Canadian police have frozen assets owned by the founders of blockchain services company Vanbex, as part of a fraud investigation into a 2017 initial coin offering (ICO) that raised $22 million.

According to court documents obtained by CoinDesk, the company, led by Kevin Hobbs and Lisa Cheng, raised $30 million CAD (about $22 million) worth of fiat and cryptocurrency through the sale of a token called FUEL.

Vanbex told investors that the token would be usable in a forthcoming smart contract system called Etherparty, and that “the value of the FUEL token would increase dramatically,” says the civil forfeiture action filed in the Supreme Court of British Columbia.

However, Vanbex “developed no usable products” and Hobbs and Cheng “did not intend to develop the products they were marketing but rather [acted] with [the] intention to misappropriate the corporately invested funds raised for their own personal benefit,” according to a filing by the director of civil forfeiture at Canada’s Ministry of Attorney General.

“FUEL tokens became virtually worthless in dollar value while not being capable of use in the non-existent smart contracts system or for any product or service other than a cryptocurrency coin creating service called Rocket,” which was different than what the purchasers were promised, the director claimed.

No criminal charges have been filed so far, and when reached by CoinDesk on Sunday evening, Cheng and Hobbs denied the fraud charges and said Vanbex is cooperating with the investigation.

But in response to the government’s application, Justice J.A. Power on March 14 authorized the government to seize the founders’ two Land Rovers; ordered Bank of Montreal to freeze Hobbs’ two accounts there containing slightly less than $1 million; and ordered him and Cheng not to sell, borrow against or damage their Vancouver condominium for at least 30 days, court papers show.

Vanbex’s response

In a statement provided to CoinDesk, Hobbs and Cheng called the fraud allegations “false,” and said that the investigations were the result of “false claims by a former contractor.”

The Royal Canadian Mounted Police (RCMP) began investigating Vanbex and its founders for fraud in May 2018 and the Canadian Revenue Agency subsequently began a tax probe, according to the filing.

The founders denied that they made any promises about the value of FUEL tokens, saying “the tokens integrate bitcoin and Ethereum and the value of any currency is beyond any company or individual’s control, obviously. … Fuel tokens pay for transaction fees on the network for Smart Contracts deployed through our architecture.”

Vanbex’s business accounts have not been frozen, they added.

They took issue with the government’s characterization of Vanbex in court papers as a shell company. “Vanbex is an operating company, which is easy to establish,” they said, adding that they have been in the crypto space since 2013.

Further, Hobbs and Cheng took issue with the authorities’ claim that Vanbex produced no usable products. “We have had more than 50 clients” – not two, as the court documents allege – “and we have two excellent products.”

‘High roller’

Still, the court papers go on to allege that Hobbs and Cheng “acquired sudden and substantial personal wealth” around the time of the ICO, purchasing two condominiums – the one in Vancouver, another in Toronto – for about $3 million each and the two Land Rovers, and leasing a Lamborghini worth $375,000 for a three-year term.

Further, Hobbs spent some of the misappropriated funds on gambling “domestically and internationally at the high roller level,” according to one of the filings.

From September 2016 to March 2018, he withdrew a total of $1.3 million from casinos in British Columbia, one document alleges. In November 2017, the state-owned British Columbia Lottery Corporation put Hobbs on a “watch list,” preventing him from buying in at any of its casinos without proof of the source of his funds.

When Hobbs and Cheng became aware of the investigation, they started attempting to liquidate their assets, taking out mortgages against the condos and putting one of them up for sale, the document claims.

Addressing this, Cheng and Hobbs told CoinDesk they borrowed the money to inject into the business.

Regarding the gambling, they told CoinDesk that Hobbs “has been a professional poker player in the past and has participated in poker tournaments around the world,” and “has never been prevented from [playing at] any casino.”

The court papers also note that Hobbs has a criminal record in Canada. He was convicted of possessing criminally obtained property and money laundering in 2008, for which was sentenced to nine months, and growing and trafficking in marijuana in 2009, for which he was sentenced to 30 months, the documents say.

In addition, he was busted for possession of pot in New York in 2005, for which he was given a one-year sentence, the Canadian government said.

Cooperation ongoing

Employees have been “encouraged to cooperate fully with the investigation and they are,” Hobbs and Cheng told CoinDesk.

“We remain confident that the truth will prevail, and this will be behind us soon,” they said.

“Unfortunately, these things move at a pace beyond our control. In the meantime, we will continue to innovate and deliver quality products. Our counsel are working to put this astern in a fashion that decisively confirms our leading role in this industry, which we intend to maintain.”

They concluded by telling stakeholders:

“Thank you for your loyalty and trust. It is not misplaced.”

Vanbex civil forfeiture order by CoinDesk on Scribd

UPDATE (April 1, 05:35 UTC): This article has been updated to correct a passage about the leased Lamborghini. $375,000 USD is the total value of the car according to the court documents, not the monthly rate of the lease, which has a three-year term.

Lisa Cheng image via CoinDesk archives.