Motion for Default Judgment

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

___________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) )

Plaintiff, ) )

v. ) Case No. 3:15-CV-1760-JAM ) HOMERO JOSHUA GARZA, ) GAW MINERS, LLC, and ) ZENMINER, LLC (d/b/a ZEN CLOUD), ) )

Defendants. ) ___________________________________________ )

SECURITIES AND EXCHANGE COMMISSION’S MOTION FOR DEFAULT JUDGMENT AGAINST

DEFENDANTS GAW MINERS, LLC AND ZENMINER, LLC

The plaintiff Securities and Exchange Commission (“Commission”) hereby requests that

this court enter default judgment against Defendants GAW Miners, LLC and ZenMiner, LLC

pursuant to Federal Rule of Civil Procedure 55(b)(2). In support of this motion, the Commission

has filed herewith a memorandum of law and a declaration of Trevor Donelan. Also filed

herewith is a proposed form of final judgment against GAW Miners, LLC and ZenMiner, LLC.

By its attorneys, SECURITIES AND EXCHANGE COMMISSION /s/ Kathleen B. Shields Kathleen B. Shields (Mass. Bar No. 637438, phv 04710) Gretchen Lundgren (Mass. Bar No. 644742) Michele Perillo (Mass. Bar No. 629343) SECURITIES AND EXCHANGE COMMISSION 33 Arch Street, 24th Floor Boston, MA 02110 (617) 573-8904 (Shields direct) (617) 573-4590 (fax) [email protected] (Shields email)

Case 3:15-cv-01760-JAM Document 15 Filed 02/12/16 Page 1 of 2

2

Local Counsel: /s/ John B. Hughes John B. Hughes (Fed. Bar No. CT 05289) Assistant United States Attorney Chief, Civil Division United States Attorney’s Office Connecticut Financial Center 157 Church St., 23rd Floor New Haven, CT 06510 Phone: (203) 821-3700 Fax: (203) 773-5373

February 12, 2016

CERTIFICATE OF SERVICE

I, Kathleen Shields, hereby certify that on February 12, 2016, I caused a true copy of the foregoing document, along with the supporting memorandum of law, the supporting declaration of Trevor Donelan, and the proposed final judgment, to be filed through the ECF system and, accordingly, the document will be sent electronically to the registered participants as identified on the Notice of Electronic Filing (“NEF”). I also sent copies of those documents by overnight mail to the agent for service of process of defendants GAW Miners, LLC and ZenMiner, LLC.

/s/ Kathleen Shields Kathleen Shields

Case 3:15-cv-01760-JAM Document 15 Filed 02/12/16 Page 2 of 2

Case 3:15-cv-01760-JAM Document 15-1 Filed 02/12/16 Page 1 of 31
































___________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, )

) Plaintiff, )

) v. ) Case No. 3:15-CV-1760-JAM

) HOMERO JOSHUA GARZA, ) GAW MINERS, LLC, and ) ZENMINER, LLC (d/b/a ZEN CLOUD), )

) Defendants. )

___________________________________________ )

[PROPOSED] FINAL JUDGMENT AS TO DEFENDANTS GAW MINERS, LLC AND ZENMINER, LLC

WHEREAS, on December 1, 2015, the plaintiff Securities and Exchange Commission

(“Commission”) commenced this action by filing a Complaint against defendants GAW Miners,

LLC (“GAW Miners”), ZenMiner, LLC (“ZenMiner”) and another;

WHEREAS, summons were issued to GAW Miners and ZenMiner on December 2, 2015,

and returns of services were filed as to those entities on December 9, 2015;

WHEREAS, the Commission filed a motion for entry of default against GAW Miners

and ZenMiner on January 6, 2016 for failure to answer or otherwise appear;

WHEREAS, in accordance with Fed. R. Civ. P. 55(a), a Clerk’s default was entered

against GAW Miners and ZenMiner on January 27, 2016;

WHEREAS, the court accepts as true the factual allegations of the Complaint against

GAW Miners and ZenMiner, who have defaulted, and finds that:

1. The court has jurisdiction over this action pursuant to Sections 20(d) and 22(a) of


2

the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§77t(d), 77v(a)], and Sections 21(d),

21(e) and 27 of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§78u(d),

78u(e), 78aa].

