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SEC charges GAW Miners and ZenMiner as a Ponzi scheme [pdf]

67 points by rbobby 11y ago

JoshTriplett 11y ago
The title seems misleading; from the sounds of things, these weren't "mining companies" in the first place, they were scams from the start. To be a mining company, they'd have to actually do mining. Instead, it sounds like their primary product was the money coming in from people buying their product, which is the definition of a pyramid scheme. Quoting the relevant bits of the ruling: 35. Second, contrary to its stated reason for existence, no mining actually occurred through ZenMiner’s ZenCloud interface. Though customers paid for equipment that they believed they were directing to mine in various pools available through the ZenCloud interface, and also paid for hosting services, very few pieces of the mining equipment purchased by customers actually existed in a ZenMiner datacenter. Most customers paid for a phantom piece of equipment that neither GAW Miners nor ZenMiner owned. Ne ither GAW Miners nor ZenMiner was directing customers’ computing power to any pools at all, much less the ones customers believed they were choosing. 37. Cloud Hosted Mining customers were entitled to request that the computer equipment they had purportedly purchased be sent to them, but neither GAW Miners nor ZenMiner owned that equipment to ship. 49. By October 2014, GAW Miners had oversold Hashlets to an even more extreme degree. It had oversold altcoin-mining Hashlets by at least about 100 times its computing capacity, and bitcoin-mining Hashlets by at least about 5 times its computing capacity. 50. Though GAW Miners built a data center that, by November 2014, contained significant computing capacity for mining bitcoin, it made no increases to its computing capacity for mining altcoin.
- alvern 11y ago
  It seems they started as a mining operation, then pivoted to sell shares or futures called "Hashlets". The scam started when they oversold these Hashlets and advertised to customers to use a cloud service instead of their physical mining rigs.
  - gawsuit 11y ago
    The reason for that is that it turns out that paying for power and cooling is more expensive than not.
  - cba9 11y ago
    Right. At one point in the complaint, they say the company had oversubscribed its mining capabilities but kept selling to 4x IIRC, which rather implies that there was mining capability there in the first place (just much much less than they were selling).
- teen 11y ago
  definition of a ponzi scheme (not pyramid scheme)
- scoot 11y ago
  Ponzi rather than pyramid scheme, but otherwise I agree. (A ponzi scheme paying current investors from the funds contributed by incoming investors, as distinct from a pyramid scheme where payouts are typically in return for recruitment of others to the scheme.)
  - JoshTriplett 11y ago
    Fair enough, though the two are often combined (paying the top of the pyramid from the bottom).
- dang 11y ago
  We changed the title to be less misleading. Submitted title was "SEC charges Bitcoin companies GAW Miners, ZenMiner as a Ponzi scheme".
LukeHoersten 11y ago
This is a surprisingly clear and articulate explanation of digital currency mining and how it was used to mask a ponzi scheme by over-issuing securities against it. Well done SEC.
jimrandomh 11y ago
The Bitcoin world seems to have an awful lot of incompetent fraudsters. This particular one is surprising, because I don't see how they thought they could get away with it; the scheme described in the SEC complaint is one that would be guaranteed from the start to unravel, and the perpetrators weren't anonymous. What they did was, they sold shares in a Bitcoin mining operation corresponding to hashing power, and kept selling long after their actual mining equipment had sold out. They then used the revenue from those sales to buy Bitcoin on the open market, and misrepresent those purchased coins as newly-mined coins for withdrawals. Seriously, how could they possibly have thought that would work out?
- gawsuit 11y ago
  I've followed this one with amusement for a while. Basically they tried to be legitimate in a sense, until that turned out to be quite expensive, at some point they tried again to be legitimate but again with the same result. There's lots of history you can read up about in the Bitcointalk thread (1500 pages of it), including details like the CEO causing tens of thousands of dollars of damage to a rental property by amongst other things, running a mining operation in his basement. At one point they made a large mining facility in the US, with contracts with the power company to use a certain amount of service. They paid in the millions of dollars for mining hardware and power installation for their own small substation, they then ran it for a few months until the power company cut them off for never paying the power bill which amounted to $350,000 USD[1]. This was responded to as "a billing dispute" [2]. From my own calculations this farm was never able to be profitable (it always used more in power than it mined), and never covered even a small portion of the hashrate they were supposed to own. At one point they posted a video from within it, filmed without sound and in such a way as to hide the fact that there was only one rack of miners.[3] Many promotional photos were posted of their "farm", but none of the hardware is actually plugged in for these photos, so it was probably reboxed and shipped to customers afterwards.[4] The part not mentioned in the SEC complaint is where the CEO flees the US to Dubai, one of the people in Dubai he defrauded of $200,000 from wins a legal battle against him, and the US Government bails him back to the US. [1]: http://www.scribd.com/doc/261395976/Mississippi-Power-vs-GAW#scribd http://www.scribd.com/doc/261395976/Mississippi-Power-vs-GAW... [2]: https://www.cryptocoinsnews.com/wp-content/uploads/2015/04/13-gaw.png https://www.cryptocoinsnews.com/wp-content/uploads/2015/04/1... [3]: https://www.youtube.com/watch?v=2ZpZdeJNSV0 https://www.youtube.com/watch?v=2ZpZdeJNSV0 [4]: https://i.imgur.com/9YTH5mB.jpg https://i.imgur.com/9YTH5mB.jpg
hughes 11y ago
> After selling approximately 2,290 Remember [9/11 Memorial] Hashlets for a total of approximately $48,000, GAW Miners donated only $10,000 to a 9/11 related charity That'll go over well with a jury!
Kinnard 11y ago
I'd be careful about the use of the term ponzi scheme. I think it's a rather dangerous example of doublespeak: https://en.wikipedia.org/wiki/Doublespeak https://en.wikipedia.org/wiki/Doublespeak Social Security exactly fits the definition of a Ponzi Scheme[1], has serious sustainability issues[2], and could do far more damage to hundreds of millions of people if it were to collapse. No one is going after the people running Social Security though it is far more dangerous. [1] "operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator." [2] Social Security is a Ponzie Scheme: https://en.wikipedia.org/wiki/Social_Security_(United_States)#Claim_that_it_is_a_Ponzi_scheme https://en.wikipedia.org/wiki/Social_Security_(United_States...
- cjensen 11y ago
  The claim that Social Security is a Ponzi scheme is nonsense -- though it seems to fit the definition at first glance, if you think through it far enough you will see it does not fit. Since a Ponzi scheme is defined as an "investment", it is therefore voluntary. A Ponzi scheme can only obtain such volunteers if it promises each volunteer investor more than it pays in. It therefore requires an ever-growing pool of investors. Since there is a finite number of people on the planet, a Ponzi scheme must fail at some point. By contrast, Social Security is a mandatory scheme, and the pay-in and pay-out can be dynamically adjusted to ensure that it remains solvent. In particular, no guarantee is made that pay-out will exceed pay-in. Do not mistake the impending Social Security deficit for an inherent outcome of the scheme. The deficit could easily be fixed if politicians on both sides would stop pandering to their bases.
  - Kinnard 11y ago
    The fact that it is compulsory while it would allow those who run it to extract more to prevent a collapse, would do nothing to assuage the damage were it to collapse.
    - vkou 11y ago
      The fact that the payouts will be adjusted is what will prevent it from collapsing.
Animats 11y ago
That's what the SEC does. About once a week, they shut down some investment scam. This was a straight Ponzi, dressed up, as the SEC says, with techno-jargon. These were some of the people behind Paycoin, too.[1] [1] https://bitcoinmagazine.com/articles/death-paycoin-employee-video-reveals-internal-chaos-1429396603 https://bitcoinmagazine.com/articles/death-paycoin-employee-...

