Securities and Exchange Commission v Garza

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

________________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) ) Miscellaneous Business Applicant, ) Docket No. ) v. ) ) CARLOS R. GARZA, ) Respondent. ) ________________________________________________)

APPLICATION FOR ORDER TO SHOW CAUSE AND FOR ORDER TO COMPLY WITH ADMINISTRATIVE SUPBOENA

Respondent Carlos R. Garza (“Garza”) has refused to comply with an

administrative subpoena seeking testimony issued by the staff of the Securities and

Exchange Commission (the “Commission”) in connection with the Commission’s formal

investigation, In the Matter of GAW Miners, LLC, File No. B-02979. The Commission

subpoenaed Garza to testify on Wednesday, August 12, 2015. Garza appeared for

testimony but refused to answer any questions. Garza also failed to produce any

documents requested in the subpoena, including a document he had earlier represented

that he would produce. The Commission therefore respectfully submits this Application

for the Court to issue: (1) an Order to Show Cause why Garza should not comply with the

administrative subpoena directing him to testify before, and produce documents to, the

Commission staff; and (2) an Order compelling Garza to appear for testimony in the

Commission’s Boston Regional Office and to produce all non-privileged documents in

his possession, custody or control responsive to the Commission’s subpoena.

Case 1:15-mc-91258-RGS Document 1 Filed 08/14/15 Page 1 of 2

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In support of this Application, the SEC relies on the Memorandum of Law filed

herewith, as well as the Declarations of Gretchen Lundgren and Kathleen Shields and

their attached Exhibits.

Respectfully submitted,

//s//Kathleen Burdette Shields Kathleen Burdette Shields (BBO# 637438) Gretchen Lundgren (BBO#644742) U.S. SECURITIES AND EXCHANGE COMMISSION 33 Arch Street Boston, Massachusetts 02110-1424 Phone: (617) 573-8904 (Shields) (617) 573-4578 (Lundgren) [email protected], [email protected] Counsel for Applicant Securities and Exchange Commission

Dated: August 14, 2015

Certificate of Service

I, Kathleen Burdette Shields, hereby certify that on August 14, 2015, I caused a true copy of the foregoing document to be served via overnight mail upon the following persons: Carlos R. Garza 136 Hillcrest Terrace Brattleboro, VT 05301 //s//Kathleen Burdette Shields Kathleen Burdette Shields

Case 1:15-mc-91258-RGS Document 1 Filed 08/14/15 Page 2 of 2


________________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) ) Applicant, ) Miscellaneous Business ) Docket No. v. ) ) CARLOS R. GARZA, ) ) Respondent. ) ________________________________________________)

MEMORANDUM IN SUPPORT OF APPLICATION FOR ORDER TO SHOW CAUSE AND FOR

ORDER TO COMPLY WITH ADMINISTRATIVE SUPBOENA Respondent Carlos R. Garza (“Respondent” or “Garza”) failed to comply with an

administrative subpoena seeking testimony and documents issued by the staff of the Securities

and Exchange Commission (the “Commission”) in connection with the Commission’s formal

investigation, In the Matter of GAW Miners, LLC, File No. B-2979.

The Commission subpoenaed Respondent to testify on Wednesday, August 12, 2015.

When he appeared for testimony, Garza had two options: (1) testify, or (2) invoke a valid

privilege not to do so. He did neither. Garza refused to provide any substantive testimony and

further refused to assert any valid privilege. He claimed that because he did not understand the

securities laws, he felt scared and intimidated and therefore would not answer any questions.

The Commission therefore requests that this Court issue: (1) an Order to Show Cause why

Respondent should not comply with the administrative subpoena; and (2) an Order compelling

Respondent to appear for testimony in the Commission’s Boston Regional Office and further to

provide testimony or assert a specific, valid legal right or privilege not to do so.

Case 1:15-mc-91258-RGS Document 1-1 Filed 08/14/15 Page 1 of 16

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BACKGROUND

1. The Commission Issued a Formal Order of Investigation Authorizing Its Staff to Issue the Administrative Subpoena.

The Commission is statutorily authorized to issue subpoenas to compel testimony and the

production of documents in its investigations. See Section 19(c) of the Securities Act of 1933

(“Securities Act”) [15 U.S.C. §77s(c)] and Section 21(b) of the Securities Exchange Act of 1934

(“Exchange Act”) [15 U.S.C. §78u(b)] (in conducting investigations, “the Commission or any

officer designated by it is empowered to administer oaths and affirmations, subpoena witnesses,

compel their attendance, take evidence, and require the production of any books, papers,

correspondence, memoranda, or other records which the Commission deems relevant or material

to the inquiry”). On February 3, 2015, the Commission issued an Order Directing Private

Investigation and Designating Officers to Take Testimony (“Formal Order”) in an investigation

entitled In the Matter of GAW Miners, LLC, File No. B-02979. See Declaration of Gretchen

Lundgren dated August 14, 2015 (“Lundgren Dec.”) ¶ 3, filed herewith. Among other things, the

Formal Order directed that an investigation be undertaken to determine whether certain persons

or entities had violated Sections 5(a), 5(c), or 17(a) of the Securities Act, or Sections 15(a),

15(c), or 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with GAW Miners’

apparent offer or sale of securities. Id. Specifically, the Commission is investigating whether

GAW Miners, LLC, and certain affiliated individuals and entities may have engaged in fraud by

selling securities that purported to entitle their holders to a share of profits from GAW’s alleged

virtual currency mining operations. Id. ¶¶ 4-5. In addition, GAW Miners’ sale of these apparent

unregistered securities, acting through individuals functioning as unregistered brokers, may have

violated the provisions of the securities laws that require securities to be registered with the

Commission, and require brokers to register with the Commission. Id. ¶ 4.


