The founder of two virtual currency startups, GAW Miners and ZenMiner, has been ordered to pay a final judgment of $9.2 million, plus $743,000 in interest.
Homero Josh Garza also has pleaded guilty this summer to one count of wire fraud for running a Ponzi scheme involving the virtual currency between May 2014 and January 2015.
Garza could face up to 20 years in prison and a $250,000 fine.
U.S. District Judge Jeffrey Alker Meyer of the District of Connecticut also permanently restrained Garza from violating the Securities Exchange Act of 1934.
Garza must pay the interest to the U.S. Securities and Exchange Commission within six months.
According to Meyer’s order, Garza’s obligation to disgorge $9.2 million will be satisfied when he is sentenced to pay restitution at his sentencing date, which is now scheduled for Jan. 5, 2018.
Federal prosecutors have agreed to recommend that Garza’s sentence be reduced because of his “prompt recognition and affirmative acceptance of personal responsibility for the offense.”
Bloomfield-based GAW Miners and ZenMiner, both of which did not defend themselves in a lawsuit from the SEC, were ordered to pay a total of $12.4 million to the federal government by Meyer earlier this year.
That includes $10.1 million in disgorged profits and interest of $305,768 for which both companies are jointly and severally liable. Both companies were ordered to pay a civil penalty of $1 million each.
Meyer also permanently enjoined the two companies from violating federal securities law. The SEC alleged that the companies swindled more than 10,000 investors.
GAW Miners and ZenMiner were founded by Garza to engage in the “mining” of virtual currencies. Computing power is harnessed to solve equations in a computing process called “mining,” resulting in new units of the virtual currency being generated for users.
GAW Miners was founded by Garza to first sell computer hardware to buyers who wanted to try their hand at currency mining. Then GAW Miners shifted to hosting in its own data center the hardware that customers had purchased. Customers, who were supposed to still control the mining strategies, paid GAW Miners a fee to cover maintenance, electricity and Internet.
Garza then founded ZenMiner to sell equipment to investors for data mining that would be kept in a data center, but which investors could access via the cloud.
Garza also began selling “hashlets,” or securities that entitled investors to share profits derived from his companies’ purported computing power and its cryptocurrency mining efforts.
According to Garza’s plea agreement, “the defendant’s companies sold … customers the right to more virtual currency than the companies’ computing power could generate.”
As a result, according to the SEC, Garza set up a Ponzi scheme in which some investors’ funds were used to make payments to other investors.
The loss attributable to Garza was $9.2 million, leading to Meyer’s order earlier this month.
In the last part of Garza’s alleged fraud, he created a new cryptocurrency, Paycoin, and sought to get investors to redeem the hashlet securities for the chance to invest in Paycoin.
Garza claimed that the market value of a single Paycoin would not fall below $20 per unit because his companies had a reserve of $100 million on hand to purchase Paycoins and drive up their price, according to court papers. In reality, there was no such reserve.
The SEC did not respond to a request for comment for this article.
Virtual currencies are becoming increasingly popular. According to CoinMarketCap, there are almost 900 virtual currencies with a market capitalization of $167.6 billion, up from $7.2 billion at the end of 2015.