FINMA papers: summary of the internal investigative report

The official FINMA decree (Verfügung) and the follow-up investigation report (Untersuchungsbericht) by GHR lawyers from Switzerland have been leaked. See our previous article for the original documents.

[PREFACE]

This is a summary of the internal investigative report of Swiss law firm GHR, which was engaged as the appointed investigator (“Untersuchungsbeauftragte”, “UB”) for FINMA (Swiss financial markets authority) in regards to the investigation of Envion AG (“Envion”) in mid-2018.

The purpose of this document is to establish a comprehensive fact sheet based on official data and relevant to Envion investors. Please be aware that the underlying report is dated October 16th 2018. Therefore, any events which occurred after this date are not reflected in this document.

The report is very extensive (66 pages) and detailed. In our summary, we concentrate on the findings that we deem to be most relevant for Envion investors. Some of the omitted bits of information are interesting and educative to fully understand the Envion history, but do not cross the relevancy threshold in our eyes, and as such are discarded for the sake of brevity. Please read the full text for that purpose.

We have subjectively highlighted some of the findings in bold. The criteria for highlighting are superior importance and/or novelty in regards to public knowledge.

The summary is largely following the structure of the original report, i.e. we do not cluster findings thematically, in order to stay true to the structure of the document. This sometimes causes duplication. Please use the original document alongside this summary if you wish to understand the logic structure of the original report. Numbers are rounded for readability.

UB = Untersuchungsbeauftragter (Appointed Investigator)
ML = Michael Luckow
MW = Matthias Woestmann
CS = Cyrill Staeger
MJG = Marc Jason Gurov

[REPORT SUMMARY]

