SEC sues over bitcoin mining scam

The U.S. Securities and Exchange Commission (SEC) has accused two bitcoin “minting” companies and their founders of a $20 million Ponzi scheme that lured investors into paying for virtual currency to get rich quick.

     The complaint filed in the U.S. District Court for the District of Connecticut shows that the SEC sued GAW Miners LLC, ZenMiner LLC, and the founder of the two companies, Homero Garza, for civil fraud.

     Garza's lawyer, Marjorie Peerce, said in New York that he was disappointed that the SEC had sued him. Peerce said they would not make any further comments before the trial.

     Thomson Reuters reporters tried to find the specific locations of the two companies but were unsuccessful.

     The SEC's complaint stated that the specific method used by the 30-year-old Gaza to defraud was to claim that his company could use the so-called powerful computing power to "mint" virtual currency. Based on this, he sold investment contracts called "Hashlets", saying that as long as investors purchased these contracts, they could obtain the corresponding profits created from the minting.

     Unlike traditional currencies, Bitcoin is not issued by a central bank and is not backed by physical assets such as gold. Instead, it is "minted" by users using computers to calculate increasingly complex mathematical equations.

     When a user solves an equation, the Bitcoin system rewards him with a certain number of Bitcoins. As time goes by, more and more Bitcoins are minted, and the equations become more and more complex, requiring more powerful computers to solve them.

Scammers keep up with the times and are eyeing trendy new trends

     Garza currently lives in Brattleboro, Vermont, and his company is located in Bloomfield, Connecticut. The SEC pointed out that they did not actually have enough computing power to mint virtual currency, in other words, the contracts they sold could not deliver on their promises.

     In other words, investors in the Hashlets contract are actually paying for computing power that does not exist. In addition, Gaza will use the funds obtained from some investors as profits to return to other investors.

     Between August and December 2014, Garza and his two companies sold contracts worth $20 million to more than 10,000 investors. Most of the investors bought Hashlets through shopping websites.

     “Almost no one made money, and in fact, most Hashlets never even got their principal back,” the CSRC noted.

They want to be able to return the profits these companies made from their frauds to investors and punish them.