The U.S. Securities and Exchange Commission on Tuesday charged a high-profile bitcoin entrepreneur with running a Ponzi scheme, alleging he duped investors out of $20 million by claiming to sell contracts tied to the creation of new bitcoins.
Josh Garza, through two firms he owned, GAW Miner and Zen Miner, sold $20 million worth of “mining contracts” between August and December 2014, the SEC alleged, to more than 10,000 investors. The contracts were supposed to be a way for investors to collect new bitcoins—a process which involves immense computing power—without themselves investing in expensive equipment. Purportedly, investors were also shielding themselves from bitcoin’s volatility, as the contracts were guaranteed to provide a steady stream of income.
“Garza and his companies cloaked their scheme in technological sophistication and jargon,” the SEC said in a press release, “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.”
Efforts to reach Mr. Garza for comment were initially unsuccessful.
The SEC is seeking “permanent injunctive relief,” the return of any ill-gotten gains, and a fine on top of that, according to the complaint.
Mr. Garza and his firm purportedly guaranteed customers a steady payout from the company’s mining operations. But GAW Miner never owned enough computing power to pay out the contracts it was signing, the SEC alleged, meaning “most investors paid for a share of computing power that never existed.”
Most investors “never recovered the full amount of their investments, and few made a profit,” the SEC said.
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Almost from the start, GAW Miner was a lightning rod for controversy. Mr. Garza was a much-discussed topic in the bitcoin community, and there were public complaints against him almost from the beginning. The SEC wouldn’t say when it began investigating GAW Miner, but by July, it had served Mr. Garza’s brother, Carlos Garza, with a subpoena, according to the agency. Carlos also worked at GAW Miner and the SEC wanted to speak with him as part of the investigation. He showed up at the SEC’s Boston office in August, but refused to answer any questions. After that, the agency sought and received a court order compelling him to testify.
The company has been the subject of a number of lawsuits from disgruntled customers. In August, a Mississippi court ruled against the company, ordering it to pay $346,600 to a state utility, Mississippi Power Company, for months’ worth of unpaid electricity bills. The utility is still trying to collect the unpaid bill. “Mississippi Power is using all available remedies to collect the monies owed by GAW Miners,” the utility said in a statement.
After launching the mining contracts, Mr. Garza had another seemingly bold idea for the market: paycoin, a bitcoin alternative that supposedly had several features that made it a superior alternative. He launched the coin on Dec. 12 amid a fair amount of hype. But it immediately fizzled, and has steadily lost value since its launch. Paycoin is still trading, though at a fraction of its launch price. It most recently was quoted at $0.02, and the 16 million coins distributed have a total market cap of about $320,000. Its peak market cap on Dec. 29, 2014, was $160 million.
