The Globe and Mail - 25.11.2019

A8 O THEGLOBEANDMAIL| MONDAY,NOVEMBER25,

I

n the summer of 2003, Gerald
Cotten joined a web forum
that exposed him to a roiling
world of shadowy digital curren-
cies and outright financial scams.
Mr. Cotten, who had just finished
ninth grade at a high school in
sleepy Belleville, Ont., tapped in
the username “sceptre” and re-
vealed nothing else about him-
self.
He soon became enthralled
with the bustling site, known as
TalkGold, where fly-by-night pro-
moters and gullible investors
could connect. Mr. Cotten made
nearly 2,000 posts over the next
decade. Hidden behind fake
names and software to obscure
his location, he experimented
with shady ventures of his own
and pushed them on the forum.
Mr. Cotten’s early online activ-
ities, which are previously unre-
ported, proved to be an educa-
tion of sorts. He apparently
launched several schemes – and
occasionally ran into trouble. “I
sincerely ask that everyone re-
main calm,” reads a post from his
sceptre account in 2004, when he
was just 15, in what looks like a
scramble to return money to at
least 235 investors.
That education also gave Mr.
Cotten the wile and the nerve he
needed for the business he even-
tually co-founded and operated
as an adult: QuadrigaCX.
Launched in late 2013, it became
Canada’s largest cryptocurrency
exchange.
Quadriga collapsed dramat-
ically this past January, a month
after Mr. Cotten died at age 30 on
his honeymoon in India due to
complications from Crohn’s dis-
ease.
When he died, he took his se-
crets with him, including how to
access $214.6-million in funds be-
longing to roughly 76,000 users.
Only he knew where the crypto-
currency – and the passwords
needed to unlock it – were locat-
ed. Quadriga, which he ran most-
ly on his own from his Halifax
home, is now in bankruptcy pro-
ceedings.
In June, Ernst & Young LLP, the
court-appointed trustee oversee-
ing the proceedings, provided the
first real glimpse of what Mr. Cot-
ten was doing behind the glow of
his computer screen. The young
CEO transferred large volumes of
customer funds into personal ac-
counts and racked up big losses
trading on other cryptocurrency
exchanges.
Mr. Cotten also used money
from Quadriga to fund an indul-
gent lifestyle, travelling the world
with his wife, Jennifer Robertson,

often flying on private jets. The

couple acquired about $12-mil-

lion in assets, including more

than a dozen properties, a Cessna

airplane and a yacht.

Over three years, Mr. Cotten

liquidated $80-million worth of

bitcoin through an offshore ex-

change, some of which came

from Quadriga.

So far, Ernst & Young has

tracked down just $33-million of

the total owed to users, and the

RCMP and the U.S. Federal Bu-

reau of Investigation are con-

ducting probes.

Last month, Ms. Robertson

agreed to transfer nearly all of her

assets to Ernst & Young for liqui-

dation and released a statement

saying she was unaware of her

husband’s “improper actions”

while managing Quadriga. “I was

upset and disappointed with Ger-

ry’s activities as uncovered by the

investigation when I first learned

of them,” she said.

To those who knew Mr. Cotten,

the news of his death and the

mess he left behind was shock-

ing. The small group of friends

and family who gathered at his

closed-casket funeral on a brisk

day in Halifax knew him as an af-

fable cryptocurrency obsessive

with an easy smile, who was set-

tling into a life of domesticity

with his wife and their two Chi-

huahuas. (The dogs were at the

funeral, too.) Some still find it

hard to fathom that Mr. Cotten

could be so reckless.

Michael Perklin, the chief in-

formation security officer at

cryptocurrency exchange Sha-

peShift.io, occasionally had

lunch with Mr. Cotten and the

two played board games togeth-

er. Mr. Perklin was a Quadriga

customer, too, and recommend-

ed it to his father, brother and sis-

ter. All of them lost money.

“I feel cheated,” he said. “As it

turns out, I befriended this crimi-

nal, this guy who ultimately stole

from my family, my friends and

me.”

But an online trail, pieced to-

gether over the past several

months through interviews and

by analyzing e-mail addresses, IP

addresses, archived websites, do-

main registrations and corre-

spondence, reveals a pattern of

deceitful behaviour. Mr. Cotten, it

appears, had experience.

As a teenager in Belleville, about

a two-hour drive east of Toronto,

Mr. Cotten never made a secret of

his interest in computers and his

talent for developing websites.

Sometimes, though, he seemed

reticent. “As smart as he was, he

was introverted,” said Kevin

Song, a friend from high school.

“He kept a lot of things close to

his chest.”

Mr. Cotten didn’t share any-

thing about his life as sceptre or

what he was doing on TalkGold.