2. Defendants GAW Miners and ZenMiner employed the means or instrumentalities

of interstate commerce, or the mails to engage in the conduct alleged in the Complaint.

WHEREAS, the Commission has applied, pursuant to Fed. R. Civ. P. 55(b)(2), for the

entry of this Final Judgment based on GAW Miners’ and ZenMiner’s failure to answer or

otherwise respond to the Commission’s Complaint, and the court having considered the prima

facie case for relief shown by the Commission’s Complaint, the memorandum of law in support

of the Commission’s motion for default judgment, and the supporting declaration of Trevor

Donelan, which showing has not been rebutted by defendants GAW Miners or ZenMiner;

NOW THEREFORE, BASED ON THE FOREGOING:

I.

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendants GAW

Miners and ZenMiner are permanently restrained and enjoined from violating, directly or

indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15

U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any

means or instrumentality of interstate commerce, or of the mails, or of any facility of any

national securities exchange, in connection with the purchase or sale of any security:

(a) to employ any device, scheme, or artifice to defraud;

(b) to make any untrue statement of a material fact or to omit to state a material fact

necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading; or


3

(c) to engage in any act, practice, or course of business which operates or would

operate as a fraud or deceit upon any person.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that, as provided in

Federal Rule of Civil Procedure 65(d)(2), the foregoing paragraph also binds the following who

receive actual notice of this Final Judgment by personal service or otherwise: (a) Defendants’

officers, agents, servants, employees, and attorneys; and (b) other persons in active concert or

participation with Defendants or with anyone described in (a).

II.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that

Defendants GAW Miners and ZenMiner are permanently restrained and enjoined from violating

Section 17(a) of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. § 77q(a)] in the

offer or sale of any security by the use of any means or instruments of transportation or

communication in interstate commerce or by use of the mails, directly or indirectly:

(a) to employ any device, scheme, or artifice to defraud;

(b) to obtain money or property by means of any untrue statement of a material fact

or any omission of a material fact necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading;

or

(c) to engage in any transaction, practice, or course of business which operates or

would operate as a fraud or deceit upon the purchaser.




4




III.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that

Defendants GAW Miners and ZenMiner are permanently restrained and enjoined from violating

Section 5 of the Securities Act [15 U.S.C. § 77e] by, directly or indirectly, in the absence of any

applicable exemption:

(a) Unless a registration statement is in effect as to a security, making use of any

means or instruments of transportation or communication in interstate commerce

or of the mails to sell such security through the use or medium of any prospectus

or otherwise;

(b) Unless a registration statement is in effect as to a security, carrying or causing to

be carried through the mails or in interstate commerce, by any means or

instruments of transportation, any such security for the purpose of sale or for

delivery after sale; or

(c) Making use of any means or instruments of transportation or communication in

interstate commerce or of the mails to offer to sell or offer to buy through the use

or medium of any prospectus or otherwise any security, unless a registration

statement has been filed with the Commission as to such security, or while the

registration statement is the subject of a refusal order or stop order or (prior to the

effective date of the registration statement) any public proceeding or examination


5

under Section 8 of the Securities Act [15 U.S.C. § 77h].






IV.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Defendants

GAW Miners and ZenMiner are jointly and severally liable for disgorgement of $____________,

representing profits gained as a result of the conduct alleged in the Complaint, together with

prejudgment interest thereon in the amount of $__________. In addition, defendant GAW

Miners shall pay a civil penalty in the amount of $_____________, and defendant ZenMiner

shall pay a civil penalty in the amount of $___________, both pursuant to Section 20(d) of the

Securities Act [15 U.S.C. §77t(d)], and Section 21(d)(3) of the Exchange Act [15 U.S.C.

§78u(d)(3)]. Defendant GAW Miners shall satisfy its obligation by paying $_____________ to

the Securities and Exchange Commission within 14 days after entry of this Final Judgment.

