The bulk of the asset shortfall—approximately $115 million—arose from Cotten's fraudulent trading on the Quadriga platform. Cotten opened Quadriga accounts under aliases and credited himself with fictitious currency and crypto asset balances which he traded with unsuspecting Quadriga clients. He sustained real losses when the price of crypto assets changed, thereby creating a shortfall in assets to satisfy client withdrawals. Cotten covered this shortfall with other clients’ deposits. In effect, this meant that Quadriga operated like a Ponzi scheme.

Cotten lost an additional $28 million while trading client assets on three external crypto asset trading platforms without authorization from, or disclosure to, clients. He also misappropriated millions in client assets to fund his lifestyle. In its final months, Quadriga had almost no assets left and was operating like a revolving door—new client deposits were immediately re-routed to fund other clients’ withdrawals.

What happened at Quadriga was an old-fashioned fraud wrapped in modern technology. There is nothing new about Ponzi schemes, unauthorized trading with client funds and misappropriation of assets. Crypto asset trading platforms, however, are novel and the regulatory framework for these platforms is evolving. Quadriga did not consider its business to involve securities trading and it did not register with any securities regulator. This lack of registration facilitated Cotten's ability to commit a large-scale fraud without detection. So did the absence of internal oversight over Cotten. From 2016 onwards, Cotten was in sole control of a company that had hundreds of thousands of clients and transacted over a billion dollars of fiat currency-denominated assets and over five million crypto asset units. He ran the business as he saw fit, with no proper system of internal oversight or controls or proper books and records.

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Similarly, Quadriga clients could not have known what Cotten was doing. Under the Quadriga business model, clients entrusted their money and crypto assets to Quadriga. Quadriga provided no meaningful insight into how those assets were being stored, moved and spent. To the contrary, Quadriga provided false assurances about asset storage. Clients had no means of verifying these claims or obtaining meaningful information about the handling of their assets. This lack of transparency also facilitated Cotten's fraud.

Under normal circumstances, these findings would likely have led to an enforcement action against Cotten and/or Quadriga. However, this is not practical given that Cotten is deceased and Quadriga is bankrupt, with its assets subject to a court-supervised distribution process. Nevertheless, we believe it is in the public interest to share our findings with the public to help investors understand what happened to Quadriga and hopefully prevent this type of situation from recurring.

The misconduct we uncovered in relation to Quadriga is limited to Quadriga and should not be understood as applying to the crypto asset platform industry as a whole. Properly conducted, crypto asset trading is a legitimate and important component of our capital markets. We remain committed to working with this industry to foster innovation. Financial innovation has always been critical to the health of our economy and the competitiveness of our capital markets.

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