Uncover - S12: "A Death in Cryptoland" E3: Cracks in the Empire

Episode Date: December 11, 2021

Gerald Cotten and his business partner, Michael Patryn, launch QuadrigaCX on Boxing Day, 2013. There’s hype in the budding Bitcoin community and the small exchange seems to have a meteoric rise. But cracks begin to appear, problems with the banks, a software bug, and delays in paying back customers. Meanwhile, online rumours of a criminal past dog Michael Patryn. For transcripts of this series, please visit: https://www.cbc.ca/radio/podcastnews/a-death-in-cryptoland-transcripts-listen-1.6035764

Hi there, I'm Gavin Crawford. I'm a writer, an actor, and a comedian. And for the last eight or nine years, I have been navigating life with my mother's increasing dementia. Has it been sad? Yeah. Has it been funny? Also, yeah. That's what my podcast series, Let's Not Be Kidding, is about. It's the true story of my life as a comedian, my mom, and dementia. Let's not be kidding. With me, Gavin Crawford.

Available now. This is a CBC Podcast. If you want to indulge in a little pageantry from the Middle Ages, there's a show you can catch called Medieval Times. It's a thing across North America. It's set in a pseudo-castle in a big arena. Men dressed as brightly colored knights speed through the stadium on horseback, capes flying, jousting before a crowd, most of whom are wearing paper crowns. It's basically dinner theater. I think

you even eat with your hands. The idea is to transport you back to the Middle Ages for a royal tournament. You get to cheer for one of the knights doing battle while serfs and wenches serve your meal. This is where Michael Patron, the co-founder of Codriga CX, has said he and Gerald Cotton met for the first time. That Jerry and Michael would go to a show where people pretend to be part of the royal court from hundreds of years ago seems a little strange for two guys

who would go on to launch an exchange for modern currencies. Surely they would have loved the competition, or the illusion of it. It was in Toronto, around 2012, the year before Quadriga launched. It may be that this was the first time meeting face-to-face, but the co-founders of Quadriga CX had a long history together online, one that stretched back years. The founders of Quadriga had met on earlier forums, and that's important because that was the sort of world they were working in, they were operating in before they went on to launch Quadriga.

And it brings into question what their intentions were when they went and launched this exchange in Canada. Jerry had been dealing in digital currencies online and on the fringes. But now he and Michael were trying to move into the real world with real stakes. His career up until he launched Quadriga was, you know, from a kid of 15, 16 years old, running stupid Ponzi's online so he can make a few bucks. The thing with Quadriga, it wasn't a kid's game anymore. I mean, this was serious business. Hundreds of millions of dollars. You know, this is the real deal.

The stakes are a lot higher. There were high hopes, but there would be big challenges ahead. A computer glitch, a court case, and a free fall in the value of Bitcoin would contribute to the unraveling of the company. And as this happens, people will wonder, were the odds stacked against a company trying to go legit?

Or was Jerry scamming people from the beginning? He shouldn't have pretended to be a competent holder of money. He either lied about his competence with people's money, or he lied about his morality. I guess that's why this is all such a mystery. Because most of the things that are, you know, mysterious facts that we can't quite know, have arguments for both sides that like, was it this or was it this? And, you know, a lot of the arguments for like the unlucky circumstances side of like, yeah, man, that just one thing went wrong after another.

And that Murphy guy took us down. I'm Takara Small, and this is A Death in Cryptoland. Chapter 3. Cracks in the Empire. He was a very interesting kid. Ran a few projects together, and eventually we settled in Vancouver. And at one point, Jerry mentioned wanting to run an exchange. So I provided the seed funding to Jerry to launch Quadriga. That's Michael Patron, Quadriga's co-founder. He's on his cell from somewhere in

Thailand. One of our co-workers spoke with him not long after the news came out that Jerry had died. Michael's nickname for him had apparently been Sunshine. Yeah, he was like a ray of sunshine. The guy just always had a big goofy smile and laugh. He used to go to crack jokes all the time. He used to say he didn't open up to many people, but he was able to open up to me and he was like a little brother to me had a disagreement over the company. A huge fight, Michael calls it. But that would come later. Those first couple of years, they saw only successes.