Defendant ZenMiner shall satisfy its obligation by paying $_____________ to the Securities and

Exchange Commission within 14 days after entry of this Final Judgment.

Defendants may transmit payment electronically to the Commission, which will provide

detailed ACH transfer/Fedwire instructions upon request. Payment may also be made directly

from a bank account via Pay.gov through the SEC website at

http://www.sec.gov/about/offices/ofm.htm. Defendants may also pay by certified check, bank

cashier’s check, or United States postal money order payable to the Securities and Exchange


http://www.sec.gov/about/offices/ofm.htm

6

Commission, which shall be delivered or mailed to

Enterprise Services Center Accounts Receivable Branch 6500 South MacArthur Boulevard Oklahoma City, OK 73169

and shall be accompanied by a letter identifying the case title, civil action number, and name of

this Court; GAW Miners or ZenMiner’s names as defendants in this action; and specifying that

payment is made pursuant to this Final Judgment.

Defendants shall simultaneously transmit photocopies of evidence of payment and case

identifying information to the Commission’s counsel in this action. By making this payment,

Defendants relinquish all legal and equitable right, title, and interest in such funds and no part of

the funds shall be returned to Defendants. The Commission shall send the funds paid pursuant to

this Final Judgment to the United States Treasury.

The Commission may enforce the Court’s judgment for disgorgement and prejudgment

interest by moving for civil contempt (and/or through other collection procedures authorized by

law) at any time after 14 days following entry of this Final Judgment. Defendants shall pay post

judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961.

V.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain

jurisdiction of this matter for the purposes of enforcing the terms of this Final Judgment.

VI. There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil

Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.


7

Dated: ______________, 2016

____________________________________ UNITED STATES DISTRICT JUDGE


1


___________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) )

Plaintiff, ) )

v. ) Case No. 3:15-CV-1760-JAM ) HOMERO JOSHUA GARZA, ) GAW MINERS, LLC, and ) ZENMINER, LLC (d/b/a ZEN CLOUD), ) )

Defendants. ) ___________________________________________ )

DECLARATION OF TREVOR T. DONELAN

I, Trevor T. Donelan, pursuant to 28 U.S.C. §1746, hereby declare as follows:

1. Since September 2014, I have been employed as an Enforcement Accountant

with the U.S. Securities and Exchange Commission (“the Commission”) in its Boston

Regional Office. My duties include conducting investigations relating to potential

violations of the federal securities laws.

2. I received a Bachelor of Science degree in business administration, with a

concentration in accounting, from the University of Richmond in Virginia in 2000. Before

joining the Commission, I was most recently a managing director in the forensic accounting

and complex business litigation unit at StoneTurn Group, LLP (“StoneTurn”), in Boston,

where I worked for over seven years. Before joining StoneTurn, I held forensic accounting

and auditor positions for a total of approximately seven years with Deloitte Financial

Advisory Services LLP, and Arthur Andersen LLP, both in Boston.


2

3. I am a Certified Public Accountant in the Commonwealth of Massachusetts,

and a Certified Fraud Examiner by the Association of Certified Fraud Examiners. I am also

Certified in Financial Forensics by the American Institute of Certified Public Accountants.

4. I make this Declaration based upon my personal knowledge and upon

information and belief as set forth below, and in support of the Commission’s motion for

default judgment against defendants GAW Miners, LLC (“GAW Miners”) and ZenMiner,

LLC (“ZenMiner”). Beginning in the spring of 2015, I became part of the team of

Commission employees conducting an investigation into GAW Miners to determine

whether there had been violations of any federal securities laws.

5. During the course of the Commission’s investigation into GAW Miners,

various bank records and accounting records were produced to the Commission.

ZenMiner’s one bank account had extremely limited activity (transactions totaling $28), and

it appears that ZenMiner did not maintain separate accounting records.