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2. The Commission’s Investigation Into GAW Miners The Commission’s Division of Enforcement is investigating possible fraud in connection

with GAW Miners’ sale of securities, as well as potential violations of the securities registration

requirements and the broker registration requirements. GAW Miners purported to be a leader in

the virtual currency “mining” industry. Id. ¶ 5. “Virtual currency” is a digital representation of

value that can be traded and functions as a medium of exchange; a unit of account; and/or a store

of value, but does not have legal tender status. See Financial Action Task Force, “Virtual

Currencies: Key Definitions and Potential AML/CFT Risks,” at 4 (June 2014) (http://www.fatf-

gafi.org/topics/methodsandtrends/documents/virtual-currency-definitions-aml-cft-risk.html).

The most widely adopted virtual currency is bitcoin, although there are many other virtual

currencies used today. Virtual currency is distinct from fiat currency, which is the coin and

paper money of a country that is designated as its legal tender; circulates; and is customarily used

and accepted as a medium of exchange in the issuing country. See id. An example of fiat

currency is the United States dollar. Virtual currencies may be traded on online exchanges for

conventional currencies, including the U.S. dollar, or used to purchase goods and services. See

SEC v. Shavers, No. 4:13-cv-416, 2014 WL 4652121, *1 (E.D. Tex. Sept. 18, 2014) (explaining

bitcoin in context of bitcoin market arbitrage operation).

In addition to functioning as a monetary alternative, bitcoin, and some other virtual

currencies, can be “mined.” “Mining” for bitcoin means applying computer power to try to solve

complex equations that verify groups of bitcoin transactions.” See Virtual Currencies, supra at

5, 7. The first computer (or collection of computers) to solve such an equation is awarded newly

created bitcoins (or fractions thereof). This process is known as “mining,” and the computer

equipment used in this process, and the humans who own them, are known as “miners.” See id.


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at 7. Thus bitcoin mining is inherently a profit-seeking endeavor. A bitcoin miner’s hope is that

he can combine his computing power with others to receive a payout in the form of new bitcoins

that is worth more than the expenses he incurs to purchase the specialized computer hardware

that solves the relevant equations and to keep that computer equipment operational.

While GAW Miners started as a distributor of the computer hardware used in virtual

currency mining, its business model transitioned, by the summer of 2014, to selling shares in the

profits it claimed would be derived from its own virtual currency mining operations. GAW

Miners named these shares “Hashlets” because they were claimed to represent a share of the

company’s purported “hashing power,” (or computing power), that would be devoted to virtual

currency mining. Lundgren Dec., ¶ 5. GAW Miners earned over $10 million in revenue from

selling Hashlets to thousands of investors. Id. By late 2014, after the profitability of Hashlets

began to wane, GAW Miners sponsored the introduction of its own, new virtual currency, known

first as HashCoin, and eventually as PayCoin. Id. ¶ 6. Though GAW Miners represented to the

public that PayCoin would have a fixed value of at least $20 (U.S. dollars) per PayCoin, in

actuality, its value quickly declined and it is now trading at approximately $.04 per PayCoin. Id.

This investigation centers around the potential securities law violations that occurred in

connection with GAW Miners’ sale of Hashlets, and its activities surrounding potential sales of

investments related to PayCoin. Id. ¶ 7. In particular, the Commission is investigating whether

GAW Miners’ claims to investors about their virtual currency mining operations were false and

misleading. Id. GAW Miners and its Chief Executive Officer (“CEO”) represented that all of

the Hashlets of computing power that investors purchased would be pooled together to engage in

virtual currency mining, and that investors’ returns, or “payouts,” would be calculated based on

the success of those collective virtual currency mining operations. Id. According to GAW


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Miners, buying a Hashlet allowed investors to mine virtual currency without the expense and

expertise that would be required to purchase and maintain their own virtual currency mining

equipment. Id. ¶ 7.

The Commission is investigating the possibility that GAW Miners and its CEO sold to

investors far more Hashlets worth of computing power than the company actually had in its

computing centers. Id. ¶ 8. The Commission is also investigating whether numerous material

representations that GAW Miners and its CEO made to Hashlet purchases were true, including

representations about the profitability and longevity of Hashlets, Hashlets’ mining activities, and

how the payouts for Hashlets were derived. Id. The Commission is also investigating whether

GAW Miners’ Hashlet sales had the hallmarks of a Ponzi scheme. Id. ¶ 9. In particular, the

Commission is investigating whether GAW Miners may have sold far more computing power

than it owned and dedicated to virtual currency mining, and therefore, whether the company may

have owed investors a return that was larger than any actual return it was making on its mining

operations. Id. If GAW Miners did not have actual mining operations, that allowed it to earn the

daily mining payout that it owed to Hashlet investors, then the payouts that investors received

could only have been a gradual repayment over time, as “returns,” the money that they and

others had invested. As a result, some investors’ funds may have been used to make payments to

other investors. Id.