1. The abovementioned persons were interviewed by the UB at the beginning of the investigation. (p.8–11)
2. ML was ordered by UB in early August 2018 to hand over documentation in relation to the Envion ICO. He did not fully comply with this demand. (p.9)
3. MW fully complied with the same demand. (p.10)
4. CS fully complied with the same demand. (p.10)
5. All (known) accounts of Envion AG (FIAT and Crypto) were frozen on instruction of the UB. These accounts include accounts at Bank Frick & Co. (Liechtenstein), Bitcoin Suisse (CH) and Postfinance (CH) as of July 25th 2018. The UB could not secure any other assets (see below regarding MMUs). (p.11)
6. At the time of the FINMA enforcement, Envion was suffering from an “Organisationsmangel” (a lack of mandatory organizational structure which threatens closure by authorities) due to a missing “Revisionsstelle” (mandatory auditor). The UB tried to engage BDO AG as the auditor, but BDO refused. This resulted into the insolvency proceedings against Envion by the Canton Zug. (p.12)
7. At no time, Envion had any (mandatory) FINMA approval regarding regulated activities. They also were not member of any self-regulatory organization. (p.13)
8. Envion lost their mandatory auditor (PWC) on May 14th 2018, upon which they tried to engage BDO as a replacement. BDO finally declined the engagement due to “many open points, unanswered questions, and missing documentation”. (p.13)
9. At the time of the investigation, Envion had no office and no postal address, which in itself is a second “Organisationsmangel”. (p.14)
10. CS described his role as “non-operative” director with no direct role in the ICO. The UB rejects this notion, with evidence for operational and strategic influence of CS on both company management and ICO. CS received CHF 280k in payments during his 5-month period at Envion (e.g. CHF 56k per month). (p.15)
11. CS received an additional “ICO Bonus” payment of US$ 580k, paid on February 16th 2018. Contractually, he was eligible for an US$ 1m bonus (50/50 in cash and tokens). Interestingly, Envion is not the contractual partner of this bonus agreement. Envion bookkeeping records show this payment as being “disputed”. UB speculates that CS, who had full access to Envion accounts, instructed this payment to himself. In any case, UB is suggesting to claim back this payment. (p.15/16)
12. ML played a decisive part in the creation of the Prospectus, the technical execution of the ICO and the operational management of Envion. According to the UB, at times, ML was the sole decision maker of Envion. He directly instructed various law firms (DWF, Morrison Foerster, Kellerhals Carrard) and authorized documents in the name of Envion and its Board. The UB collected vast evidence in regards to this subject matter. The UB assumes ML to be a “faktischer Verwaltungsrat” (“factual board member”) of Envion AG, alongside MW and CS, with full legal responsibility for Envion AG. Additionally, the UB clarifies that until January 25th 2018, ML was substantially involved on the operational management of Envion AG, so that the UB deems ML to be part of the managing board of Envion alongside MW. (p.17–19)
13. On January 22nd 2018, the capital of Envion was increased from CHF 150k to CHF 390k. The CHF240k new shares were signed by Sycamore AG. On February 9th 2018, 121.5k shares were transferred from Quadrat Capital (MW’s investment company) to Trado. (p.19)
14. Interestingly, ML does not own any shares in Trado. Instead, the two sole owners of Trado are Jasper Hellman and Alfred Luckow. (p.20)
15. Both MW and ML agree that it was originally planned that Trado becomes 81% shareholder in Envion after the ICO, via the conversion of a convertible loan agreement over EUR 112k granted by Trado to Quadrat Capital. (p.20/21)
16. The UB states that Trado did not have any statutory rights to participate in the capital increase. There are no indications that the capital increase was unlawful or irregular, and the UB stresses that there is no valid legal recourse against the capital increase. (p.21)
17. The UB further states that the dispute about the capital increase between Trado and Quadrat Capital does not legally affect Envion AG in any way, as it is solely a dispute between independent shareholders. (p.21/22)
18. FINMA first contacted ENVION in November 2017 to disclose information about its activities. This demand was responded to by Envion’s Swiss law firm in December 2017 (p.25)
19. There is only one fully functioning MMU in existence. This MMU is stored in a warehouse in Berlin. Additionally, there are two prototypes, and 10 empty containers in Czech Republic. Total balance sheet value of all mobile tangible assets was CHF 310k, now written off to CHF 1. (p.26/27)
20. The UB notes that this fact is in contradiction to statements in the “Investor Deck” seized by UB, which advertises two functioning MMUs. Also, these advertised MMUs were supposedly generating $44k in January 2018 (p.27), however, the interim financial statements from April 2018 do not record any revenues from MMU operation. (p.28)
21. The UB estimates the acquisition cost of a single MMU to be approx. US$ 100–150k, based on documentation. There is a single bill from Trado to Envion for the delivery of one MMU in the amount of EUR 250k (roughly US$ 300k at that time), which was paid by Envion on January 11th 2018. This corresponds to the recorded balance sheet value (see item 19 above). There is some unclarity about who instructed this payment; CS stated that he is not aware of any MMU-related bills or payments to Trado. (p. 27)
22. The UB assumes that the single functioning MMU is being owned by Envion (as per ML’s statement), not by Trado (as per MW’s statement). (p.27)
23. The UB seized a bill from November 2nd 2017 regarding a patent application for a mobile data center. According to officials, patent protection was secured for Germany, but not internationally. However, the patent owner is not Envion (!). (p.28)
24. The UB highlights that there is a total lack of any contracts, any detailed billings, any order confirmations, or any plans or blueprints for the creation of MMUs. (p.28)
