The Securities and Exchange Commission on Tuesday charged two Connecticut-based Bitcoin mining companies and their founder with running a Ponzi scheme that defrauds investors.
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Homero Joshua Garza allegedly committed the fraud through two companies, one called GAW Miners and the other ZenMiner, by purporting to offer shares of a digital Bitcoin mining operation, according to the SEC’s complaint filed in federal court in Connecticut.
The complaint describes “mining” for Bitcoin or other virtual currencies as applying computer power “to try to solve complex equations that verify a group of transactions in that virtual currency.” The first computer or collection of computers to solve an equation is awarded new units of that virtual currency.
Garza allegedly lied to investors about his companies’ ability to mine for Bitcoin. In a statement, the SEC said GAW Miners and ZenMiner in fact didn’t own enough computing power for the mining they promised to conduct, “so most investors paid for a share of computing power that never existed.”
In classic Ponzi scheme form, returns paid to some investors came from proceeds generated from sales to other investors, according to the SEC.
“As alleged in our complaint, Garza and his companies cloaked their scheme in technological sophistication and jargon, but the fraud was simple at its core: they sold what they did not own, misrepresented what they were selling, and robbed one investor to pay another,” said Paul G. Levenson, director of the SEC’s Boston Regional Office.
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The SEC’s complaint charges that from August 2014 to December 2014, Garza and his companies sold $20 million worth of purported shares in a digital mining contract they called a Hashlet.
Investors were misled to believe they would share in returns earned by the Bitcoin mining activities when in reality Garza’s companies “directed little or no computing power toward any mining activity,” according to the SEC.
Garza and his companies allegedly sold far more computing power than they actually owned and paid out daily returns collected from other investors rather than from currency derived from “mining” for currencies. Most Hashlet investors never recovered the full amount of their investments, and few made a profit, the SEC said.