This is Jerry being interviewed at an industry convention in the Bahamas, talking up his credentials. So one of the differences between QuadrigaCX and a lot of our competitors is that I come from a background where I've dealt with digital currencies in the past. So I know the challenges that Bitcoin exchanges and any sort of digital currency faces. He describes their meteoric rise. So over two years, we began in December 2013. describes their meteoric rise. So over two years, we began in December 2013. We've gone from zero market share to now 80% market share, as most of our competitors have fizzled out.

And he had bigger ambitions. For Quadrigo, we're seeing quite a bit of blue sky. So as we expand globally and are able to tap into a lot of that market, we'll be able to grow and our profits will increase dramatically. But in order for the company to grow, Jerry needed to change the optics, build public trust. Bitcoin had a bad rap, so he registered with Canada's anti-money laundering watchdog, Fintrack. And less than a year after they formed the company, they had the idea to list Quadriga on the Canadian Securities Exchange. We're going to start off by highlighting a few companies in the Toronto space that

are involved in crypto. It all began one mild winter's evening in 2015, on St. Patrick's Day. We're going to start off with Gerald Cotton from Quadriga. A little more than a year after founding Quadriga, Jerry has left Vancouver and is now in Toronto. Gerald, are you around here? He's a guest speaker at a conference. Thanks, Anthony.

It's a pleasure to be here tonight in front of such a huge crowd that's so enthusiastic about Bitcoin and other decentralized technologies. Jerry's hair is neatly combed back. He's standing stiffly in a dark suit, a crisp white shirt, and a blue tie. He describes how the company started off pretty small, but that their fortunes are changing. And over the past 12 months, we've exchanged more than $25 million worth of Bitcoin. He talks up Quadriga a bit more. Then he pauses. He's got news.

Anyways, I'm thrilled to be at this event. I see it as a pivotal moment in the Bitcoin space. It's basically a new chapter as we move towards the mainstream financial industry. He smiles modestly and then exits. Stage left. Thank you. The little Canadian company that could. It would have been huge,

the first cryptocurrency exchange in the world to go public. Michael took charge of getting the company listed. He thought it would bolster their reputation. This would create a lot of trust and make Quadriga the most trusted crypto exchange, ironically. In case you missed that, he says it's ironic, because he thought it would make Quadriga the most trusted crypto exchange. A move to legitimize a space tainted by scandal.

But going public would never come to pass. Bitcoin was very common with, essentially, criminals in its early days. I'm on a video call with Alexandra Posadzki. She's a business reporter with the Globe and Mail newspaper in Toronto. She's got strikingly red curly hair and big glasses. When Bitcoin was first invented, she says it didn't have a good reputation. It was very often used to launder money. So, you know, to move proceeds of crime because it has a sort of pseudo anonymity built into it, which means in the early days, if I wanted Bitcoin, I could open an account at one of these exchanges.

And very often they would take very little or even no steps to actually verify that I am who I say that I am. And so even though every single Bitcoin transaction is actually technically public, it's recorded in this public ledger that anyone can witness, you know, that shows this user sent this amount of cryptocurrency to this other user, you wouldn't know who the users behind these accounts were necessarily. And so for that reason, Bitcoin was very common with essentially criminals in its early days. It's kind of interesting because right now the regulation on Bitcoin in Canada is a total gray

area. Oh, it's like the Wild West. It is because Bitcoin isn't a real currency. Right. As far as the government is concerned. This is Jerry on that podcast we mentioned before, the one called True Bromance. And in this episode, they've got the young CEO explaining his company. A business that's so groundbreaking, even the government doesn't know what to think of it. And as far as money laundering is concerned, it only matters when it comes to real currency. Therefore, just the way the legislation is written, they want to do something about it, but until the government changes the legislation,

there's nothing they can do. So as far as the government's concerned, it's monopoly money. Exactly. That being said, I'm being proactive with the regulations. Because obviously they are going to impose new regulations in the near future. I don't want to be sort of left out in the cold without any of these things set up. So basically I've done a bit more than I have to do. Yeah, you've gone above and beyond.

