Lyoness/Lyconet! 21-page legal opinion.

The Central Prosecutor’s Office for Business Affairs and Corruption (WKStA) commissioned an expert report from court-appointed business expert Magistra Andrea Kamposch and Magister Christian Steiner; the report ran to twenty-one pages. The subject of the report was the Lyconet “Cloud” offer.

Hubert Freidl was unable to answer twelve of fourteen questions.

This was yet another incredible failure by the Austrian Justice system in the Lyoness/Lyconet matter as even the report it had itself commissioned was not admitted as evidence in the court proceedings, leaving seasoned lawyers at a loss for words.      

Extracts form the report:

LEDV(s) = Limited Edition Discount Voucher(s); SP(s) = Shopping Point(s); Respondent = Lyoness/Lyconet; KP = Plaintiff; [WKStA = Austrian Central Prosecutor’s Office for Business Affairs and Corruption]

001    ……. The report from business expert Magistra Andrea Komposch on the business model at dispute concluded that the discount vouchers, LEDVs and Clouds have no definition, that the advertising materials from the respondent are incomplete and misleading, and that there is a risk of total loss.

002    The discount vouchers and Clouds were a creation of the respondent’s CEO (Hubert Freidl). The WKStA interviewed him as a suspect on 31 January 2017. He was unable to respond to all fourteen questions although the idea and development were his creation, so he must have already known the answers. He has still not responded by way of written statements or certificates as he has promised. So not even the creator knows about his fantasy creations. All that mattered was that the product sounded promising with suggestions of high profits for credulous investors to be duped into it.

003    In any case, Freidl claims that the money has been billed as a liability towards the customers and has not been used for any other purpose (response to question 20).

004    The report indicates that the main factors deciding the success of the investment are undetermined, and are therefore under the arbitrary control of the respondent. References to findings from the report are marked as such with the appropriate marginal reference numbers in the following comments.

005    The respondent is therefore at liberty to define the service arbitrarily and bilk the investors, which is what happened.

006    The respondent evidently set up the business model deliberately in such a way as to extol the benefits of the investment but formulate the specifics so vaguely that the investment would inevitably end in a complete loss. The respondent was at liberty to determine the number of customers in a Cloud according to its own discretion and therefore also set shopping revenues arbitrarily. The investor is robbed of any say in the investment and is left to the whim of the respondent.

007    The respondent has not as yet supplied any verifiable documentation or evidence on the number of customers in a Cloud, or their shopping revenues. Instead, the respondent is perfectly happy to leave the investors empty-handed. Investors have lost their investment on the LEDVs and have not received any dividends. These Clouds are just empty bubbles sold as a profitable venture, but leave the investors with nothing. There is an obvious intent to defraud.

008    The advertising brochures claim that all registered customers are combined in the Cloud without referrers.

009    However, this fails to specify the period within which Cloud registrations are accepted before the Cloud starts; this (the number of registered customers) plays a role in SP volume (Ref. No. 50). This means that investors are misled about the number of customers, and the respondent alone is free to decide which customers are admitted to the cloud and which are not.

010    There are also inconsistencies in apportioning SPs. The advertising materials of the respondent promise that 1,500 or 500.00 SPs will be redeemed and paid out per LEDV against discount vouchers worth €1,500.00 or €500.00, respectively, in the initial apportionment. However, the respondent’s representations towards the assessor held that this was only an assumption, as the respondent could not in any way guarantee the scope and extent of cash or non-cash benefits that may result from participation in the Cloud (Ref. No. 36, 53).

011    The documents do not explain either the form that the redemption and payment would take in the discount voucher or the SP volume apportionment (Ref. No. 54).

012    The documents fail to make any clear indication of the date from which shopping revenues in target countries would be included in the proportional allocation of resulting SPs. Apart from that, there is no explanation as to how the respondent would be able to redeem and pay out the resulting generated SPs for discount vouchers. There is also little detail as to how many units would result from the SPs.

013    This precludes any explanation as to how the apportionment is made and what effect an apportionment would finally have (Ref. No. 55).

014    The presentations available from LYCONET on participation in the “Customer Clouds” do not indicate or explain in any specific terms:

• What a customer actually gains from an LEDV at €1,500, and how this ultimately affects the customer other than fulfilling the requirement to participate in the Customer Cloud.

• Whether the customer is entitled to use the €1,500 for purchases or has no entitlement to receipt in cash from this amount.

• What the formulation “Redeemable value: Order value can be redeemed at 100%” with reference to the LEDV actually means.

• The description that “the first 1,500 SPs per LEDV could be redeemed and paid out in discount vouchers worth €1,500” does not reveal any specific explanation, especially as redemption and payout evidently only take place at the amount of the discount vouchers already available. The formulation “apportionment of SP volume” amounting to the difference (between LEDV and discount voucher) does not yield any sufficient explanation either.

• Why the initially apportioned number of SPs at €1,500 has been described as accepted.

• The period within which registrations from LYONESS members are actually accepted before the Cloud starts on 8 September 2016.

• This plays a role in the SP volume to be apportioned and the resulting SPs. (Ref. No. 57)

015    There is no explanation at all as to the risk of total loss in the Cloud investment; on the contrary, the investment is touted as safe and risk-free. The general impression from the professionally designed brochures misleadingly suggests that the discount vouchers and Clouds are a risk-free investment with guaranteed performance.

016    The report confirms that the advertising materials from the respondent are incomplete and misleading, that the respondent is in sole control of how the investors’ money is used and apportioned to investors, and that there is a risk of total loss.

017    The discount vouchers have no real cash value (Ref. No. 69).

018    LEDV value depends on future SPs and cannot be redeemed immediately as vouchers for goods (Ref. No. 72).

019    The success of the Customer Clouds depends chiefly on the establishment of a customer base (Ref. No. 77), which is the respondent’s responsibility.

020    The business failure of an investment in the Customer Clouds as a whole will inevitably result in a dead loss for each and every individual investor (Ref. No. 74, 77).

021    Investors are left with a claim for an indefinite amount, and the claim will not arise until a later date (Ref. No. 81).

022    The business model and Shopping Points calculation are intransparent for the most part (Ref. No. 81).

023    There is a significant period between purchase and apportionment of the first Shopping Points (Ref. No. 81)

024    There is in any case a risk of total loss beyond the general risk of insolvency, such as failure to recruit enough customers or any customers at all, or failure of customers to buy in sufficient amounts or generate Shopping Points (Ref. No. 81)

025    The respondent alone, not the investors, manages the capital invested in the customer Clouds; the respondent uses the funds collected to run the Customer Clouds without the participating investors’ involvement. The investors have no say as to which projects are targeted for the money (Ref. No. 86).

026    Summing up, there is no evidence that investors have any significant say on how the money is used or appropriated (Ref. No. 87).