The Globe and Mail determined

the account belonged to him

through an e-mail address. One

of four addresses used by the ac-

count’s owner was

[email protected]. Mr. Cotten

also used that address to order

services in his own name for one

of his websites, according to doc-

uments reviewed by The Globe.

In January 2004, when Mr. Cot-

ten was 15, he apparently

launched a website called S&S In-

vestments and promoted it on

TalkGold. S&S was known as a

high-yield investment program

(HYIP), a bizarre cross between a

Ponzi scheme and online gam-

bling that littered some corners

of the internet at the time.

The creator of an HYIP, almost

always anonymous and unlicens-

ed, would set up a website pro-

moting a vague investment strat-

egy, promise exorbitant returns,

advertise in forums and through

social media and accept deposits

through digital currencies. That

part was key. Digital currencies,

even before bitcoin was launched

in 2009, allowed for anonymity,

so operators could hide profits

outside regulated financial sys-

tems. Transactions were also irre-

versible, leaving no recourse for

investors who wanted their mon-

ey back.

PHOTOILLUSTRATION

BYTHEGLOBEANDMAIL

The Securities and Exchange

Commission in the U.S. has

warned HYIPs are “often frauds,”

and the schemes followed a pat-

tern. A typical HYIP paid interest

for a while using funds from new

investors, then vanished. Accord-

ing to a 2012 academic study by

U.S. authors, the median lifetime

of a HYIP was just 28 days, and

the average investment was

about US$1,000.

Some investors were genuine-

ly duped. But others knew HYIPs

were fraudulent and figured that,

by getting in early and then with-

drawing their money before a

program collapsed, they could

profit at the expense of less savvy

participants.

Like many HYIPs, the website

for S&S contained little informa-

tion but boasted returns of up to

150 per cent. The program accept-

ed deposits through e-gold, an

early digital currency eventually

shut down by U.S. authorities.

Some of the disclaimers on the

site were comically amateur. “All

I will say is that we will generate

your return and that we are not

what is called a ponzi or pyramid

scheme,” one said. (The line was

removed on later versions of the

site.) Despite the blinding red

flags, the website built up an in-

vestor base.

After a few months, S&S

seemed to run short of funds to

repay more than 200 investors.

On TalkGold, sceptre pleaded for

time. “If a threat of any kind is

made...you are stating that you

do not wish to receive a refund

and you will not receive one,”

one post said.

Some investors said they had

only risked tiny amounts, but

others said they put in hundreds,

even thousands of dollars. One

user claimed to have bet $3,000.

“I knew what I was getting into,

but my judgment regarding tim-

ing was extremely poor,” the user

wrote on TalkGold.

While sceptre was ostensibly

trying to refund investors, Mr.

Cotten apparently started anoth-

er HYIP called Lucky-Invest and

created a new TalkGold account

to promote it. But at one point,

he seems to have forgotten which

account he was using and an-

swered a post directed at sceptre

while signed in under his new

handle.

Users immediately noticed.

“I’m not trying to hide,” sceptre

claimed. “My profits go to help

pay refunds,” he said of the new

program.

By May, 2004, the S&S website

was no longer online, and soon,

sceptre stopped responding to in-

vestors on TalkGold. Some post-

ed they had received their money

back, while others were frustrat-

ed by the silence. “Waiting...like

a sheep waiting for his flee[c]e to

grow back,” one wrote.

Still, Mr. Cotten continued to

use the alias sceptre. “Nice work

with S&S,” another TalkGold user

FOLIO

BeforeQuadriga:

Howshadyventuresin

GeraldCotten’syouthledto

thecreationofhisill-fated

cryptocurrencyexchange

Evenat15,hewassellingget-rich-quickschemesononlineforumsthat

taughthimhowtodeceiveinvestorsandcoverhistracks.Nowhe’sdead,and

thesecretsofQuadriga’smoneyaregonewithhim–butthedigitaltrailof

hisearlyventuresisstillhere.TheGlobespentmonthsfollowingwhereitled

MichaelPerklin,thechief

informationsecurity

officeratcryptocurrency

exchangeShapeShift.io,

wasfriendlywithMr.

Cotten.Mr.Perklinwasa

Quadrigacustomer,too,

andrecommendeditto

hisfather,brotherand

sister.Allofthemlost

money.ROSSTAYLOR/

THEGLOBEANDMAIL

TheCessnaowned

byGeraldCottenisseen

attheTruroFlyingClub

inDebert,N.S.,in

February.Mr.Cottenand

hiswifeacquiredabout

$12-millioninassets.

DARRENCALABRESE/

THEGLOBEANDMAIL

JOECASTALDO
ALEXANDRAPOSADZKI