Exactly. Jerry makes sure they know Quadriga is registered with Canada's anti-money laundering watchdog. Then he describes how this is supposed to keep his company in check. So if someone walks into our office with 40 grand cash, we do get their ID. Yeah. And do you have to mail that in to the FinTrack and say, this person came in? No,

we don't actually. FinTrack has told us don't mail it to us. Don't. Oh, really? Just in case of an audit. So you keep all the records and then they could come in and you'll have a list of all.

Exactly. So in the event they're like, so-and-so criminal came into your place last week and did this. Yeah. I can be like, I complied. I more than complied with the regulations. Yeah.

And so forth. Oh, so you would never stop anyone like oh well i would obviously stop someone if it was a blatant like case of fraud or but if someone came in and they had like a hundred grand and it was some random person and they weren't a big gold chain and they got tattoos all over their face and many piercings. No, like, would you take the $100,000 or no? I mean, that's a kind of ridiculous scenario. Well, no, but... The odds of someone walking into my office without my...

But if that happened, would you take the $100,000 or no? Legally speaking, I'd comply with all of FinTrack's requirements, and I would. Okay. Yes. There's a bit of dead air. I mean, that's a lot of cash, Jerry. And then he adds a caveat. Generally speaking, for my clients who might be listening,

please don't do that. I'd rather a bank transfer so I'm not walking out of the office with $100,000. Ah, yes, yes, yes, yes, yes, yes, yes, that's true. In the run-up to Go Public, Michael Patron hires a consultant to help raise the money for the initial public offering. Here's Amy Castor, the freelance journalist in the U.S. And they raise a bunch of money. They raise like $850,000 Canadian dollars from some major Canadian brokerage houses. But, you know, it never takes off. It never happens. Instead, they burn through all the money. And by June 2015, the company has just run out of money. It's lost 45% of its market

share, holding to Patron. And Patron gets pissed off and he blames. And Michael launches a lawsuit against the consultant, but it never really goes anywhere. It's at this point things get a little more interesting. Quadriga appears to morph. So Michael Patron steps away, as far as we know, what we're told, he steps away from Quadriga in 2016. He says it's because he disagrees with Gerald Cotton's decision to call off the listing of the company. What they're saying is that he wanted to continue to take the company public and Gerald didn't want to. So they couldn't come to terms on that. So they parted ways. And at the same time, a bunch of Quadriga's directors stepped down, all at once.

And then at that time, from then on, you know, Quadriga is sort of becomes this one-man show. Gerald Cotton taking care of everything and running everything from his laptop. He's got a couple contractors that are helping him out. But mostly all the major decisions, everything is coming from Gerald Cotton. Mr. Cotton, yeah. Mr. Cotton and his laptop. So from then on, I mean, that's the narrative, at least, that we've been told by Cotton and Quadriga that Padner stepped down, and now it's just Gerald Cotton doing whatever he wants to do.

Cotton doing whatever he wants to do. People close to Quadriga inside were supportive of Jerry taking control. Andrew Wagner is that Bitcoin believer in Vancouver who knew both Jerry and Michael. He says many of them thought it was for the best. Up until then, it looked like Michael

had control. We thought it was going to be better, but I think it was worse. In 2017, it felt like drugs were everywhere in the news. So I started a podcast called On Drugs. We covered a lot of ground over two seasons, but there are still so many more stories to tell. I'm Jeff Turner, and I'm back with season three of On Drugs. And this time, it's going to get personal. I don't know who Sober Jeff is.

I don't even know if I like that guy. On Drugs is available now wherever you get your podcasts. Although Jerry bragged about going out of his way to comply with regulations, it looks like he actually ignored them. And the British Columbia Securities Commission says that Quadriga is now banned from selling securities altogether. And they issue a seized trade order so that, because apparently Quadriga has not submitted

a financial audit for 2015. And all the regulatory filings, all the legit things that a Quadriga should have been doing sort of stopped. In those texts which were leaked online, Jerry tells his operations manager, Aaron, that he hadn't renewed his FinTREC registration when it came due because it was more hassle than it was worth. An auditor had turned up at their office in Vancouver. Normally, Bitcoin companies weren't allowed to register with Fintrack.

