The Securities and Exchange Commission announced Monday it has charged two bitcoin companies and their founder Josh Garza with defrauding investors.
Garza's companies, GAW Miners and ZenMiner, were Ponzi schemes the complaint alleges, selling shares in digital mining operations that never came to fruition. Many investors never received their funds back and very few made a profit, 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," Paul G. Levenson, Director of the SEC's Boston Regional Office said in a statement.
The SEC is seeking a permanent injunction against Garza's alleged illegal activities, and the return of his profits "plus prejudgment interest and penalties."
Garza claimed that GAW Miners and Zen Miners mined Bitcoin, a process which uses large amounts of computing power to solve the cryptographic puzzles that secure and verify Bitcoin transactions. To incentivize the solution of these problems, each computer or group of computers is given a prize for verifying the transactions. Garza allegedly promised investors he was purchasing bitcoin mining hardware, and that they would receive a portion of each mining prize in return for funding his venture, a concept known as cloud mining.
In reality, Garza devoted "little or no computing power toward any mining activity," according to an SEC statement.
Instead, Garza payed investors with money received from other subsequent investors. According to the SEC filing, Garza and his companies earned $19 million in revenue from the sale of purported shares in a digital mining contract they called a Hashlet from August 2014 to December 2014. Although the operation involved complex technology, the scam was a Ponzi scheme like any other.
The cloud mining scheme was not Garza's first controversial business venture. He has launched several business ventures over the years, making himself well-known (and disliked) in the Bitcoin community. In 2011, he was awarded a $40,000 grant to bring a rural community in Massachusetts high-speed internet that never actually came to fruition. According to the SEC, in 2014 GAW Miners sold 9/11-themed cryptocurrency tools, promising to donate all the funds to charity, but pocketed much of the money. In April, Motherboard wrote about Garza's Paycoin scam, in which Garza shut down a Bitcoin exchange and took off with many users' money.
At the time, a former employee shared an SEC document with Motherboard showing Garza was under investigation for Paybase, but charges have not yet been brought against him in that case.
Peter Van Valkenburgh, director of research at Bitcoin research and advocacy group Coin Center, said because the mining companies involve an investment contract, the legal area surrounding the schemes is easier for the SEC to pursue––but that's not to say the SEC won't come after Garza for his other operations. He added that these charges won't come as a surprise to the Bitcoin community.
"There are a lot of people in the bitcoin community that were familiar with the general scammy nature of his fraudulent promises," he said. "He was uniformly recognized as a fraud, and nobody likes a fraud because it devalues the honest work other people do."
It is not immediately clear where he Garza is today. Van Valkenburgh suggested he is likely out of the country. His LinkedIn page lists his location as Springfield, Massachusetts, but he claims to be the CTO of a new venture based in Los Angeles called "Vision Innovations." A website for that operation lists its location as Sarasota, Florida. A call to Vision Innovations was not answered. Garza and his affiliates did not immediately reply to request for comment.