With respect to PayCoin, the Commission is investigating whether individuals and

entities were induced to pay significant sums of money to GAW Miners in exchange for future

rights to acquire interests in PayCoin, or methods of earning money dependent on PayCoin,

whether the representations made in connection with these PayCoin rights were false or

misleading, and whether these rights constitute securities that are subject to the federal securities


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laws. Id. ¶ 10.

Another component of the Commission’s investigation concerns what happened to the

revenue that GAW Miners earned in bitcoin and other virtual currencies, with an equivalent

value of millions of United States dollars. Id. ¶ 11.

Respondent Garza is the brother of GAW Miners’ CEO and he began working for the

company in approximately August 2014, shortly before GAW Miners began selling Hashlets to

the public. Id. ¶ 12. Though Garza had several roles at GAW Miners, he was primarily a

salesman, and had responsibility for sales made through GAW Miners’ resellers, and sales to

“VIP” customers who had a high net worth or who made high dollar value purchases from GAW

Miners. Id. In those roles, Garza was intimately familiar with representations that GAW Miners

made to its customers about both Hashlets, and later PayCoins. Id. He also communicated with

GAW Miners’ CEO and others at the company about whether, and on what terms, GAW Miners

could sell Hashlets, and later, rights dependent on PayCoins, to its investors. Id. ¶ 13. In

connection with his sales efforts, Garza also frequently communicated with customers about the

ways in which they could pay GAW Miners with bitcoins. Id. He thus likely has knowledge

about how GAW Miners received and transferred bitcoin and other virtual currencies, as well as

GAW Miners’ recordkeeping relating to those bitcoin transfers.

The staff has questions for Garza concerning, among other things, his relationship and

communications with customers and resellers of Hashlets, his knowledge of marketing and sales

of Hashlets, his communications with GAW Miners’ CEO concerning sales of Hashlets, his

relationship and communications with purchasers of PayCoin, and GAW Miners’ receipt and

transfer of bitcoin and other virtual currencies to and from its customers and among its accounts.


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3. Garza’s refusal to provide substantive testimony. On June 30, 2015, the Commission subpoenaed Respondent Garza to testify before

officers of the Commission. His testimony was scheduled for July 28, 2015. See Lundgren

Dec., ¶14, Ex. A. After serving the subpoena, and sending a follow up letter to Garza asking him

to contact the Commission’s staff, the Commission’s counsel received a telephone call from

Garza on July 20, 2015. During that telephone call, Garza stated that he was calling on a phone

that his brother, GAW Miners’ former CEO, had provided to him and that he did not feel

comfortable talking on that phone. See Declaration of Kathleen Shields (“Shields Dec.”), ¶ 3.

He asked if he and the Commission’s counsel could engage in a video chat or Skype call. The

Commission’s counsel responded that that was not possible and provided her email address so

that Garza could contact her if he did not want to speak on his brother’s phone. Id. ¶ 5. Later

that day, Garza emailed the Commission’s counsel and requested an extension of his testimony

date so that he could retain legal counsel. Id. ¶ 6, Ex. A. The Commission’s counsel agreed and

gave him an additional week to retain counsel, until August 4. Id. The Commission also

inquired about Garza’s production of documents responsive to the subpoena, which had been due

on July 14, 2015. Id. ¶ 7. Garza responded by email, thanking the Commission for the extension

and representing that the only responsive document he had was his 1099 tax form. Id. ¶ 8 The

Commission asked that he bring that document with him when he testified on August 4. Id. ¶ 9.

He agreed to do so, but did not bring the document with him.

Several days later, on July 31, 2015, Mr. Garza asked for another extension of his

testimony date. Id., ¶ 10. While he claimed that he had “applied for many state assistance

programs to reduce my cost I have yet to acquire an attorney.” Id. The Commission’s counsel

agreed to give him one final extension, until August 12, 2015, to retain counsel. Id. ¶ 11. Mr.


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Garza expressed satisfaction with that extension. Id. ¶ 12.

Garza appeared at the Commission’s office on August 12, 2015 without counsel. Before

the opening of the record, the Commission’s counsel provided Garza with a copy of the

Commission’s Formal Order of Investigation, and another copy of the Commission’s Form 1662,

which had also been attached to the subpoena served on him. The Form 1662 explains how the

Commission may use the information that witnesses provide during its investigations. See

Lundgren Dec., ¶ 14, Ex. A. The Commission’s counsel gave Garza the opportunity to ask any

questions he wished to ask about those documents. Though he stated that he did not understand

them, he declined to ask any questions about them, or any of their provisions.

Once the testimony began, and after Garza took an oath to tell the truth, he basically

refused to provide any further substantive testimony. Id. ¶ 16, Ex. B. Garza refused to answer

even background questions, including his full name, whether he was related to GAW Miners’

CEO, his age, or his educational level. Id. at 14, 21, 30, 32-33. He also refused answer any

questions relating to his employment at GAW Miners. Id. at 8, 15. Garza’s refusal to answer

questions extended even to basic questions about the events that had transpired during the

testimony itself (whether any substantive discussion happened off the record, whether he saw

documents that were placed before him). Id. at 18-19, 22-25.