The regulatory agency wasn't set up to deal with digital currencies. So Kodriga arranged to offer the option to exchange U.S. dollars for Canadian. And that qualified them. But then there was this audit. Jerry laughs about it in his text, saying, the girl who did it was about 25. She wanted to learn about Bitcoin. And that,

she only wanted to see our Canadian to U.S. conversions, which we had none because no one used that service, lol. So with no one watching, Jerry carried on with business. But there would be obstacles. Some Jerry could have predicted, others not. One of the big issues that Quadriga faced when it launched was that it couldn't get banking. Banks don't want to deal with companies that are associated with cryptocurrency. So since they couldn't have,

Quadriga itself could not as a business set up a bank account. What it had to do was it had to find workarounds. And it found these workarounds through what are called payment processors, right? Payment processors are third parties. In this case, individuals or numbered companies, which would open bank accounts on behalf of Quadriga. The bank won't know what the money's for. Maybe they tell the bank a different story, like it's for real estate or whatever.

And then if you are a Quadriga customer, you want to send money to Quadriga, the exchange would then direct you to send money to one of these bank accounts set up by one of their third-party processors. Over time, Quadriga worked with more than 10 of them. But in early 2018, troubles began with one of Quadriga's processors.

One of Canada's major banks, CIBC, observed some strange activity with a number of accounts. So the bank noticed that in this brief period of a couple of months, I believe between like December and February, period of a couple of months, I believe between like December and February, they got this influx of money into these accounts that were operated by this guy. I think it raised a red flag for them just to have, I think it was like north of $60 million kind of flooding into these bank accounts all at once from hundreds of different sources. So that was kind of unusual. CIBC had received some requests from Quadriga customers who had wired money to accounts belonging to the processor. But now these folks wanted their funds back. So the bank takes a look, but they can't figure out who the money belongs to. And, you

know, they notice some of the money's being put into some of his personal accounts, too. And so they see this sort of funny business happening. And so they freeze all these accounts. Accounts worth over $26 million Canadian. Money Jerry would have been counting on. CIBC then goes to the courts to help decide who all this cash belongs to. And this came just months after the company had lost 10 million bucks worth of a cryptocurrency called Ether. A software bug had permanently frozen hundreds of millions worth of assets worldwide. Not only that, the value of Bitcoin was changing. After hitting a high of nearly 20,000 US, like a roller coaster, it rounded a peak and then things really had itself.

Bottoming out below $3,500 US. In 2018, the price began to crash, so people were anxious to sell their assets so they could realize their profits. When they went to go take their money off of Quadriga, they couldn't get it off because Gerald Cotton didn't have the cash to fund their withdrawals. It was very slow getting funds out of Quadriga. I'd been through that kind of situation a couple of times before with other exchanges. QCX Ant is the Quadriga customer-turned-sleuth who lost hundreds of thousands of dollars. He says initially he didn't see the red flags. This happens all the time in crypto.

It was business as usual. It's annoying, but, you know, we'll deal with it. With so much of his cash on the exchange, he was directly in contact with Quadriga's director of operations. The lines of communication were good. And Aaron Matthews was reassuring, you know, other traders and including myself that, yes, we've got a backlog of processing. We've got funds that are held up in this court case, you know, the notorious case where

25 million of their funds had been frozen, which was true and verifiable. So he believed them, even sympathizing with the company's bank problems, because that part of the story was true. It just wasn't the whole story. Jerry was hiding something. Alexandra Posadzki was hearing from Koduga customers who were upset. They were having trouble getting money out of the exchange. So they had requested to get their money and then had waited weeks or even months and hadn't gotten their money yet. And they were very frustrated. So they wrote in to me asking if I could help them.

