Lawsuit reveals intricacies of GAW Miners bitcoin scheme – vtdigger.org


(This story by Bob Audette was published in the Brattleboro Reformer on Jan. 17, 2017.)

BRATTLEBORO — Plaintiffs in a civil suit over bitcoin mining characterized the defendant as “the man behind the curtain,” in a filing in opposition to a dismissal request.

According to court documents, Stuart A. Fraser “… characterizes himself as a mere minority investor even though the Amended Complaint alleges that (Joshua) Garza and (Stuart) Fraser were 50-50 partners.”

The plaintiffs, a group of investors in GAW Miners and ZenMiners, alleged in their original filing — submitted in June 2015 — that Fraser and Garza fleeced them and up to 10,000 customers out of millions of dollars by selling “physical mining equipment … who would use its computing power to ‘mine’ for virtual currency.” The two companies were nothing more than components of a Ponzi scheme, wrote the plaintiffs, “in which investors’ returns were mostly paid by using the money invested by others.”

In December 2015, the Securities and Exchange Commission filed charges in the District of Connecticut, alleging Garza used cyber currency to defraud his customers. The SEC is asking a federal judge to award a default judgment of more than $10 million against Garza. On Nov. 22, Garza filed a sealed motion requesting a 60-day extension in the SEC proceedings. On Nov. 28, the court stayed the proceedings against Garza.

In 2002, Garza began Optima Computers in Brattleboro. The company offered new computer systems for sale, as well as service and repair of existing computer systems, of which Fraser was an investor. After Optima Computers went out of business, Garza and Fraser founded Great Auk Wireless High Speed Internet, also in Brattleboro. In previous articles reported by the Reformer, it was noted that Great Auk Wireless received a $60,000 grant from the state for broadband access, which had to be returned to the state. While Garza refused to comment on any ongoing litigation, he told the Reformer he was no longer involved in Great Auk Wireless at the time. “By that time I had left my position for over a year. I literally did not even know the president there had taken grant money until I read about it. Stuart and the president worked together on that. I had no involvement in any capacity.”

Josh Garza

Josh Garza

On Nov. 4, 2016, Garza was dismissed from the civil suit after “conversations …” between Garza and the plaintiffs. On Dec. 6, 2016, legal counsel for Fraser filed a motion in the Federal District Court for the District of Connecticut to dismiss the lawsuit against him as well, contending “Plaintiffs made a deal with the Devil, agreeing with the previously alleged mastermind of the fraud, original lead defendant Homero Joshua Garza, to dismiss all the claims against him in exchange for purported information from him in the hope that it could cure the deficiencies in their claims against Fraser.”

In the Nov. 4 filing dismissing Garza from the civil suit, Fraser was described as “a mentor and business associate of Garza for over a decade.” The Garza dismissal filing does not reveal what was talked about in those discussions, but it does characterize the relationship between Garza and Fraser as an “unholy alliance …”

On Jan. 9, the plaintiffs filed a motion in opposition to Fraser’s motion to dismiss, describing Fraser as “a Wall Street mogul and Vice-Chairman of prominent investment bank Cantor Fitzgerald …” who first befriended Garza when Garza was still a high schooler. “The two quickly became close friends, and Garza looked to Fraser for mentorship, business advice, financial support, and investments.”

The Jan. 9 filing also states “Courts construe control broadly precisely so that individuals like Fraser — the proverbial ‘man behind the curtain’ — cannot escape responsibility by maintaining a degree of formal separation from the primary fraudsters while exerting control over them and reaping the rewards of their fraud. To the extent the Amended Complaint now alleges greater involvement by Fraser, it does so because Plaintiffs learned new facts about Fraser’s role at the companies. Fraser’s fire-and-brimstone depiction of Plaintiffs’ efforts to obtain information about Fraser’s role at the companies and his relationship with Garza as a ‘deal with the devil’ and an ‘unholy alliance’ is ironic given Fraser’s ten-year friendship and numerous ‘deals’ with the very same ‘devil.’”

The plaintiffs also contend the pair started a variety of companies together, and that they agreed “they would be 50-50 owners in the companies they started or would start. They shared an informal understanding that Garza would take responsibility for their companies as ‘CEO,’ while Fraser would act as a de facto ‘Board.’ In that role, Fraser had the ability to control Garza and the companies.”

Those companies, designed to capitalize on the bitcoin phenomenon, including Paycoin, Hashlets, Paybase and HashTalk. Fraser’s position and participation “… brought a measure of legitimacy that the companies would otherwise lack,” noted the plaintiffs.

