December 1, 2015 / 8:31 PM / in 3 years

UPDATE 2-SEC charges bitcoin mining companies in $20 million scam

(Adds comment from Garza’s lawyer in 3rd paragraph and details about “Hashlets”)

By Suzanne Barlyn

Dec 1 (Reuters) - Two bitcoin mining companies and their founder used the lure of quick riches from virtual currency to defraud investors in a $20 million Ponzi scheme, the U.S. Securities and Exchange Commission said on Tuesday.

The commission charged GAW Miners LLC, ZenMiner LLC and founder Homero Garza with civil fraud, according to a complaint filed in the U.S. District Court for the District of Connecticut

Garza is disappointed that the SEC has filed suit against him, said his lawyer, Marjorie Peerce in New York. Any further comments will be through the court process, Peerce said.

Efforts to locate the two companies were not successful.

Garza, 30, carried out the fraud by selling investment contracts, which he called “Hashlets,” that represented shares in profits the companies claimed would come from using their purported computing power to “mine” for virtual currency, the SEC said in the complaint.

Unlike traditional currency, bitcoins are not distributed by a central bank or backed by physical assets like gold, but are “mined” by users who use computers to calculate increasingly complex algorithmic formulas.

When a user solves a formula, the bitcoin system awards that user a set number of bitcoins. As time passes and more bitcoins are mined, the codes become more complicated and require more-powerful computers to solve them.

Garza, who now lives in Brattleboro, Vermont, and the companies, based in Bloomfield, Connecticut, did not have enough computing power to mine for the currency it needed to back up the contracts, or “Hashlets” it sold, the SEC said.

As a result, many investors paid for computing power that never existed. Moreover, Garza paid returns to some investors from proceeds generated from sales to others.

Garza and the companies sold $20 million in investment contracts to 10,000 investors between August and December 2014. Investors typically bought their Hashlets through a web-based shopping site.

“Most Hashlet investors never recovered the full amount of their investments, and few made a profit,” the SEC said.

The agency is seeking penalties and the return of profits the company made through the fraud, among other relief. (Reporting by Suzanne Barlyn; Editing by Lisa Von Ahn and Andrew Hay)

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