As purported justification for his refusal to answer questions, Garza claimed that he was

scared and intimidated because he did not understand what the Commission did, or the federal

securities laws. Id. He claimed that he did not understand why he was being asked to testify. In

response to the Commission’s counsel’s attempts to clarify that the Commission was interested

in asking him questions about his work at GAW Miners, Garza refused to elaborate on why he

was scared, or what specifically he did not understand. Id. at 7-8, 10-11, 20. Garza steadfastly


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refused to provide any substantive responses to questions in what appeared to be coached

obfuscation. In response to a number of basic questions about whether he saw information that

was contained in a document that was placed before him, he asked “will I get in trouble if I

answer that question?” Id. at 46-47, 48, 50, 51. Attempts by the Commission’s counsel to

determine what type of “trouble” he meant resulted in no further clarity. Id.

Garza’s responses to the Commission counsel’s questions were articulate. He had no

trouble conversing in English. Documents received during the course of the Commission’s

investigation demonstrate that Garza is capable of communicating in written English. See

Lundgren Dec., ¶ 17. Though he claimed to be uneducated in matters relating to the securities

laws, he neither claimed nor demonstrated that he was lacking in ordinary intelligence such that

his capacity to testify could be questioned. Id. ¶ 16, Ex. B at 60-61.

The Commission’s counsel also asked Garza repeatedly if he wished to invoke his Fifth

Amendment right against self-incrimination, and indicated that if he did so, she could not compel

him to answer her questions. Id. at 6-7,12, 28, 33, 34, 54, 62. Garza refused to do so. Id.

Garza repeatedly requested that the Commission appoint counsel for him because he

claimed to be unable to afford his own attorney. Despite having requested two extensions in

order to obtain counsel, and despite his email representation that he had attempted to find state

assistance with retaining counsel, Garza refused to identify any steps that he had taken to attempt

to locate or retain his own counsel, and refused to indicate whether there was any likelihood that

he would have the resources to be able to retain his own counsel within the next two or three

weeks such that a further extension had the chance to produce a meaningfully different result.

Id. at 10, 12-13. The Commission’s counsel made it clear on the record that the Commission

does not appoint counsel for witnesses in its investigative proceedings. Id.


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At that point, after nearly 90 minutes of the staff trying to understand and address Garza’s

concerns and his ability to obtain counsel, the parties were at an impasse concerning whether

Garza’s refusal to answer questions was valid. Commission counsel then suspended testimony

for the purpose of seeking judicial assistance. Id. at 62-64.

ARGUMENT

The Commission has served Respondent Garza with an enforceable subpoena. The

Commission is conducting this investigation for the proper purpose of investigating potential

violations of Sections 5(a) or (c), and 17(a) of the Securities Act, and Sections 15(a), 15(c), or

10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with GAW Miners’ offer or

sale of securities. The Commission issued the subpoena to Garza in accordance with required

administrative procedures. Garza’s testimony is clearly relevant to this securities law

enforcement investigation. Thus, the Court should enforce this subpoena.

Garza’s refusal to provide testimony based on his unspecified apprehension about the

Commission’s investigation is not a valid response to a legitimate Commission subpoena.

Garza’s choices in response to the Commission’s questions were (1) to provide truthful and

complete testimony or (2) to assert a valid privilege, such as the Self-Incrimination Clause of the

Constitution’s Fifth Amendment. He did neither. Witnesses like Garza cannot be allowed to

subvert legitimate Commission investigations by simply refusing to testify as a result of their

own personal fears or their claimed lack of education.

Garza’s request that the Commission appoint counsel for him is similarly a nonstarter.

Garza has no right to have appointed counsel in an administrative investigation. The

Commission has no funds to provide such counsel. While many witnesses retain counsel to

represent them in investigative testimony, many witnesses appear without counsel. This Court


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should enter an order compelling Garza either to testify, at which time he must answer the

Commission’s questions or assert some valid legal privilege such as his Fifth Amendment right

against self-incrimination.

I. THE COURT SHOULD ENFORCE THE COMMISSION’S SUBPOENA. To enforce an administrative subpoena, a court must be satisfied that: (1) the inquiry is

being conducted for a proper purpose; (2) the subpoena was issued in accordance with the

required administrative procedures; and (3) the information sought is relevant to that legitimate

purpose. See, e.g., United States v. Powell, 379 U.S. 48, 57-58 (1964) (enforcing administrative

subpoena); see also SEC v. Howatt, 525 F.2d 226, 229 (1st Cir. 1975) (applying the Powell

standard and enforcing SEC administrative subpoena in District of Massachusetts).

Once the Commission meets these criteria, a Respondent bears the burden of establishing

that the Commission’s purpose was unlawful or its subpoena unreasonable. SEC v. Arthur

Young & Co., 584 F.2d 1018, 1024 (D.C. Cir. 1978) (enforcing SEC subpoena where respondent

did not demonstrate that subpoena was an unreasonable burden); Howatt, 525 F.2d at 229

(enforcing SEC subpoena where respondent did not demonstrate that agency was acting in bad

faith); SEC v. Murray Dir. Affiliates, Inc., 426 F. Supp. 684, 686 (S.D.N.Y. 1976) (enforcing

SEC subpoena where “it would not be abusive for this court to compel compliance”).

