Class action sought in bitcoin civil suit

By Bob Audette, Brattleboro Reformer
HARTFORD, CONN. — With more than 200,000 users having spent nearly $30 million on cryptocurrency that didn’t actually exist, plaintiffs in a civil suit in Connecticut are pushing for their suit to be reclassified as a class action.
“There are several thousand class members here,” wrote Mark Kindall and Robert A. Izard, of Izard, Kindall & Raave in West Hartford. “Given the complexity of securities litigation and the size of the claims of individual Class members, it would not make sense for Class members to proceed individually.”
Kindall and Izard represent three men who claim they were misled by Josh Garza into investing in a cryptocurrency between Aug. 1, 2014, and Dec. 1, 2015. But, wrote Kindall and Izard, “An enormous group of potential plaintiffs, with losses ranging from millions of dollars to tens of dollars,” deserve to be represented in the suit, as well.
On Friday, Sept. 14, Garza pleaded guilty in a federal court in Hartford to wire fraud and was sentenced to 21 months in prison followed by six months of home confinement and three years of probation. Garza was also ordered to pay nearly $10 million in restitution to his victims.
Garza founded the now-defunct Optima Computers in Brattleboro, Vt., in 2002. Once Optima went out of business, Garza and his then-business mentor, Stuart Fraser, founded Great Auk Wireless High Speed Internet, also in Brattleboro. Great Auk was eventually bought out and no longer exists. In 2014, Garza and Fraser also founded GAW Miners and ZenMiner, bitcoin mining companies.
“This case might sound complicated,” wrote Kindall and Izard. “Though cloaked in technological sophistication and jargon, defendants’ fraud was simple at its core — defendants sold what they did not own and misrepresented the nature of what they were selling.”
The civil suit against Garza and Fraser was filed in 2016, accusing them of running a bitcoin Ponzi scheme that resulted in the plaintiffs losing more than $10 million. Several months after the filing, Garza was dismissed from the suit.
Fraser, who has been characterized by the plaintiffs as Garza’s mentor and “the man behind the curtain,” has contended that he had very little, if any, control of Garza’s actions in the scheme. Fraser has claimed the plaintiffs made “a deal with the Devil, agreeing with the previously alleged mastermind of the fraud … 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.”
Fraser’s attorneys have filed motions in the U.S. District Court for the District of Vermont, where the civil suit has been field, seeking the notes of the meetings between Garza and the attorneys for the plaintiffs. The judge has not yet ruled on that request.
According to the motion requesting consolidation into a class action suit, Garza and Fraser were required to register their products as securities under the Connecticut Uniform Securities Act, which they did not.
Garza also made misrepresentations about the nature of products the companies sold, including how much computing power was available to conduct the calculations that create a cryptocurrency and that the companies had a $100 million reserve to back up the $20 value of each of the bitcoins produced. In an internal email, Garza admitted that the companies would need to hold huge amounts of cash to guarantee the $20 price and “the entire model is flawed,” noted the class action filing.
In fact, noted one of the former employees of the companies, there wasn’t actually any bitcoin being mined.
“Instead,” wrote Kindall and Izard, “the Companies used payments they received from new investors to make payouts to older investors.”
“I knew that if his mindset was to over-leverage the mining capacity to bring in more revenue, that that was not going to be sustainable for long, plus it’s illegal, I believe,” stated GAW Miners’ Chief Technical Officer. “It’s a Ponzi scheme.”
“No reasonable investor would have purchased the products if they knew the truth about defendants’ fraudulent scheme,” wrote Kindall and Izard. “The fact that investors paid for the products indicates they were unaware of the falsehoods.”
The Companies also represented that thousands of merchants, including Amazon.com, had agreed to accept PayCoin, when “In fact, no such agreements had been made with Amazon or any other significant retailer. This promise was particularly significant because widespread commercial adoption had not been achieved by any other cryptocurrency and was considered crucial for long-term value.”
“For the foregoing reasons and authorities, plaintiffs request that the Court grant their motion to certify the class,” wrote Kindall and Izard.
Bob Audette can be contacted at 802-254-2311, ext. 151, or [email protected].
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