a security expert to hack into the computer.

In its petition to the Nova Scotia court, QuadrigaCX claimed they didn’t have access to wallets containing $137 million USD in cryptocurrency owned by an estimated 115,000 users. The affidavit claims that QuadrigaCX has 363,000 registered users and owes approximately $190 million USD. Court documents show that one user alone had a balance of approximately $70 million CDN ($53 million USD).

Professional services firm Ernst & Young said they would focus on finding out whether there are any reserves in cold storage and, if there are, how to access them.

In court today, the lawyers for QuadrigaCX said they are considering selling the exchange to pay off funds that are owed. Maurice Chiasson, a lawyer representing QuadrigaCX, has said that, currently, there are several payment processors that hold funds from the exchange.

A number of affected users have retained lawyers and formed class actions to seek restitution. Attorneys for the applicants now have five days to serve the 115,000 customers owed funds with notice of the order.