The First Circuit has recognized that Congress committed securities investigations to the

Commission and “it is not the court’s role to intrude into the [Commission’s] function.” Howatt,

525 F.2d at 229. As a result, a Respondent’s burden of showing unreasonableness “is not easily

met.” SEC v. Brigadoon Scotch Dist. Co., 480 F.2d 1047, 1056 (2d Cir. 1973) (refusing

respondent’s request that the court determine whether subject of inquiry was within SEC’s

jurisdiction; enforcing SEC subpoena where the inquiry was for a legitimate purpose and the


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information sought was relevant to that inquiry). Here, the Commission’s subpoena satisfies all

applicable standards, and Garza cannot meet his burden of demonstrating that the Commission’s

actions are unreasonable or unlawful.

A. The Commission Has a Proper Purpose for Its Investigation.

Section 20(a) of the Securities Act and 21(a) of the Exchange Act authorize the

Commission to conduct investigations into possible violations of the federal securities laws.

Section 19(c) of the Securities Act and Section 21(b) of the Exchange Act further permit the

Commission to subpoena witnesses and compel their attendance at testimony. Its investigation

of GAW Miners and related persons and entities is being conducted pursuant to the Formal

Order issued by the Commission pursuant to those statutory provisions. Accordingly, this

investigation is lawful and falls within the scope of authority that Congress has granted to the

Commission. See SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1376 (D.C. Cir. 1980)

(recognizing the scope of Commission’s authority under §21(a) of the Exchange Act).

B. The Subpoena Satisfies All Administrative Requirements.

The subpoena issued to the Respondent satisfies all applicable administrative

requirements. Pursuant to Section 21(b) of the Exchange Act, officers designated by the

Commission are empowered to subpoena witnesses and require the production of relevant

evidence. Gretchen Lundgren, who is an enforcement attorney in the Commission’s Boston

Regional Office, issued the subpoena to Garza and was specifically empowered by the Formal

Order with authority to subpoena witnesses and documents in connection with this investigation.

Lundgren Dec., ¶ 14. Kathleen Shields, who is a trial counsel in the Commission’s Boston

Regional Office, and who asked the majority of the questions during Garza’s appearance on

August 12, 2015, was also specifically authorized to administer oaths and compel witnesses’


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testimony for the GAW Miners investigation. Id.

C. The Commission Seeks Relevant Information from Garza.

For purposes of subpoena enforcement, relevance is established when the information

sought is not “plainly incompetent or irrelevant for any lawful purpose.” Arthur Young & Co.,

584 F.2d at 1029 (citing Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 509 (1943)). The

court in Arthur Young held that “the test is relevance to the specific purpose, and the purpose is

determined by the investigators.” 584 F.2d at 1031.

Here, the information sought by the Commission is directly relevant to the Commission’s

ongoing investigation of potential securities laws violations. Garza worked for the company that

engaged in the conduct the Commission is investigating, at the time when the company was

selling the apparent investment products that are the focus of that investigation. Garza’s sales

role at the company also put him in direct contact with customers, in situations where he served

as a conduit of information between the company and its customers, and particularly some of its

largest customers. His testimony about communications he had with customers is thus relevant

to whether false or misleading statements were made to those customers. Documents obtained

by the Commission also suggest that Garza may have had knowledge, or access to information

suggesting that GAW Miners engaged in a fraudulent scheme to oversell Hashlets when

compared to the computing power it possessed and used for virtual currency mining. Obtaining

testimony from Garza about these documents will assist the Commission in evaluating the

scienter of those potentially involved in fraud. Further, Garza appears to have information that

may assist the Commission in determining how and into what accounts GAW Miners received

virtual currency from its customers, which may assist the Commission in tracking that virtual

currency to the present. Thus, Garza’s subpoenaed testimony is directly relevant to the


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Commission’s investigation of possible violations of Sections 5(a) or (c), and 17(a) of the

Securities Act, and Sections 15(a), 15(c), or 10(b) of the Exchange Act and Rule 10b-5

thereunder.

II. GARZA’S REQUEST FOR APPOINTED COUNSEL IS NOT A VALID BASIS FOR HIS REFUSAL TO TESTIFY.

Garza’s only asserted basis for refusing to provide testimony was his claim that the

Commission should appoint counsel for him, and he would then feel comfortable testifying. His

position is contrary to law, and should not be countenanced as a legitimate basis for refusing to

testify. Garza simply has no right to appointed counsel in a Commission investigation. See

Lassiter v. Dep’t of Soc. Servs. Of Durham Cty, N.C., 452 U.S. 18, 26-26 (1981) (right to

appointed counsel only exists “where the litigant may lose his physical liberty if he loses the

litigation”); DesRosiers v. Moran, 949 F.2d 15, 23 (1st Cir. 1991) (“There is no absolute right to

a free lawyer in a civil case.”); Lucien v. Spencer, 534 F. Supp. 2d 207, 209 (D. Mass. 2008)

(finding no right to counsel for prisoner bringing habeas petition); SEC v. Current Financial

Services, 62 F. Supp. 2d 66, 67 (D.D.C. 1999) (defendants have no constitutional right to counsel

in SEC enforcement proceeding). Although courts have the discretion to appoint counsel in

“exceptional” cases, this is not the type of case where the absence of counsel would lead to a

“fundamental unfairness” that impinges on due process rights. Cookish v. Cunningham, 787

F.2d 1, 2 (1st Cir. 1986). To the contrary, this is a relatively straightforward securities fraud

investigation, where the facts about which Garza will be asked relate to his own actions and

inactions. See Lundgren Dec., Ex. B at 9, 11. He is not being asked for his opinions about

matters of securities law, or about anything for that matter. There is no basis to believe that

Garza would be incapable of understanding any questions that Commission’s counsel asked him,

or incapable of answering those questions truthfully.


