Connecticut Crypto Currency Trader Convicted For Wire Fraud And Sentenced To 21 Months In Prison And Pay Restitution Of Over $9 Million.

Do not think that just because digital exchanges are not broker-regulated by the IRS and digital exchanges are not obligated to issue a 1099 form reporting transactions, that your crypto currency transactions will always be a secret. The Federal government is cracking down on non-compliant traders and recently secured a conviction against 33-year-old Homero Joshua Garza a/k/a Josh Garza who reportedly collected over $9 million from investors.

Charges Filed Following Investigation By Federal Authorities

The U.S. Attorney’s Office for the District Of Connecticut announced on September 13, 2018 in a press release that Mr. Garza, age 33, of Somers, Connecticut, was sentenced by U.S. District Judge Robert N. Chatigny in Hartford to 21 months of imprisonment, followed by three years of supervised release, the first six months of which Mr. Garza must spend in home confinement, for his role in his companies’ purported generation and sale of virtual currency. 

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 approximately May 2014 and January 2015, Mr. Garza, through GAW, GAW Miners, ZenMiner, and ZenCloud, companies he founded and operated, defrauded 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”.  A hashlet entitled an investor to a share of the profits that GAW Miners or ZenMiner would purportedly earn by mining virtual currencies using the computers that were maintained in their data centers.  In other words, hashlet customers, or investors, were buying the rights to profit from a slice of the computing power owned by GAW Miners and ZenMiner.

Wire Fraud – 18 U.S. Code § 1343

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.

To generate business and attract customers and investors, Mr. Garza made multiple false statements related to the scheme, including stating that GAW Miners’ parent company purchased a controlling stake in ZenMiner for $8 million and that ZenMiner became a division of GAW Miners.  In fact, there was no such transaction.  Mr. Garza also stated that the hashlets his companies sold engaged in the mining of virtual currency.  In fact, Mr. Garza’s companies sold more hashlets than was supported by the computing power maintained in their data centers.  Stated differently, Mr. Garza’s companies sold the customers the right to more virtual currency than the companies’ computing power could generate.  Mr. 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 the companies would use to purchase Paycoins to drive up its price.  In fact, no such reserve existed apparently making the program operate like a ponzi scheme whereby Mr. Garza is alleged to have taken money from one company to prop up another by borrowing from newer investors while trying to keep older ones from getting too concerned.

Conviction Culminated Investigation By Multiple Federal Agencies

Through this scheme, Mr. Garza defrauded hundreds of individuals around the world of a total of $9,182,000.  On July 20, 2017, Mr. Garza pleaded guilty to one count of wire fraud. As part of the sentence, Judge Chatigny ordered Mr. Garza to pay restitution in that amount. Mr. Garza has been since released on bond and is ordered to report to prison on January 4, 2019.

Like other U.S. crypto crime cases, in is common for these cases to involve multiple law enforcement and regulatory agencies like the Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), and the U.S. Department of Justice (DOJ).

Of course now that Mr. Garza is done with the Federal criminal proceedings, he will likely have to face the Civil Division of the Internal Revenue Service.

What Should You Do?

The IRS is always interested in teaming up with other Federal agencies in their investigations of non-compliance with the laws and with only several hundred people reporting their crypto gains each year, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.