25. The token qualifies as a digital bond (“digitale Anleihe”), and as such is an investment token as per FINMA guidelines. (p.32)
26. ML had sole access to the private keys to the smart contract. MW never had any access to the smart contract. (p.32)
27. Before the ICO, Envion raised money in private placements between October 9th and December 14th 2017 based on SAFT agreements. There are 8 identified SAFT (“Subscription Agreement for Future Tokens”) agreements. (p.33) The UB does not have access to all SAFT agreements (p.44). The UB was able to trace back a total of 20 payments from 14 pre-sale investors (p.46). The total pre-sale volume was CHF 1.15m. In addition, there was a loan from a private investor in the amount of USD 500k. (p.47)
28. During the ICO, there were 4 phases with different offering prices (0.70, 0.80, 0.90, 1.00 CHF per token, respectively). (p.33/34)
29. During the last phase, a new prospectus and subscription agreement (the “Offering Documents”) was released. According to the UB, there is unclarity about the acceptance of the different versions of the offering documents, leading to the question which versions are effective. (p.35)
30. There is no detail about the KYC process in any offering document. The Prospectus references the Subscription agreement, however, there is no further information in the latter. The KYC process was mentioned in various internal documents, but was not defined in detail (p.35)
31. Trado had sole oversight and was solely responsible for the KYC process. Trado partially subcontracted this task to a service provider (“Onfido”). MW and Envion never had any access to the KYC data. (p.36)
32. The KYC database is incomplete. There are only 5 different Excel lists with information about the KYC status of investors (including two from the service provider, dated March 2018, and one from Trado. For details see page 46 of the report). As of October 2018, KYC has not been completed. (p.36)
33. The UB raises doubts about the quality of the KYC checks. (p.37)
34. Envion does not have access to a full list of investors who have completed KYC. (p.37)
35. Envion planned to launch a bounty program, reserving 2% of tokens to this marketing effort. There were no token allocations to bounty participants despite demands from participants. The details of the program were never fixed in writing. The UB did not find any contractual documentation between Envion and bounty participants and assumes there are none. (p.38)
36. Envion signed a deal with a Sofia (Bulgaria) based service provider (“Hypergrowth”) to help with the execution of the bounty program. At least one bill was paid. (p.38)
37. Envion entered into a commission agreement with a Berlin based service provider (“Paranoid Internet”) regarding the placement of tokens with investors. The agreed commission was 12.5% of moneys raised. The agreement was not signed by Paranoid, however, a payment of EUR 18k was made by Envion on November 20th 2017. MW denies that any placement services were used. (p.38)
38. Two of the pre-sale investors received an allocation of 83k and 89k tokens, labelled “Bonus Tokens Founders”. The UB was not able to determine whether this was a commission and whether these tokens were actually delivered. (p.38)
39. The UB clarifies that the subscription agreements (v1 and v2) qualify as “Anleihensbedingungen” supporting the Prospectuses (v1 and v2). In case of conflict, the subscription agreement (“SA”) has preference over the Prospectus (“PRO”). (p.39)
40. The issue price per token in the pre-sale (SAFT agreements) range between US$ 0.17 and US$ 0.45. There was no fixed rule for different prices. The SAFT agreements refer to an issuance of 1 Billion tokens. (p. 40)
41. The investments under the SAFT agreements exclude any repayment of invested moneys. (p.40)
42. The SAs are subject to German law, the PROs are subject to Swiss law. (p.41/42)
43. The SAs include 4 phased token price levels, the issuing terms were therefore not uniform. (p.41)
44. The SAs include a repayment obligation in regards to the investments, subject to either a termination by investors for important reason or the expiration of the 30-year term. Repayment is due in ETH exclusively. (p.41/45)
45. The PROs include reference to the SAs in regards to the repayment obligation and are an integral part to the SAs (p.42)
46. The UB could not determine whether all investors have accepted the 2nd version of the SA (p.43)
47. The 2nd version of the SA, unlike the 1st version, includes a subordination clause in regards to the investments. (p.43)
48. The UB suspects that not all pre-sale (SAFT) investors have signed a SAFT agreement or had access to one. Also, it was not ensured that pre-sale investors took note of the Whitepaper, and they did not have access to a Prospectus. (p.44)
49. It cannot be determined that all investors took note of the 2nd version of the offering documents, and it is assumed that a majority of investors made their decision to invest and made payment based upon the 1st version of the offering document. (p.45)
50. Only the 2nd version of the offering documents include a subordination clause. It is assumed that any investments made based on version 1 of the offering documents are not subject to subordination. (p.45)
51. The token qualifies as an unsecured bond issue under German law.
52. The total number of ICO investors cannot be identified accurately by the UB. There are various lists which are somewhat inconsistent. The available excel lists have different sources. The best plausible estimate, based upon a list provided by Trado, is 37.157. (p. 46/47)
53. Trado has sole access to any data required to assess the number of investors. As of the date of the report, Trado has not finished further clarification in regards to the data. (p.47)
54. The AB had difficulty defining the total amount raised during the ICO. Various parties mentioned different numbers (between US$ 60m and US$ 100m). The Excel lists (see above) available to the UB do not reliably track investment amounts. (p.47)
55. Based upon bookkeeping records, total Credit Card investments amount to USD 16.3m, whereas the corresponding Bank Frick account shows US$ 16.5m. The difference is assumed to be due to chargebacks or XE rates. (p.47)