This piqued Alexandra's interest. It sounded like a story. Coincidentally, she and Jerry had gone to the very same school at the exact same time. I know we had mutual friends in common on Facebook. So Alexandra emails with Jerry. When I asked him about this $28 million that had been frozen, he told me that it was because of the bank and the banks don't like Bitcoin and the banks are so threatened by this new business model. And that was really interesting.

He very clearly had this sort of this perspective on the sort of financial system and the banking system and at least seemed to believe very strongly in what crypto stood for in terms of being this kind of stateless, unregulated, decentralized form of value transfer user to user. And he felt very strongly that the banks were sort of discriminating against him because they felt threatened by this new form of commerce. And I think he also praised me for spelling his name right, because Cotton very often autocorrects to C-O-T-T-O-N, and his spelling was C-O-T-T-E-N.

So Jerry blames the banks for his troubles. And Alexandra says he seemed sincere. My impression from that exchange was that he was a genuinely nice guy. And I guess I got sort of duped a little bit because I walked away from it almost, almost believing him, you know, that there was maybe nothing untoward happening here, that this was just kind of a run of the mill crypto problem. I think he handled it really well. I mean, in retrospect, I think it was just a very brilliant move on his part because, you know, when I had told him that these people were having issues

getting money out of his exchange, he said, oh, well, why don't you let me know if they're willing to kind of share their names so I can resolve it. So he sounded like he wanted to help. Alexandra reported on the court case, but it makes her a little uneasy. I think that they were using the asset freeze as the sort of sole explanation

for why people couldn't get their crypto or their money out of the exchange. And having a story show up in the Globe and Mail saying that CIBC had frozen their money kind of legitimized their, well, Jerry's alibi on this. You know, he could point to this story in a mainstream media publication and say, well, it's the evil bank that won't let you have your money back. It's not us at Quadriga. And so I almost feel a little bit guilty for that because I don't like to think that perhaps my reporting on this legal battle between Quadriga and CIBC, which was all entirely true and accurate, but still inadvertently may have kind of reassured people that this exchange was a legitimate business and safe to transact with. was a legitimate business and safe to transact with.

And that's exactly how Jerry appears to have taken it. In those leaked texts with his director of operations, he seems delighted by the news coverage. He writes, I actually think the Globe and Mail article helped us quite a bit because it legitimized all of the issues. Before, it was me saying the banks were causing issues. Now it's a giant newspaper saying that CIBC stole money from us. LOL.

The article doesn't actually say that, but clearly Jerry saw it as a help. Because in reality, there were other secret reasons for why Jerry was struggling to pay out customers. And so they had all this money tied up. I don't think they were able to process withdrawals. And so I think they started resorting to very shady methods of moving money due to their normal channels being closed on them. Quadriga was instructing some of his customers to send their money to processors with bank accounts in foreign countries.

I got a text message from a family friend asking for clarification because they were trying to make a deposit into Quadriga and they were just told to send their dollars to a bank in Poland. Michael Perklin had recommended Quadriga to a lot of family and friends. I liked the fact that if something went wrong, I could just send a text message to Jerry. A family friend was concerned about making a wire transfer to Poland. They wanted to know if this was legit or a scam. So Michael Perklin asked Jerry about it. Jerry responded saying, yep, it's fine. We are using a Polish account for that. Your friend can make that deposit. So I responded to my friend saying, yep, I just talked to Jerry.

He said it's legit. So go ahead, send your money to Poland. It was a little bit strange, but it wasn't completely out of the realm of normalcy. And when I heard Jerry say, yeah, that's fine. Your friend can feel safe giving his money to that Polish bank account. Okay, well, he's the CEO. He's Jerry. He's been in my home. I know this guy. He wouldn't lie to me. been in my home. I know this guy. He wouldn't lie to me. Odd bank accounts, unusual delays getting money. People were now doing a double take, looking more closely at Quadriga. Now, in the Bitcoin industry, when an exchange experiences delays and withdrawals, that's usually the first warning sign of some bad news. Now, it's not always,

and sometimes delays happen, and they're just delays. But he points to a legendary story in the Bitcoin world, the tale of the collapse of Mt. Gox, a Japanese exchange that lost over $470 million U.S. worth of Bitcoin to a Russian hacker. Its CEO was found guilty of producing false records. In the case of MT Gox, those delays were a result of MT Gox not having the money to send those customers requesting the withdrawals. So the delays were stall tactics waiting for other people's deposits to come in so they could be forwarded to the withdrawers. Kwojiga's customers were on high alert. Around that time, I was also hearing these sort of crazy rumors swirling around this company. Just some really bizarre stuff. Rumors about Quadriga's co-founder Michael Patron, previously only whispers in the Bitcoin community, spread to Reddit.

