The SEC charged two Bitcoin mining companies and their founder with operating a Ponzi scheme to defraud investors.  “Mining” for virtual currency means applying computer power to solve complex equations that verify a group of transactions in that virtual currency.  The first computer (or collection of computers) to solve such an equation is awarded new units of that virtual currency.

The SEC’s complaint, filed in federal court in Connecticut, alleged that through his Connecticut based companies, Homero Joshua Garza perpetrated fraud by purporting to offer shares of a digital Bitcoin mining operation.  However, in reality, these companies did not own enough computing power for the mining it promised to conduct, leaving most investors paying for a share of computing power that never existed.

The SEC alleges that Mr. Garza and his companies, through their actions, engaged in:

  • Fraud in connection with the purchase or sale of securities, in violation of Section 10(b) of the Securities Act of 1934 (the “Exchange Act”) and Exchange Act Rule 10b-5;
  • Fraud in the offer or sale of securities, in violation of Section 17(a) of the Securities Act of 1933 (the “Securities Act”); and
  • The offer and sale of unregistered securities in violation of Section 5 of the Securities Act.

According to the SEC’s complaint, Mr. Garza, through his companies, earned approximately $19 million in revenue from his sale of digital mining contracts that supposedly entitled the holder to a share of the computing power used to mine for virtual currency.   More than 10,000 investors purchased the shares, who were led to believe that they would share in returns earned by the Bitcoin mining activities.  The SEC’s complaint states that Mr. Garza and his companies sold more computing power than they owned and had promised investors a return that was larger than the actual return they were making on the limited mining operations they did control.  Investors were gradually paid “returns” over time that were actually funds collected from other investors; however, few investors made a profit and most investors did not recover the full amount of their investments.

The SEC is seeking permanent injunctive relief as well as  disgorgement of ill-gotten gains and the imposition of civil penalties due to the egregious nature of the alleged violations.

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