Piecing together the financial picture of one of Canada’s biggest cryptocurrency exchanges has proven to be a unique challenge.
According to a court-appointed monitor for QuadrigaCX, the company does not have accounting records available to it and did not “systematically” track incoming and outgoing payments. It also does not have a bank account in its name.
Those circumstances have come to light as part of Quadriga’s filing for creditor protection, which came after the company found itself unable to track down millions of dollars in cryptocurrency following the sudden death of its founder and CEO.
The unique circumstances, lack of financial reporting resources and absence of historical accounting information has caused this to be a challenging process
Ernst & Young
One of the duties of Quadriga’s monitor, Ernst & Young, is to review and comment on its cash flows. That posed an issue, according to EY’s pre-filing report.
“The Applicants’ treasury and accounting systems either do not exist or are not capable of recording and producing even the most basic of accounting summaries for the proposed monitor to review and comment upon,” the monitor said in the Jan. 31 report, which was only recently published online as part of Quadriga’s legal proceedings.
EY said it would set up a trust bank account in its name to receive funds and make payments approved by Quadriga, such as fees owed to lawyers. It also said it would account for those receipts and disbursements throughout the proceedings.
Quadriga had a request for protection from creditors approved on Tuesday by the Supreme Court of Nova Scotia. The company said it ran into liquidity issues after trying for weeks, without success, to locate “very significant cryptocurrency reserves” and to find a financial institution that would accept bank drafts owed to it.
“Since we were unable to resolve these issues in a timely fashion, we did not want trading to continue on our platform,” the company’s website said on Tuesday. “We filed for creditor protection to help resolve these matters and preserve the interests of our customers.”
The plight of the company and its customers has grabbed headlines worldwide, reigniting concerns around corporate governance and regulation of cryptocurrency and cryptocurrency companies.
“The nature, cumulative claim value and number of affected stakeholders, combined with challenges associated with gaining access to the Affected Funds, the limited accounting resources of the Applicants and efforts required to locate the Missing Coins for the benefit of the Applicants’ stakeholders, presents an extraordinary set of case facts,” EY noted.
According to the monitor, Quadriga owes approximately 92,000 users around $260 million in cash and cryptocurrency. One user is said to have a claim of approximately $70 million.
“With an inability to access the affected funds and funds held by third party processors, and locate and/or access the missing coins, the applicants are insolvent on a balance sheet and going-concern basis,” EY said.
Sorting through Quadriga’s financials has apparently taken some doing.
“The applicants do not have bank account(s) in their name,” EY said in its report. “Furthermore, the proposed monitor has been advised that the applicants do not have accounting systems or accounting records available to it.”
Directions to release payments through payment processing companies used by Quadriga had been given by the firm’s late founder and CEO, Gerald Cotten, who was “the controlling mind of the business,” EY said.
“The proposed monitor is advised that Mr. Cotten’s payment instructions were typically issued via e-mail,” EY’s report stated. “The applicants did not have an accounting group and payment inflows and outflows were not systematically tracked.”
An affidavit sworn by Jennifer Robertson, Cotten’s widow, said the CEO had used an encrypted laptop computer to run the business. Robertson said she did not know the password or the recovery key for the laptop and has not been able to find them.
“Despite repeated and diligent searches, I have not been able to find (the passwords) written down anywhere,” Robertson said in the affidavit, which indicated that the 30-year-old Cotten unexpectedly died in India in December due to complications from Crohn’s disease.
A court document shows he left all his assets to his wife and made her the executor to his estate, according to his last signed will and testament on Nov. 27, 2018.
The exchange founder’s will outlines numerous assets he held, including several properties in Nova Scotia and in Kelowna, British Columbia, a 2017 Lexus, an airplane, a Jeanneau 51 yacht and his pet chihuahuas, Nitro and Gully. He also left his frequent flier points and reward points to Robertson. He held accounts with Bank of Montreal and Canadian Tire.
Robertson said she had retained an expert to help with recovering any relevant information, with “some limited success” in recovering cryptocurrency or information from Cotten’s cell phones and other computer, “but not yet from the main computer he used to conduct business.”
EY said it would try to retain “cryptocurrency forensic advisors” to help with tracking down the missing bitcoin and otherwise.
Quadriga also prepared a statement of weekly projected cash flow up to April 28, EY noted, which was based on assumptions about future events.
“Furthermore, notwithstanding the proposed monitor’s efforts to review and assess the cash flow forecast for reasonability, the unique circumstances, lack of financial reporting resources and absence of historical accounting information has caused this to be a challenging process,” EY said.
The monitor stressed that Quadriga had shown “diligence and good faith in pursuing these CCAA proceedings.”
Meantime, the company plans on looking at all the options available to it to meet its obligations to users, including a possible sale of its trading platform. EY said Quadriga had been approached by “certain parties” who were interested in buying the exchange.
“Discussions with these parties have not been advanced given the uncertainty facing the Company,” the filing said. “However, the applicants intend to aggressively pursue such negotiations post-filing with the assistance of the proposed monitor.”
With files from Bloomberg/Reuters