The Securities and Exchange Commission (SEC) has sought judgments against Homero Joshua Garza, GAW Miners and ZenMiner, LLC, claiming they engaged in selling fraudulent investments in virtual currency mining operations. The motion filed in the U.S. District Court District of Connecticut claims the defendants did not have the computing power needed to generate the profits they promised to investors.
In addition, the investment contracts were not registered with the SEC as required.
The SEC ordered the defendants to pay $10,384,099 in disgorgement plus prejudgment interest, along with civil penalties. The SEC charged Garza, GAW Miners and ZenMiner with securities fraud and conducting a Ponzi scheme in January. The motion seeks permanent injunctions prohibiting the companies from engaging in future violations.
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Defendants Sold Fraudulent Investments
From August through December 2014, the defendants engaged in fraudulent schemes to oversell investments in their virtual currency mining operations. Defendant Garza, who controlled both GAW Miners and ZenMiner, sought time to respond to his complaint and still has time to respond. The responses to the complaints against the mining companies were due Dec. 28, 2015, and they were not provided.
The SEC claims the companies began selling Hashlet investment contracts in August 2014. These contracts entitled investors to a share of the profits from the mining operations.
The companies sold “far more Hashlets of computing power than they actually had in their data centers or used to engage in virtual currency mining,” the motion stated. Most of the returns paid to investors were not proceeds earned from the mining; most were from money investors had paid to buy Hashlets. The operation resembled a Ponzi scheme.
GAW Miners also misled investors about the mining operations. It claimed the Hashlets would always be profitable and never become obsolete. It claimed the Hashlets were engaged in mining through pools available in ZenMiner’s website interface when in fact the company knew that few Hashlets were supported by mining.
The company further claimed that its mining pool, called ZenPool, was only available to investors who bought more expensive Hashlets. In reality, ZenPool never engaged in mining.
At Least $19 Million In Hashlets Sold
The companies sold at least $19 million of Hashlets to more than 10,000 investors, most of whom never recovered the full amount of their investments through the daily payouts. Few made a profit.
The court can conduct a hearing to determine damages, the motion noted, although such a hearing is not mandatory. The court can determine damages based on detailed affidavits and documents.
The securities law prohibits the offer or sales of securities using attempts to defraud, to obtain money or property by using misleading statements, and using practices that fraud and deceive.
The motion stated that Hashlets are securities as defined by the law.
Even those Hashlets purchased with bitcoin are considered an investment of money, the filing stated.
GAW Miners emphasized to investors how easy Hashlets were to use. The companies claimed they would do all the mining work. They assumed responsibility for buying the computer equipment, operating it (including supplying power and cooling), connecting the equipment to the Internet and to mining pools, establishing the accounts for the various mining pools to allow payouts, and calculating the share of payouts for each Hashlet investor.
Investors also paid daily maintenance fees to subsidize these services.
Had investors known that GAW Miners and ZenMiner did not possess the mining operations they claimed to own, and that their investment was being recycled to fund purported daily payouts to investors, a reasonable investor would have considered such information before deciding to invest.
Intent To Deceive
The filing claims the companies acted with the intent to deceive. “There is no logical view of the fact alleged in the Complaint that suggests their fraud was anything but deliberate and motivated by greed.”
The Hashlets were marketed and sold primarily over the Internet, which constituted the use of interstate communication.
Concerning disgorgement, the SEC said a reasonable estimate would be the amount investors paid to buy Hashlets plus that which they paid in daily maintenance fees minus any payouts received. It stated that a reasonable approximation of the disgorgement is $10,078,331. The SEC also sought prejudgment interest of $305,768.
The commission noted that it acquired a copy of the database the companies used to operate the website from a former GAW Miners employee.
Garza was also the founder of bitcoin exchange Paybase, which discontinued making withdrawals from users in early 2015, CCN reported. Users claimed Garza blocked their accounts when they asked him about this on Twitter. Paybase and GAW Miners were accused of executing fraudulent sales of securities with the sale of their Paycoin digital currency.
He was also accused of lying about a business relationship with Amazon to accept Paycoin in the future. Amazon denied any knowledge of Paycoin.
Featured image from Shutterstock.