And so according to these rumors, Michael Patron had once lived in the U.S. under a different name. That First from Omar Danani to Omar Patran and then from Omar Patran to Michael Patran. In January of 2018, a year before Jerry's reported death, someone on Reddit posts, quote, Quadriga CX run by fraudster Patran, a.k.a. Omar Danani. Someone on Reddit posts, quote, It was a big, bold post, accusing Michael of hiding his past and his real identity. Andrew recalls how the rumors started. What really happened was someone he made an enemy of figured out that he had changed his name and become famous in the Bitcoin community and set upon himself to ruin Mike's reputation in the Bitcoin

community by dredging up everything from his past. A lot of forum posts, a lot of screenshots. And remember, Patron said he'd left the company by then, a fact that was repeated by the company on Reddit. We must have ruffled someone's feathers. This guy is posting hypothetical nonsense about someone with a different name of someone who left our company more than two years ago. Michael denied all of it. It was a case of mistaken identity, he said. But Andrew believed what he was hearing. And his relationship with Michael changed. Eventually, I stopped being friends with him. Just because he wasn't being very honest. You know what I mean? Like, who he was, his past, what he's done.

And that just didn't jive with me. You know, like, if he had told me, Andrew, I did some terrible things in the past, here they are, X, Y, Z. I would have been like, well, okay, everyone has a past. But he didn't do that. He didn't tell me at all. And I found that offensive, so I ended the friendship. And I found that offensive, so I ended the friendship. Michael Patron decided to do something about those posts.

At one point, he had hired this company called Reputation.ca, which is basically this company based in Toronto that will help you bury bad Google search results and promote more positive content. The problem was that when you Googled his name, that Reddit post calling him a fraudster would pop up amongst the very first results. He agreed to pay Reputation.ca $3,500 a month for a limited period of time to clean up his online profile. According to court documents, because that's where things landed, the company says it created 10 websites which included positive content about Michael, pushing the bad stuff further down the Google queue.

But Michael wasn't satisfied and sued. And then when we contacted them, they actually said that they failed to vet Patrick properly when they took him on as a client. Eventually, the claim was settled. Publicly, Michael has denied that he was either Omar Patron or Omar Danani. One of the things online is this rumour that you actually go by, or went by a different name in your past. Do you have any reaction to that? Yeah, I've been seeing that online for many, many years.

Unfortunately, there's not much you can do about slander over the internet from these people. It's just internet rumors that unfortunately does happen in the crypto space. Next time on A Death in Crypto Land. He ended up going to a federal penitentiary, which is super uncommon. In America, if you get caught doing something bad, you're going to go to a local jail. Unless you do something really fucked up, then you go to a federal prison. And Omar went to a federal prison. A Death in Cryptoland is hosted by me, Takara Small, and written and produced by Joan Weber and Enza Uda. Eunice Kim is our associate producer. Sound design by Natasha Aziz and Graham McDonald.

Our digital producer is Emily Connell. Special thanks to Dave Downey, Cecil Fernandez, and Yvette Brent for her reporting and interviews with Michael Patron. Legal advice by Sean Moorman and fact-checking by Emily Mathieu. Chris Oak is our senior producer, and the executive producer of CBC Podcasts is Arif Noorani. If you're looking for another podcast to listen to, check out Uncover from CBC Podcasts.

Each season investigates a different story, from the NXIVM sex cult to the satanic panic of the 1980s. Find Uncover on the CBC Listen app or wherever youca slash podcasts.