🔒SEC sues Bloomfield cryptocoin founder for $19M securities scheme

The legal case of a defunct Bloomfield cryptocurrency startup is coming to a head.

The U.S. Securities & Exchange Commission this month filed suit against Gaw Miners and its CEO Homero Joshua Garza, and affiliated company ZenMiner, alleging he and his companies defrauded thousands of investors to the tune of at least $19 million.

The SEC is asking a New Haven federal judge to require Garza to disgorge allegedly ill-gotten financial gains, with interest, and to pay a civil penalty.

Garza is required to respond to a Dec. 2 summons by the end of the month. The SEC alleges Gaw Miners committed securities fraud and made false and misleading statements to potential investors about investment contracts, called Hashlets, which were sold in 2014.

More than 10,000 customers bought Hashlets and most lost money, the SEC said.

Gaw had promised investors that Hashlets, which the SEC alleged were unregistered securities, would always be profitable and never obsolete. In reality, the contracts became unprofitable in just three months and obsolete by January 2015, the suit said.

Hashlets represented shares in profits Gaw said it would generate by using its computing power to mine for cryptocurrency.

But in reality, the complaint alleged, Gaw sold so many Hashlets in the first week that it would have needed as much as four times the computing power to back up the contracts.

“Most customers paid for a phantom piece of equipment that neither Gaw Miners nor ZenMiner owned,” the complaint reads. “Garza was responsible for Gaw Miners' and ZenMiners' decision to keep selling Hashlets, despite his knowledge (or reckless and negligent disregard) that the companies lacked the computing power they purported to be selling to investors.”

Because it wasn't generating enough cryptocurrency from its mining operation, Gaw paid some investor returns using other investors' money, according to the SEC, which described Hashlets as a Ponzi scheme.

Garza, 30, resided in Somers for a time, but is now living in Vermont, the complaint said. He didn't respond to a request for comment. It was unclear last week if he had a lawyer yet.

The SEC suit comes on the heels of several civil judgments against Gaw earlier this year.

In July, a Connecticut Superior Court judge awarded a pre-judgement remedy of $205,000 to two Gaw customers. The following month, that judge granted the plaintiff's motion for default, because Garza had failed to respond to a summons.

The Dec. 1 SEC complaint highlights Gaw's frequent shifts in its business model.

Founded in May 2014, Gaw first operated as a reseller of virtual currency mining equipment from overseas manufacturers.

In the spring, the company switched to a “hardware hosted mining” model, in which the company kept in its datacenter the computing equipment purchased by customers, who could control how it was used for mining.

In June 2014, Gaw switched to a cloud-hosted mining model, which gave customers less control over how their mining power was being used. Some customers complained, and Gaw began urging those customers in August 2014 to convert their cloud-hosted machines into Hashlet contracts.

Under the Hashlet model, Gaw owned and operated the computing power, and investors were promised a slice of the profits from that equipment's mining operations.

After Hashlets became unprofitable, the company launched its own cryptocurrency, called PayCoin, in December 2014.

The company encouraged customers to convert their Hashlet contracts to “HashStaker” digital currency wallets, which would hold and earn a return on PayCoins. But PayCoin's value tanked. Last week it was trading at around 4 cents.

“In offering HashStakers to Hashlet investors, GAW Miners and Garza attempted to prolong their scheme and prevent the collapse of GAW Miners,” the SEC complaint said.

– Matt Pilon