Zero day Envion: The chronology of a cryptocurrency catastrophe

The company promised shining returns by coupling renewable energy with blockchain technology. Investors who gave the company $100 million are now left with a near-worthless virtual currency.
Pandora's box?

Michael Luckow is tall and lanky and seemed nervous when Handelsblatt met him in Düsseldorf. The native Berliner had barely started shaving when he founded his first company — an internet classifieds site which he eventually sold to a rival for "a six-figure" amount. On paper, he was then a student at the Technical University of Berlin. But after the sale, he concentrated instead on the capital city’s legendary nightlife.

Mr. Luckow never found his way back to university. He was financially independent in his early 20s and already had a network of business contacts. Mr. Luckow wasn’t afraid to take risks. He founded a ticket company, launched a marketing agency, helped organize the Berlin Holi dance festival and sold Chinese beanbags online. Nothing seemed to take off, but then his path suddenly became very clear.

Early this year, at the height of the cryptocurrency gold rush, investors entrusted $100 million to Luckow and his associates, who founded a startup named Envion. The company’s business model was ingenious: Cash in on the cryptocurrency industry’s growing power problem by taking the computers to places where electricity was abundant, cheap and sustainable. In exchange, the investors got tokens, virtual currency that only exist online. At the time, each coin was worth $1 and investors were promised a 161 percent return.

But Envion never followed through, and now the company’s coins, held by about 30,000 investors around the world, are now worth just 5 cents each. Envion’s board and founders are suing each other and are under investigation in both Switzerland and Germany.

Wizened investors who saw this coming might just laugh, but Envion’s investors, hyped by media reports of incredible cryptocurrency gains, slacked on their due diligence when Envion announced its initial coin offering, or ICO, in December. ICOs are the cryptocurrency equivalent of an initial public offer. Sometimes the coins represent a stake in a company and sometimes they’re just tokens to be traded online, ostensibly like stocks or national currencies. The ICOs happen in a legal gray area and are mostly unregulated, though regulators are increasingly taking interest.

"We are seeing a rapid increase in ICOs in Europe and around the world and are concerned that investors are not aware of the risks involved,” the European Securities and Markets Authority, or ESMA, warned ahead of Envion’s ICO. Other national regulators followed suit but the warnings have fallen on deaf ears. Investors sunk $13.7 billion into ICOs in the first half of 2018, up from $7 billion in all of 2017. The listings have become so popular that the Stuttgart Stock Exchange, Germany’s second-largest bourse, plans to launch its own cryptocurrency trading platform in autumn.

A cornucopia called ICO

But back to the origins of Envion. "In early 2017, I was sitting with friends. We had been thinking about new business models," Mr. Luckow says. They talked about the new blockchain technology that powers cryptocurrencies. The technology was gaining in popularity and grabbing more headlines every day, as it enables anonymous and secure transactions over the internet.

Bitcoin was the focus of the hype, but cryptocurrencies founded in its wake were flourishing too. "It seemed like the Neuer Markt," Mr. Luckow says, alluding to Germany’s now-defunct attempt at mimicking the Nasdaq. It failed along with the internet bubble at the end of the 1990s.

Mr. Luckow and his friends had an idea: The blockchain technology on which cryptocurrencies are based requires enormous computing power, which means enormous power consumption. So they wanted to create mobile computer units to mine currencies. Mining refers to the computational process used to create cryptocurrencies — computers solve complex math problems and are rewarded with currencies.

The mobile units would be placed next to solar and wind farms, or hydroelectric power plants with surplus electricity. The entrepreneurs wanted to exploit the fact that renewable energy wasn’t in demand because prices were too low — and that’s when his containers would kick into high gear, crafting cryptocurrencies on the cheap.

Envion’s ideas were anything but cheap, but luckily for Mr. Luckow, investors were clambering to invest in cryptocurrencies. "It had to be quick,” Mr. Luckow remembers. "People were getting money thrown at them. It was clear this wasn’t going to go well for long."

Credible faces

Mr. Luckow was ready to launch the company and collect millions but he didn’t want to be the face of Envion. Is it because he already had bad debts that could scare away investors? He's tight-lipped about it, saying he just wanted to be in the background.

Mr. Luckow and his partners set off to find a high-profile executive for their company and quickly found Matthias Woestmann, who had been a foreign correspondent for state broadcaster ARD until 1997. Mr. Woestmann, who made a killing on shares of solar company Solon before it went belly up, then founded an unsuccessful film rights company before launching Quadrat Capital, an investment company supposedly focused on fossil and renewable energies, though it only lists two investments on its website.

But that was good enough for the burgeoning Envion. Like Mr. Luckow, Mr. Woestmann was based in Germany’s capital and by October 2017 he was CEO of Envion AG. He was given a 19 percent stake.