6. During the course of the Commission’s investigation into GAW Miners, a

copy of the database that GAW Miners and ZenMiner used to operate the ZenCloud website

(the “ZenCloud Database”) was produced to the Commission. The ZenCloud Database was

produced to the Commission by a former employee of GAW Miners whose responsibilities

included using that database. The ZenCloud Database is a Microsoft SQL (“SQL”) database

which is a relational database program that is sold commercially.

7. After I received the ZenCloud Database, I participated in a number of

telephone conversations with the former employee from whom the Commission received the

database. During those conversations, the former employee described how the data in the

ZenCloud Database was compiled, what the various tables and fields in the database meant,


3

and how the tables and fields in the database related to one another. The former employee

also described to me how GAW Miners and ZenMiner had used the ZenCloud Database to

operate the ZenCloud website and the Hashlets.

8. Based on my conversations with the former employee who produced the

ZenCloud Database to the Commission, and with other former GAW Miners and ZenMiner

employees, it is my understanding that the ZenCloud Database obtained by the Commission

contains the most reliable and complete data about defendants’ sales of Hashlets, about

payouts credited to Hashlet owners, and about maintenance fees charged to Hashlet owners,

because it contains the data that defendants themselves used to operate the ZenCloud

website and Hashlets.

9. The ZenCloud Database produced to the Commission is very large. It

consists of 29 tables containing approximately 45 million records. Because of its size, and

the amount of personally identifiable information about Hashlet customers it contains, it

would be technologically challenging to produce the complete database to the Court for its

review.

10. I was asked by other Commission staff working on this matter to calculate

the following numbers: 1) the amount that investors paid to purchase Hashlets, 2) the

amount that was credited to investors’ ZenCloud accounts as payouts from their Hashlets

from purported mining operations, and 3) the amount that was deducted from Hashlet

investors’ ZenCloud accounts as maintenance or service fees for their Hashlets.

11. Another Commission employee who has expertise with using SQL, working

under my supervision, queried the ZenCloud Database to isolate: 1) data that would show

defendants’ revenues from sales of Hashlets; 2) data that would show daily payouts earned


4

by Hashlet owners; and 3) service or maintenance fees that were charged to Hashlet owners.

I understand the queries that were submitted to the ZenCloud Database, and I have reviewed

the data retrieved by those queries.

12. I then summarized the data retrieved by those queries into the following

table. The line labeled Hashlet Sales shows, on a monthly basis, the revenues that

defendants earned from selling Hashlets, for a total of $20,755,203 in revenues. The line

labeled Hashlet Payouts (Gross) shows, on a monthly basis, the amount that Hashlet account

owners earned for their Hashlets’ purported mining activity via credits added to their

Hashlet ZenCloud accounts, for a total of $15,336,090. The line labeled Hashlet Service

Fees shows, on a monthly basis, daily fees that were charged to Hashlet owners and

deducted from each Hashlet’s ZenCloud account, for a total of $4,659,218. I subtracted the

numbers in the Hashlet Service Fees line from the numbers in the Hashlet Payouts (Gross)

line to arrive at the numbers in the Hashlet Payouts (Net) line. I then subtracted the Hashlet

Payouts (Net) line from the Hashlet Sales line to arrive at the line labeled Disgorgement. I

calculated the total disgorgement number for the time period from August to December

2014 to be $10,078,331.


5

13. The Commission’s standard practice is to seek prejudgment interest on a

defendant’s disgorgement obligation calculated in the same manner that the Internal

Revenue Service uses to calculate tax over-payments or under-payments. Applying that

methodology and calculating the prejudgment interest starting on December 31, 2014, and

ending on December 31, 2015 (the last day of the last quarter prior to today), I calculated

$305,768 in prejudgment interest on the amount of $10,078,331. A table supporting my

prejudgment interest calculation is attached as Exhibit 1.

14. The sum of the total disgorgement figure I calculated ($10,078,331) and the

prejudgment interest I calculated ($305,768) is $10,384,099.

I declare under penalty of perjury under the laws of the United States of America

that the foregoing is true and correct.

Executed on February 12, 2016, in Boston, Massachusetts.

/s/ Trevor T. Donelan Trevor T. Donelan




Documents

Motion for Default Judgment