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After giving Garza about one month to retain counsel before his originally scheduled

testimony date, the Commission agreed to delay his testimony for two additional weeks to allow

him time to retain counsel. In that intervening six week period, there is no reason to think that

Garza did anything to obtain counsel. When asked under oath, he refused to provide any

description of his attempt to locate or retain counsel. Similarly, under oath, he provided no

information to support a finding that a further reasonable delay would result in him obtaining the

money that it would cost him to retain counsel. Any further delay is unwarranted in this on-

going investigation, in which there are potentially vast investor losses. Because Garza refused to

testify substantively, the Commission staff is presently unable to obtain testimony that will

potentially provide important information to aid the Commission’s investigation.

There is no legal precedent for permitting a witness to flaunt a Commission subpoena

simply because the witness claims he cannot afford to hire counsel. Such a ruling would be

extremely prejudicial to the Commission’s mandate to enforce the securities laws because it

would stymie the Commission’s investigative authority, and potentially permit wrongdoers to

escape justice simply because they may already have spent the proceeds of their fraud by the

time they are subpoenaed, and have nothing left to fund the expenses of counsel.

In recognition of the need for expeditious action, Commission subpoena enforcement

proceedings are generally summary in nature. See, e.g., SEC v. Sprecher, 594 F.2d 317, 319-320

(2d Cir. 1979); SEC v. First Sec. Bank of Utah, N.A., 447 F.2d 166, 168 (10th Cir. 1971). As the

Second Circuit stated in United States v. Davey, “[W]e take this occasion to stress again the

desirability of expediting resolution of any question concerning the validity of subpoenas and the

production of evidence in the district court as well as on the appellate level. These matters

should be given precedence over other business.” 426 F.2d 842, 845 (2d Cir. 1970) (discussing


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IRS summons). Accordingly, the Commission respectfully requests that the Court act promptly

to grant this Application and the requested relief.

CONCLUSION

For the reasons stated above, the Commission requests that its Application be granted in

all respects and that this Court enter: (1) an Order to Show Cause why Respondent should not

comply with the administrative subpoena; and (2) an Order compelling Respondent to appear for

testimony in the Commission’s Boston Regional Office and further to provide testimony or

assert a specific, valid legal privilege not to do so.

Respectfully submitted,

//s//Kathleen B. Shields Kathleen Burdette Shields (BBO# 637438) Gretchen Lundgren (BBO#644742) U.S. SECURITIES AND EXCHANGE COMMISSION 33 Arch Street Boston, Massachusetts 02110-1424 Phone: (617) 573-8904 (Shields) (617) 573-4578 (Lundgren) [email protected], [email protected] Counsel for Applicant Securities and Exchange Commission

Dated: August 14, 2015

Certificate of Service

I, Kathleen Burdette Shields, hereby certify that on August 14, 2015, I caused a true copy of the foregoing document to be served via overnight mail upon the following persons: Carlos R. Garza 136 Hillcrest Terrace Brattleboro, VT 05301 //s//Kathleen B. Shields Kathleen Burdette Shields




DECLARATION OF GRETCHEN LUNDGREN IN SUPPORT OF SECURITIES AND EXCHANGE COMMISSION’S APPLICATION FOR

AN ORDER TO COMPLY WITH ADMINISTRATIVE SUPBOENA I, Gretchen Lundgren, pursuant to 28 U.S.C. § 1746, do hereby declare as follows:

1. I am an attorney and a member in good standing of the bar of the Commonwealth

of Massachusetts. I am an attorney in the Enforcement Division in the Boston Regional Office

of the U.S. Securities and Exchange Commission (“Commission”). I am participating in a

Commission investigation In the Matter of GAW Miners, LLC, (B-02979). I make this

declaration in support of the Commission’s Application for an Order to Comply with

Administrative Subpoena.

2. This declaration is based upon information that the Commission staff has obtained

from various sources described more fully below, during the course of the Commission

investigation into the potential sale of unregistered securities by GAW Miners, LLC (“GAW

Miners”) and alleged fraudulent representations about those securities.


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The Commission Investigation

3. On February 3, 2015, the Commission issued an Order Directing Private

Investigation and Designating Officers to Take Testimony (“Formal Order”) in an investigation

entitled In the Matter of GAW Miners, LLC, (B-02979). Among other things, the Formal Order

directed that an investigation be undertaken to determine whether certain persons or entities had

violated Sections 5(a), 5(c), or 17(a) of the Securities Act of 1933 (“Securities Act”), or Sections

15(a), 15(c), or 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5

thereunder. The Formal Order designated certain officers of the Commission as having power to

subpoena witnesses for documents and testimony, including Kathleen Shields and Gretchen

Lundgren. Because the Formal Order is a confidential document concerning a non-public

investigation of the Commission, it is not attached to this declaration, but will be provided upon

the request of the Court for in camera review.

4. Staff in the Commission’s Division of Enforcement are investigating possible

fraud in connection with GAW Miners’ sale of securities, as well as potential violations of the

securities registration requirements and the broker registration requirements.

