SCAC Mailing : First-of-its-Kind Jury Verdict Finds that Cryptocurrency Products are Not Securities External Securities Class Action Clearinghouse Mailing List <scac-mailing-list@lists.stanford.edu> 12:30 PM (1 hour ago) to scac-mailing-list@lists.stanford.edu SCAC Mailing : First-of-its-Kind Jury Verdict Finds that Cryptocurrency Products are Not Securities Home | Filings Database | Latest News & Blogs Excerpts | Advanced Search First-of-its-Kind Jury Verdict Finds that Cryptocurrency Products are Not Securities On November 2, 2021, a jury found that products linked to cryptocurrency mining operations were not securities in what appears to be the first jury verdict to decide whether cryptocurrency products are securities under the Supreme Court’s 1946 Howey test, as well as a rare verdict in a federal securities class action lawsuit. The case commenced in 2016 when plaintiffs filed a class action complaint against GAW Miners, LLC (“GAW Miners”), ZenMiner LLC (“ZenMiner”), Homero Joshua Garza (“Garza”), the founder and CEO of GAW Miners, and Stuart A. Fraser (“Fraser”), who invested in GAW Miners and served as a mentor and business associate of Garza for over a decade. The complaint alleged that defendants sold a progressive array of products to investors by fraudulently claiming that the products would yield profits from cryptocurrency mining operations. Although defendants initially sold virtual currency mining equipment, they eventually shifted their business to offering Hardware-Hosted mining and later Cloud-Hosted Mining. According to plaintiffs, GAW Miners and ZenMiner never had sufficient equipment to support the hosted mining services they sold to customers. Plaintiffs allege that defendants next sold shares in the returns from their purported mining operations through investment contracts called “Hashlets.” Hashlet contracts entitled their purchasers to a share of the profits from defendants’ “hashing power,” or the computing power that defendants purportedly devoted to virtual currency mining. In reality, defendants sold far more Hashlets worth of computing power than they actually had in their computing centers, and there was no computer equipment to back up the majority of Hashlets that defendants sold. When the Hashlets scheme began to unravel, defendants pivoted and began selling “Hashpoints,” which were convertible promissory notes that could be converted into Paycoin, a new form of virtual currency. Defendants then introduced HashStakers, which were digital wallets that could lock up Paycoin for a set period of time and generate fixed returns. Plaintiffs argued that all of the products sold by defendants - Hardware-Hosted Mining, Cloud-Hosted Mining, Hashlets, Hashpoints, HashStakers, and Paycoin - constituted investment contracts and thus “securities,” and that defendants engaged in fraudulent conduct in connection with the sale of these products in violation of state and federal securities laws and common law fraud. Garza was dropped from the class action in 2016 after he pled guilty to wire fraud in a related criminal action and agreed to pay damages in an SEC action. The Court entered default judgment against GAW Miners and ZenMiner in 2017. The case against the only remaining defendant, Fraser, went to trial on October 20, 2021. On November 1, the jury rendered its verdict in favor of the Defendant, finding that none of the products offered by defendants were securities, and hence Fraser could not be held liable for securities fraud. The jury also rejected the plaintiffs’ claim for common law fraud. This marks only the 10th case tracked in the Securities Class Action Clearinghouse to reach a jury verdict. This also appears to be the first case in which a jury has been asked to decide whether cryptocurrency products are securities, a question that has been hotly debated among regulators and participants in the crypto industry. --- Securities Class Action Clearinghouse (SCAC) ---