Judge denies dismissal of GAW Miners civil lawsuit
BRATTLEBORO — The alleged mentor of a man who has pleaded guilty in a $10 million crypto-currency Ponzi scheme had his bid to dismiss a civil suit denied last week by a judge in the U.S. District Court for the District of Connecticut.
The suit, filed by investors of GAW Miners and ZenMiner, involves an alleged scheme to defraud customers and investors in a series of business ventures related to "virtual currency mining," which the complaint describes as the "appli[cation] of computer power in an attempt to solve complex equations that verify a group of transactions in [a] virtual currency [such as Bitcoin]. The first computer (or collection of computers) to solve an equation is awarded new units of that virtual currency."
In July, Homero Joshua Garza pleaded guilty to wire fraud in a criminal case filed against him in federal court by the Securities and Exchange Commission.
On Oct. 4, the federal court accepted a settlement reached between Garza and the Securities Exchange Commission, in which Garza, a former Brattleboro businessman, agreed to discontinue any illegal activity related to his sales of crytpo-currency and to give up $9,182,000 in profits from his illegal or wrongful conduct, including an additional $742,774 in interest. Garza also faces a prison sentence of up to 20 years in prison.
In addition to the criminal case filed against Garza, he was also named in the civil suit, but eventually dismissed after he agreed to work with the plaintiffs, leaving his business mentor, Stuart Fraser, as the sole defendant. Garza founded the now-defunct Optima Computers in 2002 and later with Fraser, Great Auk Wireless High Speed Internet, both in Brattleboro.
Fraser, the vice chairman of Cantor Fitzgerald, an investment bank, and Garza first met in 2003 when Garza was in high school. Fraser had hired Garza to install internet service at his vacation home in Vermont and "[t]he two quickly developed a close business and personal relationship" with Garza looking to Fraser for "business advice, direction, and mentorship," according to court documents. Over the next decade, Fraser "served as a mentor and business associate of Garza" and they formed several businesses together, including Great Auk Wireless High Speed Internet, with Garza serving as CEO and Fraser "as the Board." Fraser also served as a financial investor in the companies.
"Unlike a traditional investor," Fraser "kept Garza on a tight leash by doling out investments in piecemeal installments" and would withhold additional funding until Garza had reported back to him.
When Garza was dismissed, Fraser contended the action was taken to provide the plaintiffs with information "in the hope that" such new information "could cure the deficiencies in [Plaintiffs'] claims against Fraser" in the original complaint.
GAW Miners was incorporated in March 2014 to sell virtual currency mining and Fraser and Garza each owned half. Fraser eventually invested $735,000 in GAW Miners, according to court documents.
"Due to low profit margins on selling physical equipment, in June 2014, GAW Miners began offering its customers Hardware-Hosted Mining," stated the complaint. "This service provided that, in exchange for a fee paid by customers to cover maintenance expenses, GAW Miners would host customers' mining equipment at its own datacenter. GAW Miners told its customers they could access and control their mining equipment via remote management software offered by ZenMiner, a company co-owned by Fraser and Garza. GAW Miners also represented to its customers that, at the customers' request, GAW Miners would terminate the hosted mining services and ship to them the physical mining equipment. But GAW Miners 'never had sufficient designated equipment to return to customers.'"
Between mid-August and December 2014, GAW Miners and ZenMiner sold at least $19 million of Hashlets — or virtual mining contracts — to more than 10,000 investors, according to court documents.
Garza and Fraser also offered a new form of virtual currency called "Paycoin" and Hashpoints, which "were convertible promissory notes that could be purchased or mined and exchanged for Paycoin once Paycoin was launched," according to court documents. The pair created HashStakers, digital wallets designed to hold Paycoin, promising that Paycoin would have an estimated value of $80 to $100 per coin and that its value would not fall below a $20 price floor.
They also represented that "banks and investment firms were standing in line to support Paycoin and were financially backing it" and that merchants were widely adopting it.
According to court documents, Garza and Fraser wanted their customers' Paycoins to be locked up for the longest period of time possible and used that delay to "dump the more than 12 million Paycoins they secretly pre-mined — and falsely claimed to have destroyed — and reap the benefits of artificially inflated prices for Paycoin while GAW Miners' customers watched the value of their own Paycoins and HashStakers plummet."
Fraser had a "deep involvement with Garza and GAW Miners" and he participated "in GAW Miners' operations and strategic decision-making, and regularly provided direction to Garza concerning GAW Miners' business."
"A claim has facial plausibility when the pleaded content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged," wrote U.S. District Court Judge Michael P. Shea. "The amended complaint plausibly pleads that Fraser controlled the Companies and Garza. It does so first by alleging that Fraser owned half of the equity in each of the Companies — a well recognized indicator of control."
Fraser argued that the complaint merely alleges that he offered "suggestions" to Garza, but that Garza was "the ultimate decision-maker, actor and authority on the Companies, their products and their marketing." But this ignores the allegations of 50/50 ownership and joint control discussed above, and some allegations suggesting that it was Fraser who was the ultimate decision maker, noted Shea. "The amended complaint pleads facts that Fraser was a culpable participant in GAW Miners' and Garza's fraud because he was aware of information that contradicted GAW Miners' public statements about its services."
The complaint alleges that, in May 2014, Garza met with GAW Miners' CFO, Shiraz Moosajee. The two "discussed the ZenCloud business model in detail, including the fact that there would be a mismatch between the Companies' mining capacity and customer orders and how customers would be paid" — a fact that, based on other allegations that GAW Miners was selling more mining capacity than it actually owned and paying new customers with the fees paid by earlier customers rather than with the proceeds of mining activity, was a clear indicator of fraud, noted Shea.
These allegations are specific and, taken as true, give rise to the requisite "strong inference" that Fraser acted at least with recklessness, he wrote. "The allegations in the amended complaint, when accepted as true and taken collectively, are enough to create a strong inference that Fraser was at least reckless with respect to the Companies' and Garza's fraud."
Bob Audette can be contacted at 802-254-2311, ext. 160.
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