5. GAW Miners purported to be a leader in the virtual currency “mining” industry.

While GAW Miners started as a distributor of the computer hardware used in virtual currency

mining, its business model transitioned, by the summer of 2014, to selling shares in the profits it

claimed would be derived from its own virtual currency mining operations. GAW Miners named

these shares “Hashlets” because they were claimed to represent a share of the company’s

purported “hashing power,” (or computing power), that would be devoted to virtual currency

mining. GAW Miners earned over $10 million in revenue from selling Hashlets to thousands of

investors.


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6. By late 2014, after the profitability of Hashlets began to wane, GAW Miners

sponsored the introduction of its own, new virtual currency, known first as HashCoin, and

eventually as PayCoin. Though GAW Miners represented to the public that PayCoin would have

a fixed value of at least $20 (U.S. dollars) per PayCoin, in actuality, its value quickly declined

and it is now trading at approximately $.04 per PayCoin.

7. This investigation centers around the potential securities law violations that

occurred in connection with GAW Miners’ sale of Hashlets, and its activities surrounding

potential sales of investments related to PayCoin. In particular, the Commission is investigating

whether GAW Miners’ claims to investors about their virtual currency mining operations were

false and misleading. GAW Miners and its Chief Executive Officer (“CEO”) represented that all

of the Hashlets of computing power that investors purchased would be pooled together to engage

in virtual currency mining, and that investors’ returns, or “payouts,” would be calculated based

on the success of those collective virtual currency mining operations. According to GAW

Miners, buying a Hashlet allowed investors to mine virtual currency without the expense and

expertise that would be required to purchase and maintain their own virtual currency mining

equipment.

8. The Commission is investigating the possibility that GAW Miners and its CEO

sold to investors far more Hashlets worth of computing power than the company actually had in

its computing centers. The Commission is also investigating whether numerous material

representations that GAW Miners made to Hashlet purchases were true, including

representations about the profitability and longevity of Hashlets, Hashlets’ mining activities, and

how the payouts for Hashlets were derived.


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9. The Commission is also investigating whether GAW Miners’ Hashlet sales had

the hallmarks of a Ponzi scheme. In particular, the Commission is investigating whether GAW

Miners may have sold far more computing power than it owned and dedicated to virtual currency

mining, and therefore, whether the company may have owed investors a return that was larger

than any actual return it was making on its mining operations. If GAW Miners did not have

actual mining operations, that allowed it to earn the daily mining payout that it owed to Hashlet

investors, then the payouts that investors received could only have been a gradual repayment

over time, as “returns,” originating from the money that they and others had invested. As a

result, some investors’ funds may have been used to make payments to other investors.

10. With respect to PayCoin, the Commission is investigating whether individuals

and entities were induced to pay significant sums of money to GAW Miners in exchange for

future rights to acquire interests in PayCoin, or methods of earning money dependent on

PayCoin, whether the representations made in connection with these PayCoin rights were false or

misleading, and whether these rights constitute securities that are subject to the federal securities

laws.

11. Another component of the Commission’s investigation concerns what happened

to the revenue that GAW Miners earned in bitcoin and other virtual currencies, with an

equivalent value of millions of United States dollars.

12. Respondent Carlos R. Garza (“Respondent” or “Garza”) is the brother of GAW

Miners’ CEO and he began working for the company in approximately August 2014, shortly

before GAW Miners began selling Hashlets to the public. Though Garza had several roles at

GAW Miners, he was primarily a salesman, and had responsibility for sales made through GAW

Miners’ resellers, and sales to “VIP” customers who had a high net worth or who made high


5

dollar value purchases from GAW Miners. In those roles, Garza was intimately familiar with

representations that GAW Miners made to its customers about both Hashlets, and later PayCoins.

13. Garza also communicated with GAW Miners’ CEO and others at the company

about whether, and on what terms, GAW Miners could sell Hashlets, and later, rights dependent

on PayCoins, to its investors. In connection with his sales efforts, Garza also frequently

communicated with customers about the ways in which they could pay GAW Miners with

bitcoins.

The Commission’s Subpoena to Garza

14. The Commission served Garza with a subpoena for testimony and documents on

June 30, 2014. Garza was ordered to produce documents on July 14, 2015, and appear for

testimony on July 28, 2015. A copy of the subpoena is attached hereto, as Exhibit A.

15. Garza twice requested, and the Commission twice agreed, to extend his testimony

date to secure counsel. Garza was required to appear for testimony on Wednesday, August 12,

2015. Garza appeared at the Commission’s office on August 12, 2015 without counsel. Before

the opening of the record, the Commission’s counsel, Kathleen Shields and Gretchen Lundgren,

provided Garza with a copy of the Commission’s Formal Order, and another copy of the

Commission’s Form 1662, which had also been attached to the subpoena served on him. See Ex.

A. The Form 1662 explains how the Commission may use the information that witnesses

provide during its investigations. The Commission’s counsel gave Garza the opportunity to ask

any questions he wished to ask about those documents. Though he stated that he did not

understand them, he declined to ask any questions about them, or any of their provisions.


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16. Once the testimony began, and after Garza took an oath to tell the truth, he

refused to provide any further substantive testimony. A true and correct transcript of his

testimony is attached hereto, as Exhibit B.

17. During his testimony, Garza’s responses to the Commission counsel’s questions

were articulate. He had no trouble conversing in English. I have also reviewed documents

received during the course of the Commission’s investigation, and those documents demonstrate

that Garza is capable of communicating in written English. During his testimony, Garza neither

claimed nor demonstrated that he was lacking in ordinary intelligence such that his capacity to

testify could be questioned.