67 points by rbobby 11y ago

The title seems misleading; from the sounds of things, these weren't "mining companies" in the first place, they were scams from the start. To be a mining company, they'd have to actually do mining. Instead, it sounds like their primary product was the money coming in from people buying their product, which is the definition of a pyramid scheme. Quoting the relevant bits of the ruling: 35. Second, contrary to its stated reason for existence, no mining actually occurred through ZenMiner’s ZenCloud interface. Though customers paid for equipment that they believed they were directing to mine in various pools available through the ZenCloud interface, and also paid for hosting services, very few pieces of the mining equipment purchased by customers actually existed in a ZenMiner datacenter. Most customers paid for a phantom piece of equipment that neither GAW Miners nor ZenMiner owned. Ne ither GAW Miners nor ZenMiner was directing customers’ computing power to any pools at all, much less the ones customers believed they were choosing. 37. Cloud Hosted Mining customers were entitled to request that the computer equipment they had purportedly purchased be sent to them, but neither GAW Miners nor ZenMiner owned that equipment to ship. 49. By October 2014, GAW Miners had oversold Hashlets to an even more extreme degree. It had oversold altcoin-mining Hashlets by at least about 100 times its computing capacity, and bitcoin-mining Hashlets by at least about 5 times its computing capacity. 50. Though GAW Miners built a data center that, by November 2014, contained significant computing capacity for mining bitcoin, it made no increases to its computing capacity for mining altcoin.

alvern 11y ago
It seems they started as a mining operation, then pivoted to sell shares or futures called "Hashlets". The scam started when they oversold these Hashlets and advertised to customers to use a cloud service instead of their physical mining rigs.
- gawsuit 11y ago
  The reason for that is that it turns out that paying for power and cooling is more expensive than not.
- cba9 11y ago
  Right. At one point in the complaint, they say the company had oversubscribed its mining capabilities but kept selling to 4x IIRC, which rather implies that there was mining capability there in the first place (just much much less than they were selling).
teen 11y ago
definition of a ponzi scheme (not pyramid scheme)
scoot 11y ago
Ponzi rather than pyramid scheme, but otherwise I agree. (A ponzi scheme paying current investors from the funds contributed by incoming investors, as distinct from a pyramid scheme where payouts are typically in return for recruitment of others to the scheme.)
- JoshTriplett 11y ago
  Fair enough, though the two are often combined (paying the top of the pyramid from the bottom).
dang 11y ago
We changed the title to be less misleading. Submitted title was "SEC charges Bitcoin companies GAW Miners, ZenMiner as a Ponzi scheme".