56. According to bookkeeping records, 46.8k ETH were received during the ICO, however, only 34.3k ETH were recorded on Envion’s corresponding Bank Frick account. Of the 12.5k ETH difference, Envion currently sues Trado for the handover of 9.9k ETH. The UB has no tangible information about the whereabouts of the remaining 2.6k ETH. The UB found some documentation suggesting that 2.4k ETH are somewhat “locked”, with no information whatsoever in regards to 200 ETH. (p.48)
57. According to bookkeeping records, 1,082 BTC were collected during the ICO, however, only 557 BTC were recorded on Envion’s corresponding Bank Frick account. Envion sues Trado for the handover of the remaining 525 BTC. (p.48)
58. In total, across all currencies, and including the pre-sale, a total of CHF 92.7m was raised by Envion. Of these, CHF 21m are in the possession of Trado and claimed by Envion in court (all XE dates: January 14th 2018). (p.49)
59. Due to XE fluctuations, as of 31. August 2018, the value of all investments would have been reduced to CHF 37.2m. (p.49) However, various bank transactions were initiated by Envion between January and August 2018, realizing XE gains. (p.49, also see below item 65)
60. The UB concludes that, at the date of the report, it was impossible to accurately define the total assets of Envion, number of investors, the amounts raised and the allocation of raised amounts to individual investors. Envion and Envion’s organs are unable to ensure a lawful bookkeeping and have violated Swiss bond law. The UB leaves open the question whether this warrants criminal persecution. (p.49,50)
61. A total of approx. 127m tokens were generated, of which approx. 86m were sold to investors. However, again, this numbers cannot be finally confirmed, as different sources show slightly differing numbers. There is not sufficient available information to accurately allocate tokens sold to individual investors (p. 50)
62. The difference between tokens sold and tokens generated is approx. 41m. According to an expert report, one part of this amount was generated as “Team Tokens”, and another part as “Storage”. There is a dispute between the parties about the allocation of these tokens, which is the reason for a criminal charge against Trado initiated by Envion. However, the issue of extra tokens is not part of the mandate of the UB and is therefore not further investigated by the UB. (p. 51)
63. Due to the unclear nature of the 41m tokens, the full amount of 127m tokens needs to be recorded on the balance sheet as a long-term interest-bearing liability at a value of 99.9% of the nominal token value. (p.51)
64. The UB could not identify any misappropriation of funds, with the possible exception of the payments to CS (see above).
65. Significant amounts of BTC and ETH were converted to FIAT immediately after the ICO, instructed by MW. In addition, there was crypto trading to realize speculative gains. (p.52)
66. Significant amounts of cryptocurrency invested into Envion are still in the possession of Trado.
67. There was never any operational activity. (p.53)
68. There were no other contractual relations outside the ones identified in the report. (p.53)
69. There was no mandate agreement with MJG, however, he was paid CHF 7.2k/month. (p.53)
70. MW was paid EUR 750/day based upon a mandate agreement dated February 10th 2018. (p.53)
71. As of August 31st 2018, Envion’s total current assets across all bank accounts amount to CHF 45m. Only CHF 700k is remaining in cryptocurrency (ETH 1760 + ETH 800). (p.54)
72. The current value of cryptocurrency withheld by Trado (which were never converted into FIAT) amounts to CHF 6.3m as of August 31st 2018 (BTC 525 and ETH 9.9k). (This represents a loss of approx. CHF 15m since the end of the ICO) (p.55)
73. Other assets, including the value of the MMU and tech, amount to CHF 300k. (p.55)
74. In total, all Envion assets, including claims against Trado, as of August 31st 2018, have a value of CHF 51.1m (including approx. CHF 44m cash, 12.3k ETH and 525 BTC). (p.55)
75. Based on the interim balance sheet created by the UB, Envion has a negative capital of CHF -83m. This is because the UB is not in a position to confirm that all investors have read and accepted the second version of the offering documents, which includes the subordination. Envion is not able, not least because of the missing documents from Trado, to provide sufficient evidence for such acceptance. (p.57, 58)
76. Envion is therefore overindebted and in consequence would need to inform the bankruptcy judge, according to Swiss law. (p.58)
77. Envion is suing Trado to return 525 BTC of investor moneys which have been withheld from Envion (LG Berlin AZ 91 O 37/18). The date for the first court hearing was moved multiple times, the last known date in the report was October 30th 2018. The UB has authorized lawyer Ms. Au of the law firm “van Aubel & Partner” to represent them in this hearing. (p.59)
78. Envion is suing Trado to return 9.9k ETH of investor moneys which have been withheld from Envion (LG Berlin AZ 95 O 36/18). The first hearing was scheduled for January 19th, 2019. The UB has authorized lawyer Ms. Au of the law firm “van Aubel & Partner” to represent them in this hearing. (p.60)
79. Envion is suing Trado to for access to all investor data, as well as access data for IT systems used by Envion (including the internet page, medium etc.) (LG Berlin AZ 90 O 42/18). (p. 60)
80. Envion has obtained a preliminary injection against Trado, preventing Trado to publicly speak in the name of Envion (LG Berlin AZ 27 O 241/18). The hearing was scheduled for October 18th 2018. The UB has authorized lawyer Ms. Au of the law firm “van Aubel & Partner” to represent them in this hearing. (p. 60)
81. Various investors, represented by lawyer Istvan Cocron of CLLB, have filed lawsuits against Envion for the return of invested moneys. The UB is challenging these claims. (p.61)
82. CLLB has filed a separate lawsuit against Envion and Trado on July 30th 2018. The UB has not yet received this lawsuit. (p.61)
83. Envion is liquid, however, it is overindebted. Therefore, the interest of the creditors and investors have to be considered as endangered. (p.62)