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SEC Charges Founder and Bitcoin Mining Companies with Fraud

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On December 1, 2015, the Securities and Exchange Commission (SEC) charged GAW Miners, LLC (“GAW Miners”), ZenMiner, LLC (“ZenMiner”) and Homero Joshua Garza (“Garza”) the managing member of both GAW Miners and ZenMiner (together the, “Defendants”) with fraud under (i) Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and (ii) Section 17(a) of the Securities Act of 1933 (“Securities Act”). The Defendants were also charged with engaging in the offer and sale of unregistered securities under Sections 5(a) and 5(c) of the Securities Act for selling $20 million worth of shares in their virtual currency digital mining contract called a “Hashlet”.

The charges stem from the Defendants’ operation as a virtual currency “miner” which uses computing power to be the first to solve complex algorithms. The first virtual currency miner to solve a complex algorithm that confirms a transaction is rewarded with newly-issued bitcoins by the bitcoin protocol.

While virtual currency mining is not illegal, the SEC found:

  • Hashlets were touted as always profitable and never obsolete and had more than 10,000 investor purchases.
  • The Hashlet contract purportedly entitled the investor to control a share of computing power that GAW Miners claimed to own and operate while Hashlets were depicted in marketing materials as a physical product or piece of mining hardware.
  • GAW Miners directed little or no computing power toward any mining activity and misled investors to believe they would share in returns.
  • Garza and his companies owed investors a daily return that was larger than the actual return they were making on their limited mining operations because they sold far more computing power than they owned.
  • Investors were paid back gradually over time with “returns” out of funds collected from other investors.

The Press release is available HERE.

A full copy of the SEC order is available HERE.