Mr. Woestmann openly admits that he had no technical understanding of mining virtual coins. "But Luckow and his boys talked about it all the time. They all walked around in T-shirts and looked like computer nerds," he says. "I thought this was going to be a learning experience. And then, of course, there was the money."

The plan was for Mr. Woestmann to handle communications with the outside world while Mr. Luckow and his partners got the actual operations off the ground, though they funneled their work through Trado GmbH, yet another company launched by Mr. Luckow, and billed Envion.

Not-so-white lies

In the run-up to the ICO, Envion released a 56-page white paper, the ICO equivalent of an IPO prospectus. It never mentions Mr. Luckow or Trado and lists Envion’s business address as in Berlin, even though Mr. Woestmann had registered it in Switzerland.

That may have been the last time Envion ran smoothly. As the Dec. 1 ICO approached, legal hiccups postponed it for two weeks. And Mr. Luckow’s Trado only ever got paid when the founder called the CEO and complained.

Mr. Woestmann lined up some big names to grace the company’s website as it worked to attract investors. A high-profile German politician was recruited and paid €15,000 ($17,417) in exchange for the use of his visage. The politician, Friedbert Pflüger, says he was called upon for environmental consulting. Thorsten Grenz, a well-known financial expert, was also brought in as a figurehead.

The efforts paid off. As soon as Envion offered its virtual coins for sale in December 2017, investors handed the company $30 million. Envion promised a profitable future and said it was already looking at a collaboration with the Italian electricity giant Enel. “Deal after deal with global players in the energy industry,” Envion promised in one circular. “Now is the time to invest!"

Was it though? Although investors had ponied up $100 million by the end of January, Enel was already denying it ever had any interest. And then the wheels began to come off what was already a shaky endeavor. One evening, a meeting was scheduled with a potential business partner who could supply computers for mining virtual currencies. "I suggested we do it without Matthias," Mr. Luckow says. "That's when he snapped. He screamed that he wouldn't let a guy like me boot him out."

The sun goes down

For two weeks, there was radio silence between the two. But when the silence broke, at a meeting between both of them at Trado, Mr. Luckow thought what he was hearing was static. While out of earshot and without permission from Mr. Luckow, Mr. Woestmann had pushed through a capital increase and issued actual shares, rather than tokens, that diluted the 81-percent stake of Mr. Luckow and his partners to a mere 31 percent.

In his coup, Mr. Woestmann had sold the new Envion shares to Berlin attorney Thomas van Aubel. Mr. van Aubel bought 240,000 new shares at a price of 1 Swiss franc ($0.88) each through his own Sycamore GmbH investment vehicle. What a bargain — Mr. van Aubel picked up 61 percent of a company that had just brought in $100 million for just 240,000 Swiss francs.

Mr. Luckow freaked and went to court. A Berlin judge agreed that what was happening wasn’t right and, via injunction, prohibited Mr. Woestmann and Mr. van Aubel “from all actions leading to a transfer or encumbrance of the assets of Envion AG.” Non-compliance with the injunction would result in fines or imprisonment.

Mr. van Aubel isn’t bothered. To begin with, he said, the ruling could easily be appealed. "The injunction temporarily prohibited the sale of Envion shares, but there was never any intent to do so,” he says.

Envion’s literature says differently. Mr. Woestmann sent a letter to potential investors on Feb. 4 soliciting offers for the company. "Envion is an innovative crypto mining company. The ICO, completed on Jan. 15, 2018, was the sixth largest in the history of the ICOs." It calls on potential investors to send offers to “Matthias Woestmann, CEO of Envion AG.”

The crypto-evangelist

While Mr. Woestmann was working to sell the company, the company itself did nothing. Mr. Woestmann was no longer paying Trado to do the actual work and was instead commissioning expert opinions and hiring PR experts. Meanwhile, investors believed their money was being spent on innovative crypto technology. In fact, Envion was only paying consultants and lawyers.

The situation was only made more cloudy by the company’s communications department, which wasn't in the hands of Mr. Woestmann, but rather Trado and social media expert Laurent Martin, a close colleague of Mr. Luckow. The former American opera singer came to Germany years ago and has worked for various internet companies as a marketing specialist. He now describes himself as a "crypto-evangelist" and is active across social media. In a February video message from Los Angeles, Mr. Martin reported on talks with major investors as well as his experience at the Beverly Hills Blockchain Meetup.

Another investor update claimed Envion was working hard to "prepare the mass production of the mining units and the organized process for the payment of dividends.” Mr. Martin went on stage at the EventHorizon conference in Berlin and talked about "low risk for our customers.”

But, at this point, Envion had revenue of exactly zero. Trado claimed to be working on executing the actual business idea but nothing happened on time and required investment from Trado. The CEO, Mr. Woestmann, wouldn’t free up the millions necessary for the crypto hardware until the dispute with Mr. Luckow had been settled.