Executed this 14th day of August, 2015, in Boston, Massachusetts.

//s//Gretchen Lundgren Gretchen Lundgren


Exhibit A


UNITED STATES

SECURITIES AND EXCHANGE COMMISSIONBoston Regional Office

33Arch Street, 23rt FloorBoston, MA 02110

DIVISION OF ENFORCEMENT Gretchen LundgrenCounsel

617-573-4578

June 30,2015Via Overnight Mail

Carlos Garza

136 Hillcrest Terrace

Brattleboro, VT 05301

Re: In the Matter of GAW Miners. LLC fB-02979^

Dear Mr. Garza:

The staff of the Boston Regional Officeof the UnitedStates Securitiesand ExchangeCommission is conducting an investigation in the matter identified above. The enclosedsubpoenahas been issued to you as part of this investigation. The subpoena requiresyou provideus documents. The subpoena also requires you to appear for testimony on July 28,2015 at 9:30a.m. at the above Boston address.

Please read the subpoena and this lettercarefully. This letteranswers some questions youmay have about the subpoena. You should also read the enclosed SEC Form 1662. You mustcomply with the subpoena. You may be subjectto a fineand/or imprisonment ifyou do not.

Producing Documents

What materials do I have toproduce?

The subpoena requires you to provide us the documents described in the attachment tothe subpoena. You must provide these documents by July 14,2015. The attachment to thesubpoena defines some terms (such as "Document") before listing what youmust provide.

Youshould produce each and everydocument in yourpossession, custody, or control,including any documents that are not inyour immediate possession but that you have the abilityto obtain. All responsive documents shall beproduced as they are kept in theusual course ofbusiness, and shall be organized and labeled to correspond with the numbered paragraphs inthesubpoena attachment. In thatregard, documents should be produced in a unitized manner, i.e.,delineated with staples or paperclipsto identify thedocument boundaries.

Documents responsive to thissubpoena may be in electronic or paper form. Electronicdocuments suchas email should be produced in accordance with the attached document entitledSEC Data Delivery Standards (the "Standards"). Ifyou have any questions concerning the





























































DECLARATION OF KATHLEEN SHIELDS IN SUPPORT OF SECURITIES AND EXCHANGE COMMISSION’S APPLICATION FOR

AN ORDER TO COMPLY WITH ADMINISTRATIVE SUPBOENA I, Kathleen Burdette Shields, declare under penalty of perjury pursuant to 28 U.S.C.

§1746, that the following is true and correct:

1. I am an attorney and a member in good standing of the bar of the Commonwealth

of Massachusetts. I am a Senior Trial Counsel in the Boston Regional Office of the plaintiff

Securities and Exchange Commission (“the Commission”). I am participating in a Commission

investigation In the Matter of GAW Miners, LLC, File No. B-02979. I make this declaration in

support of the Commission’s Application for an Order to Comply with Administrative Subpoena.

2. I make this declaration based upon my personal knowledge.

3. On July 20, 2015, I received a telephone call from an individual who identified

himself as Carlos Garza. Mr. Garza stated that he was calling about the Commission subpoena

he received. Mr. Garza also stated that he was calling on a telephone that his brother had


2

provided to him and that he did not feel comfortable talking on that phone. He asked if we could

engage in a video chat or Skype call rather than speaking on the phone.

4. I am aware, based on the Commission’s investigation in this matter, that Carlos

Garza’s brother is Homero Joshua Garza, the former CEO of GAW Miners.

5. I told Mr. Garza that I could not participate in a video chat or Skype call with

him, but I gave him my email address and told him that he could contact me by email if he did

not feel comfortable speaking to me on the telephone.

6. Later in the day on July 20, 2015, I received an email message from Mr. Garza.

In that email message, Mr. Garza requested an extension of his scheduled testimony date so that

he could retain legal counsel. A true and accurate copy of my email correspondence with Mr.

Garza is attached hereto as Exhibit A.

7. I responded to Mr. Garza’s email on July 21, 2015. See Ex. A at 3. I agreed to

extend his testimony date for an additional week, until August 4, 2015, so that he could retain

counsel. I also inquired about Mr. Garza’s production of documents responsive to the subpoena,

which had been due on July 14, 2015.

8. Mr. Garza replied to my email on July 24. See Ex. A at 2-3. He thanked me for

the extension and represented that the only responsive document he had was his 1099 tax form.

He asked if I wanted him to send that document to me.

9. I replied to Mr. Garza’s email on July 27. See Ex. A at 2. I told him that I would

like to see his 1099 tax form and that he could bring it with him to testimony or email it to me.

10. Mr. Garza emailed me again on July 31. See Ex. A at 1-2. In that message, he

asked for another extension of his testimony date. He stated that though he had “applied for

many state assistance programs to reduce my cost I have yet to acquire an attorney.” Id.


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11. I responded to Mr. Garza’s email on August 3, 2015. See Ex. A at 1. I agreed to

give him one final extension, until August 12, to find an attorney.

12. Mr. Garza responded to my email and thanked me for the extension. See id.

Executed this 14th day of August, 2015, in Boston, Massachusetts.

/s/ Kathleen Burdette Shields Kathleen Burdette Shields





