This communication is to give you an update on (1) ongoing cryptocurrency asset tracing; (2) timing for distribution; and (3) website updates.
(1) Retention of Kroll Associates Inc.
On August 17, 2020, at the direction of the inspectors of the bankruptcy estate of Quadriga and its related entities (the “Inspectors”), the Trustee retained Kroll Associates Inc. (“Kroll”) to conduct further analysis on a subset of transaction data.
The Inspectors and the Official Committee have been working with the Trustee over the past eight months to obtain and consider proposals from third party crypto-currency asset tracing firms to conduct certain additional forensic analysis.
After conducting diligence and carefully reviewing proposals, the Inspectors directed the Trustee to select Kroll to conduct this additional forensic analysis.
Kroll, a division of Duff & Phelps, is a leading global investigative consultancy firm. Founded in 1972, Kroll has conducted thousands of wide-ranging internal and external investigations related to fraud, bribery, and corruption, and is a recognized leader in conducting complex financial and asset search investigations internationally. Kroll’s resources include nearly 3,500 professionals in 70 offices and 28 countries. Kroll’s global team – including former prosecutors, forensic accountants, former law enforcement officers and cryptocurrency experts, among others – has decades of experience conducting complex investigations.
Kroll is working on this assignment in collaboration with its strategic partner Coinfirm, a global leader in AML and analytics for cryptocurrencies and blockchain. Since being founded in early 2016, Coinfirm has created a powerful analytics engine for blockchain tracing exercises. The Kroll/Coinfirm partnership will use a combination of professionals as needed with experience in cryptocurrency, asset tracing/searching, asset recovery, fraud investigations, and data analytics.
The key terms impacting Affected Users are as follows:
Scope: Analysis of specific subset of data. Due to confidentiality, no further comment will be made on the specifics of Kroll’s engagement (the “Engagement”).
Fees: Fees are capped at a maximum of $50,000 USD.
Indemnity: There is a contractual indemnity provided by the Trustee in favour of Kroll which has capped the Trustee’s indemnity at $150,000 USD (three times the professional fees).
In Representative Counsel’s view, the indemnity provision is highly unlikely to have the effect of delaying distribution. The Trustee’s obligation to indemnify Kroll expires on the earlier of:
- 1 year after completion of Kroll’s Engagement and any additional work if instructed to do so, and payment of Kroll’s fees; and
- the Ontario Superior Court of Justice (Commercial List) grants a court-ordered release in favour of Kroll.
Due to the sensitive nature of these transactions, as well as the ongoing involvement of law enforcement, Representative Counsel will not be providing further public comment on Kroll’s retention.
As a secondary update, Representative Counsel has forwarded the information gathered from Affected Users regarding Crypto Capital to the Trustee to add to the information that the Trustee had already collected to date regarding Quadriga’s activities and affairs. Representative Counsel understands that based on the Trustee’s review of the information provided by Affected Users and information in its possession, there is currently insufficient evidence to establish that Crypto Capital owed any funds to Quadriga as of the date of bankruptcy.
If new information arises regarding funds owed to Quadriga by Crypto Capital as of the date of bankruptcy, the Trustee will consider recovery avenues available to the Quadriga estate.
(2) Timing for Distribution
Under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), as required by the Inspectors, the Trustee will declare and distribute dividends to unsecured creditors with valid claims from time to time. However, where there is or may be a claim by a taxing authority (such as the CRA), some additional requirements are imposed.
Practically, in Quadriga’s estate, in order for the Trustee to be able to distribute funds, the following needs to occur:
- Final determination of unsecured claims; and
- Completion of the CRA Audit.
Under the BIA, the Trustee is responsible for examining proofs of claim and wholly or partially allowing or disallowing them. The Trustee may also disallow any right to priority claimed by a creditor. If a Trustee disallows a claim, the creditor has the right to appeal the Trustee’s decision to a court within 30 days of receiving written notice of the Trustee’s decision.
In its Interim Claim Status Report dated May 12, 2020, the Trustee reported receiving 16,959 proofs of claim. The Trustee advised that they continue to receive and review proofs of claim.
Each claim will have to be determined. Depending on the nature of an Affected User’s claim, an Affected User may only have indicated on their proof of claim that they agree with the quantum of their claim according to Quadriga’s books and records, as disclosed by the Trustee on the claims website. Representative Counsel does not anticipate a significant expense or delay from the determination of such claims.
In other instances, such as Affected Users with a completed withdrawal or pending withdrawal claim, the Affected User was required to provide documentation satisfactory to the Trustee in order to prove their claim. Representative Counsel anticipates that such claims will require time and expense to determine as the evidence provided by an Affected User will need to be individually assessed by the Trustee and/or its counsel.
The final determination of unsecured claims will also require the Trustee to address certain proofs of claim that have technical deficiencies, such as a lack of a signature, claim status issues, and improper claims to priority. The Trustee has advised that it anticipates to address these technical issues by way of a court order. Representative Counsel supports this approach; the alternative would be an expensive back-and-forth process between the Trustee and each applicable creditor to address these technical deficiencies.
The most material impact on the speed of distribution will be the CRA’s audit of Quadriga’s tax liabilities. On April 14, 2020, the Court granted an order authorizing the Trustee to comply with a production demand made by the CRA for the purpose of completing an audit. The Trustee complied with the production demand by providing the CRA with a copy of the database. The CRA has advised Representative Counsel that they are reviewing the information received by the Trustee. The CRA did not confirm a timeline of when the CRA Audit will be completed given the COVID-19 pandemic.
(3) Website Updates
Please note that Representative Counsel regularly updates its website at https://www.millerthomson.com/en/quadrigacx/ with status updates for Affected Users, alongside more significant email communications that are sent out directly to Affected Users.
Representative Counsel is committed to responding to Affected Users, rather than members of the general public or the media, and notes that email is the preferred form of communication with Representative Counsel. Further instructions on how to contact Representative Counsel, along with other FAQs, can be found on Representative Counsel’s website.