The former CEO of a virtual currency company is heading to prison and must pay more than $9 million in restitution for his role in his companies’ purported generation and sale of virtual currency that devolved into a Ponzi Scheme.
Josh Garza, 33, formerly of Somers, Connecticut, was sentenced in Hartford District Court to a term of 21 months in prison, followed by three years of supervised release, the first six months of which he will have to spend in home confinement for his role in the multi-million dollar scheme.
According to court documents and statements made in court, “virtual currency” “is a digital representation of a value that can be traded and functions as a medium of exchange. Virtual currency generally is not issued or guaranteed by any jurisdiction or government, and its value is decided by consensus within the community of users of the virtual currency.”
A virtual currency generally self-generates units of currency through a process called “mining.” A virtual currency “miner” is computer hardware that runs special computer software to solve complex algorithms that validate groups of transactions in that virtual currency. Once a complex algorithm is solved, a unit of currency, such as a bitcoin, is awarded to the individual operating the miner. This process is known as “mining.”
Between May 2014 and January 2015, Garza, through four companies he founded and operated, defrauded his victims out of money in connection with the procurement of virtual currency on their behalf. The companies sold miners, access to miners and the right to purchase a virtual currency called “PayCoin” as well as “hashlets,” which entitled investors to a share of the profits the companies were allegedly earning.
According to John Durham, the United States Attorney for the District of Connecticut, “hashlet customers, or investors, were buying the rights to profit from a slice of the computing power owned by the companies."
In an effort to generate business, Garza made multiple false statements related to the scheme, overstating their worth and claiming they owned an $8 million stake in a parent company. Ultimately, Garza’s companies sold more hashlets than were supported by the computing power maintained in their data centers. His companies eventually sold the customers the right to move more virtual currency than the companies’ computing power could generate.
Garza also stated that the market value of a single “PayCoin” would not fall below $20 per unit because his companies had a reserve of $100 million that could be used to purchase PayCoins to drive up the price. No such reserve ever existed.
During the course of the scheme, Garza, through his companies, used the money they generated from the new investors to pay older investors. In total, Garza defrauded hundreds of people out of a total of $9,182,000 - which he was ordered to pay back by a judge. On July 20 last year, Garza pleaded guilty to one count of wire fraud. Garza remains released on bond, and is due to report to prison on Jan. 4 next year to begin his time behind bars.
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