In addition, Fraser “provided an important and ready source of financing to the companies. He provided GAW Miners’ only capitalization. He loaned the companies money, and let Garza and the companies use his credit cards for company business.” Fraser also acted as a representative of the companies and negotiated with third parties and sought investments on the companies’ behalf. “Fraser directed the companies’ policies. He participated in their strategic direction of the companies. He participated in the management and direction of the companies’ advertising strategy. Fraser had a twitter account that he used to send messages promoting GAW Miners. Fraser used his connections to Cantor Fitzgerald to further GAW Miners business. Fraser secured regulatory advice from Cantor employees … Fraser used Cantor ‘personnel to respond to media inquiries about GAW Miners, to provide administrative support, and to handle accounting or legal issues related to GAW Miners.’”

Fraser was also well aware of the Ponzi-scheme nature of GAW Miners and ZenMiner, they wrote. “(T)he companies’ central business was selling computing power, but GAW Miners lacked the computing capacity to support its Cloud-Hosted Mining and Hashlet orders through ZenMiner.”

According to the filing, “Fraser had the power to control the companies, and held just as much power to direct the management and operations of the companies as Garza. Underscoring that point, when asked by a reporter whether Fraser was ‘an active partner’ or a ‘silent investor,’ Garza represented that Fraser was ‘a partner, just like me.’”

In 2015, a cache of 5.1 gigabytes of emails were leaked from the office of GAW Miners, spanning the time period May 2014 through January 2015 and “detail the lengths Homero Joshua Garza has gone to in order to maintain his fraudulent business activities,” according to qntra.net, edited by Aaron Rogier.

Those emails figure into both the SEC lawsuit and the civil suit filed against Fraser.

“I propose a simple solution, we split every system and company in half. I am both aware of the value of all you have invested in the past to get us here. As well as the value of the systems and companies (GAW Labs and VP) I have built,” wrote Garza. “Going (forward), here is what I am thinking, we will create a equal partnership (50/50) in our holding company ‘Geniuses At Work Corporation’, you can have the voting power (I dont care). I will put in everything I have built …”

In that email, Garza asked Fraser for a $10,000 per month investment “paid to Geniuses at Work Corporation for 24 months (to pay myself with),” adding “I am sure you get tired of hearing it. But I can never thank you enough for all you have done and continue to do. I am proud of everything we have done this year. GAW HSI, Smart-Tech, and GAW Labs are all cash flow positive. And we could have not gotten here without your support.”

After Fraser did not respond to multiple emails, Garza wrote “I thought a lot about it. Obviously I never thought when I made the deal that I would end up giving up half a company this successful. But, like you said, it could have gone either way. And one of the many things you taught me was to always honor your deals, the good and bad ones. Yes I have worked hard to build this company, but I would not here where I am today without you. No question in my mind. So in light of all that, let’s finish the deal as planned. You can pay out the rest of the cash to me, and I will issue you the 41% you deserve. If it’s cool with you, let’s keep each of us at 41% so there is equity available for investors. Sounds good?”

Wikimedia Commons photo

Wikimedia Commons photo

The emails also draw attention to a “pay-to-play” accommodation between bitcoin entrepreneurs and online sites established to purportedly report on the bitcoin business, including CryptoCoinNews and Bitcoinist. According to qntra.net, Garza made an attempt “to purchase equity in the payola based bitcoin news site amid Garza’s constant need to preview articles, have them edited or pulled on demand while liaising with other CCN authors …”

“We did wire $13,312.00 to Jonas Borchgrevink in Oslo, Norway for 1 month of advertising in Cryptocoinnews.com,” wrote a staff member to Garza.

According to the emails, Garza also sent a bitcoin “wedding gift” to another writer for CryptoCoinNews.

When asked by qntra.net if the writer was “an unwitting and naive accomplice … used by Garza to promote his scams,” the writer responded “I feel blind and stupid for falling for this. So many of us were sucked into what seemed to be a good thing. I got too close thinking he was a friend and working for the community. … I do apologize to the community as this was not intentional. I was duped along with so many others.”

In August 2015, a federal court judge in Mississippi granted a summary judgment against GAW Miners in favor of the Mississippi Power Company, in the amount of nearly $350,000 for an unpaid power bill. But, according to coindesk.com, “it remains unclear how MPC might go about recouping the funds. GAW is effectively defunct following months of staff exits, service shutdowns and the release of thousands of emails that detailed the company’s inner workings.”



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