Finger pointing

Then in May 2018, Handelsblatt first reported on the chaos at Envion. The token's value plummeted 45 percent. Mr. Luckow hired more media consultants and a war of words began. Mr. Woestmann was depicted as a bumbler with no idea of the company he runs. Major shareholder Mr. van Aubel and his wife were painted as "parasites."

One-time advocates of the company retreated. Mr. Pflüger, the politician, demanded the removal of his picture from the company's website months after the end of his consulting contract. Others followed.

But investors couldn’t run away so easily. Take Szilard Damm, whose name has been changed for his privacy. The IT consultant from Vilnius, Lithuania, starts to sweat when he thinks about his Envion investment. By the end of 2017, he had saved some money and wanted to have something to leave his daughter. Mr. Damm bought €20,000 worth of Envion tokens.

Around the time of the ICO, Bitcoin was at its all-time high of nearly $20,000. "According to Envion's advertising, an investment of €20,000 gave us hope for a payout of €2,500 per month," recalls Mr. Damm. With Bitcoin where it was, the decision was easy. “That's the way you think, it's only human," he says.

Today he thinks differently. Mr. Damm represents a group of around 100 investors who have connected via Telegram, a secure chat app, to defend themselves. They’re looking for legal recourse to reign in the damage.

Many have landed with István Cocron, a capital market specialist at the Berlin law firm of CLLB. He’s been working with cryptocurrencies issuers for 18 months. "This market is very confusing," Mr. Cocron says. "Envion seems to have been lazy from the beginning."

The attorney refuses to dwell on the question of whether Mr. Woestmann cheated his business partners from Trado, or if they cheated Mr. Woestmann. He has filed several lawsuits for damages at a Berlin court — against both sides. The crux of his accusation: ICO fraud.

"Investors believed they would invest in a reputable company at Envion AG," Mr. Cocron says. "In fact, however, all persons essential to the ICO worked for Trado GmbH in Berlin." He sees Mr. Luckow as a de facto managing director, a man with a checkered financial past. "If my clients had known about this construct, they would not have acquired the tokens in question."

And it’s not what Mr. Luckow left out of the white paper that now seems suspicious. The company claimed that its origins dated back to 2015, which were followed by “two years of hard work” to develop "revolutionary technology and a vision for the company." But both Mr. Luckow and Mr. Woestmann told Handelsblatt that they didn’t even meet until the summer of 2017.

Mr. Cocron says massive mistakes were made, either out of haste or malice. Envion sold the virtual coins to private German investors but didn’t have the white paper vetted by BaFin, the German capital market regulator, as would have been required.

And, strangely enough, many millions of euros paid by investors didn’t go to the company. Instead, they ended up in the accounts of Trado and its employees. Mr. Luckow says Mr. Woestmann requested the transfers, but Mr. Cocron points to a half-dozen laws that prohibit such a lax handling of investor money.

The lawyer says that the damage to his clients was intentional and immoral. He hears from new Envion investors every week. Some invested €10,000 euros, others 40 times that.

Mr. Woestmann's criminal complaint caught the eye of Berlin prosecutors, who have sicced their computer crime experts on the case, looking for signs of fraud and embezzlement. And now Mr. Luckow wants to file criminal charges against Mr. Woestmann.

More importantly, Finma, the Swiss financial regulator, said it’s reviewing Envion’s actions and stripped Mr. Woestmann of any power, at least for the time being. Finma launched an enforcement action that “focuses in particular on possible violations of banking law due to any unauthorized acceptance of public deposits in connection with the initial coin offering,” it says.

The regulator also installed attorney Markus Brülhart as its agent at the company as it investigates. The attorney, from GHS in Bern, is the only person with signatory authority at Envion until Finma completes its investigation.

The official website of Envion AG remains a testimony to the hubristic plans of Germany's largest ICO. The site promises July 2018 sales of $13.4 million. The actual July 2018 sales? Zero. Instead, the company’s two most high-profile executives fight while 30,000 investors are left with near-worthless virtual coins.

The investors aren’t alone — 80 percent of all 2017 ICOs were fraudulent, according to US consultancy Satis Group. The Bitconnect cryptocurrency scheme in the US was shuttered by authorities, and millions disappeared via Pincoin in Vietnam. And Austrian crypto exchange Cointed has also attracted interest from criminal investigators.

Envion founder Mr. Luckow summed it up best when he said, “It was clear this wasn’t going to go well for long."

Andrew Bulkeley, an editor in Berlin for Handelsblatt Global, adapted this article in English. Sönke Iwersen leads Handelsblatt team of investigative reporters. Felix Holtermann is an editor on Handelsblatt’s finance desk in Düsseldorf. To contact the authors: [email protected], [email protected], [email protected]