The former CEO of a cryptocurrency company has been sentenced to prison time and ordered to pay $9 million in restitution due to his company’s role in a major Ponzi scheme that cost hundreds of investors millions of dollars. The hearing comes as the U.S. government and regulatory agencies step up their crackdown on cryptocurrency-related fraud.

A District Court Judge in Connecticut sentenced 33-year-old Josh Garza to a 21-month prison sentence followed by six months of house arrest for his role in a Ponzi scheme based around the issuance of a cryptocurrency – called PayCoin – which entitled investors to a portion of another company’s mining profits.

The scheme was conducted between May of 2014 and January of 2015 through four companies owned by Garza. These companies sold the rights and access to cryptocurrency mining operations and allowed investors to buy a portion of these operations through “PayCoin “and “Hashlets,” which claimed to give investors the rights to a portion of the profits from the mining operations.

John Durham, the U.S. District Attorney for Connecticut, spoke about the scheme, saying that “hashlet customers, or investors, were buying the rights to profit from a slice of the computing power owned by the companies.”

Although the operation seems legitimate on the surface, Garza made multiple claims that should have raised red flags for investors, including the guarantee that the price of the virtual currency wouldn’t drop below $20 per unit, because the company would prop the price using their $100 million digital currency reserve.

After pleading guilty for defrauding investors and committing wire fraud, Garza was ordered to pay full restitution to all the investors that had lost their entire investments after the operations were found to be illegitimate. The judge required that Garza pay all the investors a total of $9,182,000 in restitution and was sentenced to 21 months in prison.

Garza’s Sentencing Comes as the US Government Increases Its Crackdown on Cryptocurrency Scams

This past week, a New York federal judge ruled that Initial Coin Offerings (ICOs) fall under the umbrella of securities offerings, opening up the gates for the Securities and Exchange Commission (SEC) to move to shut down fraudulent, or potentially fraudulent, ICO operations.

The ruling came about in a case regarding a man who has defrauded ICO investors by claiming, and providing falsified evidence, that the virtual currency was physically backed by diamonds and real estate.

Judge Raymond Dearie, the judge handling the case, commented on his ruling, saying that:

“Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called… Stripped of the 21st-century jargon, including the defendant’s own characterization of the offered investment opportunities, the challenged indictment charges a straightforward scam, replete with the common characteristics of many financial frauds.”

Following this ruling, the SEC immediately moved to shut down and charge two cryptocurrency scams that were defrauding investors. The first company charged was TokenLot, a self-described ICO superstore, that was charged with operating as an unregistered broker-dealer. The TokenLot team cooperated fully with the SEC, which led to light charges.

The second company that was shut down by the SEC was a cryptocurrency hedge fund, called Crypto Asset Management LP, that had falsely claimed to investors that it was the first fully regulatory compliant crypto hedge fund. The operator of this fund, Timothy Enneking, had taken over $3 million from investors, and more than 40% of his fund’s investments were considered as securities by the SEC.

It is likely that the SEC and other regulatory authorities in the U.S. will continue to crackdown on cryptocurrency-related scams in the near future.

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