SEC Sues Crypto Asset Mining Machine Firm Over Fraudulent Claims to Investors
A Fort Worth, Texas-based company that claimed to have favorable contracts with electricity providers to operate cryptocurrency asset mining machines profitably lied to investors about how it would operate the machines, alleged the SEC Wednesday in a securities fraud complaint Wednesday (docket 4:24-cv-00365) in U.S. District Court for North Texas in Fort Worth. The suit names as defendants Geosyn Mining and founders CEO Caleb Ward of Smyrna, Georgia, and Chief Operating Officer George McNutt of Weatherford, Texas.
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From November 2021 to December 2022, the defendants engaged in an unregistered and fraudulent offering through Geosyn, a crypto asset mining and hosting company that claimed to offer investors a chance to profit from bitcoin mining “by outsourcing to Geosyn the technical expertise, crypto asset miner procurement, and management of a complex crypto asset mining system,” the complaint said.
Ward and McNutt raised over $5.6 million from 64 investors in 18 states and three foreign countries through the sale of client service agreements (CSAs), alleged the complaint. Under the CSAs' terms, Geosyn said it would buy, maintain and operate crypto asset mining machines “and then distribute the mined crypto assets, such as bitcoin, to the investors for a fee,” it said.
When signing the CSAs, investors specified the number and model of mining machines that they wanted Geosyn to buy on their behalf and agreed to pay the company a 15% “procurement fee” above the cost of the mining machines, the complaint said. In exchange for the investment, Geosyn agreed to buy and run crypto asset mining machines on investors’ behalf and to pay them a return of profits in the form of monthly crypto asset distributions, “minus deductions for Geosyn’s 7% hosting fee, mining pool fees, and electricity charges,” the complaint said.
While soliciting investors, the defendants “falsely claimed” Geosyn had contracts with electricity providers that allowed it to operate the crypto asset mining machines profitably; failed to disclose to new investors that they never bought mining machines, or that they brought mining machines online for some of the previous investors; and failed to disclose Geosyn wasn’t providing the services claimed in offering documents, including allowing investors to personalize their crypto mining strategy or providing 24/7 onsite monitoring of the mining machines, the complaint said.
Profit margins in the crypto asset mining industry center on maintaining low energy costs, the complaint said. Ward and other Geosyn representatives “falsely represented,” through a return on investment spreadsheet and through statements made directly to investors, that Geosyn had secured commercial electricity contracts at .045 to .048 cent per kilowatt hour. A summary page told investors they benefited from “wholesale power pricing, which makes mining bitcoin more profitable.”
But Geosyn’s actual electricity costs didn’t benefit from wholesale power pricing “and, at times, more than doubled the represented rates,” the complaint said. At one of the company’s locations, electricity costs ranged as high as 50% above the .045 cent/kWh purported cost represented to investors. At the other location, "McNutt’s mother signed a one-year contract with an electricity provider in April 2022 for a fixed base rate of $0.084743/kWh which, with delivery charges, was more than double the cost that Geosyn continued to represent to investors,” it said.
Of the investor funds raised, Ward and McNutt “misappropriated" about $1.2 million for personal use and paid approximately $354,500 to investors in purported mined bitcoin distributions, "while admitting in messages to each other that they needed to buy bitcoin to fully fund distributions,” the complaint alleged.
The SEC alleges violations of the Securities Exchange Act and requests an order permanently restraining and enjoining Ward and McNutt from participating, indirectly or directly, “through any entity controlled by either of them, in any offering of securities, including any crypto asset security.” It also seeks to enjoin the defendants from serving as an officer or director of any issuer with securities registered under Section 12 of the Exchange Act. The defendants violated the antifraud and registrations provisions of federal securities laws, and unless they’re enjoined, will continue to do so, said the complaint.