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SEC alleges bitcoin investment was Ponzi scheme

The Securities and Exchange Commission charged two bitcoin mining companies and their founder on Tuesday with defrauding investors.

The SEC’s complaint accuses Garza and his firms of running a Ponzi scheme that used “mining” for bitcoin or other virtual currencies as a front to steal investor funds. “Mining” means applying computer power to try to solve complex equations. The first computer or collection of computers to solve an equation earns the bitcoin currency.

From August to December 2014, the SEC alleges in its complaint Homero Joshua Garza sold $20 million worth of shares in a digital mining contract he called a Hashlet through his digital bitcoin mining companies GAW Miners and ZenMiner. But those companies did not own enough computing power to solve the problems. Garza and his companies sold far more computing power than they owned, so some investors received proceeds generated from sales to other investors.

“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,” said Paul G. Levenson, director of the SEC’s Boston Regional Office, in a press release.

The SEC is looking for the court to stop the operations as well as force the companies to forfeit any allegedly illegal gains plus interest and penalties.

Garza’s attorney, Marjorie Peerce of Ballard Spahr, told MarketWatch, “Josh Garza is disappointed that the SEC has filed suit against him. Any further comment will be through the court process.”
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