LukeHoersten 11y ago

This is a surprisingly clear and articulate explanation of digital currency mining and how it was used to mask a ponzi scheme by over-issuing securities against it. Well done SEC.

jimrandomh 11y ago

The Bitcoin world seems to have an awful lot of incompetent fraudsters. This particular one is surprising, because I don't see how they thought they could get away with it; the scheme described in the SEC complaint is one that would be guaranteed from the start to unravel, and the perpetrators weren't anonymous. What they did was, they sold shares in a Bitcoin mining operation corresponding to hashing power, and kept selling long after their actual mining equipment had sold out. They then used the revenue from those sales to buy Bitcoin on the open market, and misrepresent those purchased coins as newly-mined coins for withdrawals. Seriously, how could they possibly have thought that would work out?

gawsuit 11y ago
I've followed this one with amusement for a while. Basically they tried to be legitimate in a sense, until that turned out to be quite expensive, at some point they tried again to be legitimate but again with the same result. There's lots of history you can read up about in the Bitcointalk thread (1500 pages of it), including details like the CEO causing tens of thousands of dollars of damage to a rental property by amongst other things, running a mining operation in his basement. At one point they made a large mining facility in the US, with contracts with the power company to use a certain amount of service. They paid in the millions of dollars for mining hardware and power installation for their own small substation, they then ran it for a few months until the power company cut them off for never paying the power bill which amounted to $350,000 USD[1]. This was responded to as "a billing dispute" [2]. From my own calculations this farm was never able to be profitable (it always used more in power than it mined), and never covered even a small portion of the hashrate they were supposed to own. At one point they posted a video from within it, filmed without sound and in such a way as to hide the fact that there was only one rack of miners.[3] Many promotional photos were posted of their "farm", but none of the hardware is actually plugged in for these photos, so it was probably reboxed and shipped to customers afterwards.[4] The part not mentioned in the SEC complaint is where the CEO flees the US to Dubai, one of the people in Dubai he defrauded of $200,000 from wins a legal battle against him, and the US Government bails him back to the US. [1]: http://www.scribd.com/doc/261395976/Mississippi-Power-vs-GAW#scribd http://www.scribd.com/doc/261395976/Mississippi-Power-vs-GAW... [2]: https://www.cryptocoinsnews.com/wp-content/uploads/2015/04/13-gaw.png https://www.cryptocoinsnews.com/wp-content/uploads/2015/04/1... [3]: https://www.youtube.com/watch?v=2ZpZdeJNSV0 https://www.youtube.com/watch?v=2ZpZdeJNSV0 [4]: https://i.imgur.com/9YTH5mB.jpg https://i.imgur.com/9YTH5mB.jpg

hughes 11y ago

> After selling approximately 2,290 Remember [9/11 Memorial] Hashlets for a total of approximately $48,000, GAW Miners donated only $10,000 to a 9/11 related charity That'll go over well with a jury!

Kinnard 11y ago

I'd be careful about the use of the term ponzi scheme. I think it's a rather dangerous example of doublespeak: https://en.wikipedia.org/wiki/Doublespeak https://en.wikipedia.org/wiki/Doublespeak Social Security exactly fits the definition of a Ponzi Scheme[1], has serious sustainability issues[2], and could do far more damage to hundreds of millions of people if it were to collapse. No one is going after the people running Social Security though it is far more dangerous. [1] "operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator." [2] Social Security is a Ponzie Scheme: https://en.wikipedia.org/wiki/Social_Security_(United_States)#Claim_that_it_is_a_Ponzi_scheme https://en.wikipedia.org/wiki/Social_Security_(United_States...

cjensen 11y ago
The claim that Social Security is a Ponzi scheme is nonsense -- though it seems to fit the definition at first glance, if you think through it far enough you will see it does not fit. Since a Ponzi scheme is defined as an "investment", it is therefore voluntary. A Ponzi scheme can only obtain such volunteers if it promises each volunteer investor more than it pays in. It therefore requires an ever-growing pool of investors. Since there is a finite number of people on the planet, a Ponzi scheme must fail at some point. By contrast, Social Security is a mandatory scheme, and the pay-in and pay-out can be dynamically adjusted to ensure that it remains solvent. In particular, no guarantee is made that pay-out will exceed pay-in. Do not mistake the impending Social Security deficit for an inherent outcome of the scheme. The deficit could easily be fixed if politicians on both sides would stop pandering to their bases.
- Kinnard 11y ago
  The fact that it is compulsory while it would allow those who run it to extract more to prevent a collapse, would do nothing to assuage the damage were it to collapse.
  - vkou 11y ago
    The fact that the payouts will be adjusted is what will prevent it from collapsing.

Animats 11y ago

That's what the SEC does. About once a week, they shut down some investment scam. This was a straight Ponzi, dressed up, as the SEC says, with techno-jargon. These were some of the people behind Paycoin, too.[1] [1] https://bitcoinmagazine.com/articles/death-paycoin-employee-video-reveals-internal-chaos-1429396603 https://bitcoinmagazine.com/articles/death-paycoin-employee-...