On Wednesday, the Securities and Exchange Commission sued the founder of a now-shuttered Bitcoin mining company, alleging that it committed $19 million worth of fraud in a Ponzi scheme.

According to the SEC’s civil complaint, Homero Joshua Garza and his companies, GAW Miners and ZenMiner, sold more than 10,000 "investment contracts representing shares in the profits they claimed would be generated from using their purported computing power to ‘mine’ for virtual currency."

Between August and December 2014, the companies sold $19 million worth of these contracts, dubbed "Hashlets."



Defendants’ Hashlet sales had many of the hallmarks of a Ponzi scheme. Because defendants sold far more computing power than they owned and dedicated to virtual currency mining, they owed investors a daily return that was larger than any actual return they were making on their limited mining operations. Instead, investors were simply paid back gradually over time, as "returns," the money that they, and others, had invested. As a result, some investors’ funds were used to make payments to other investors. Most Hashlet investors never recovered the full amount of their investments, and few made a profit.

… GAW Miners and Garza made three basic types of misrepresentations to Hashlet investors. First, they misleadingly claimed that Hashlets would be always profitable and never obsolete, when they had no reasonable basis to support those claims. Second, they misleadingly claimed that Hashlets were engaged in mining for virtual currency through pools available in ZenCloud, when they knew that few Hashlets were supported by actual mining activity. Third, they misleadingly claimed that ZenPool engaged in mining, when they knew that it never did.

The lawsuit asks for Garza and his associates and entities to pay back the money that was stolen and to pay civil penalties "due to the egregious nature of defendants’ violations."

"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," Paul G. Levenson, director of the SEC’s Boston Regional Office, said in a statement.

Gone baby gone

In August 2015, Homero Joshua Garza’s brother Carlos Garza, a former GAW employee, was ordered to respond to a subpoena as part of the SEC investigation into the company.

The implosion of GAW Miners marks yet another example of incompetence and possible criminal behavior associated with companies selling Bitcoin mining hardware. Previously, CoinTerra, Butterfly Labs, and HashFast also faced similar legal battles.

More recently, the SEC brought a similar case against a related operation in Southern California known as Gemcoin.

In January 2015, Ars reported on the opening of the SEC investigation into Josh Garza and GAW Miners.

In early 2014, GAW Miners was first introduced to the Bitcoin public by re-selling Bitcoin mining rigs. Later, the company shifted to cloud-based mining (Hashlets), and in early 2015, it introduced its own altcoin, dubbed "Paycoin." GAW also tried its hand at its own cloud-based wallet service (Paybase) and its own online discussion board (HashTalk).

For over a year now, there has been active speculation among the Bitcoin community that GAW may be a scam or at least that it could be engaged in illegal behavior. There have been threads on both BitcoinTalk and Reddit with titles like "GAW Miners - Liars, Frauds - A brief recap of what we know."

Josh Garza did not respond to Ars’ request for comment.

Garza reportedly sold 41 percent of GAW to Stuart Fraser, a vice president at the major Wall Street trading firm Cantor Fitzgerald.

Cantor Fitzgerald also did not respond to Ars' request for comment.