SEC Accuses Geosyn Mining of $5.6 Million Fraud: An In-depth Analysis

2024-05-08, 02:53

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## [TL; DR]
On 24 April the US SEC filed a lawsuit against Geosyn and its founders for misappropriating investor funds and operating an illegal crypto mining business.

Geosyn founders misappropriated more than $1.2 million of investor funds.

A coordinated global approach is key to support rapid responses when fraudulent activities such as hacking occur.

## Introduction
The United States enforcement action against GeosYN, a Texas-based crypto asset mining firm, indicates its resolve to bring the sector under its control.  On 24 April, the [US Securities and Exchange Commission (SEC)](https://www.gate.io/learn/articles/the-sec-is-everywhere-what-challenges-does-the-ethereum-spot-etf-face/2503 "US Securities and Exchange Commission (SEC)"), filed a lawsuit against GeosYN for defrauding 64 investors of more than $5.6 million in a shoddy crypto mining deal. This article covers the SEC’s allegations against GeosYN.

## SEC's Claims against Geosyn Mining
As hinted above, the U.S SEC filed a lawsuit against GeosYN and its founders, Caleb Joseph Ward and Jeremy George McNutt, for committing various offences including operating an unlicensed crypto mining business and defrauding the investors.

Related news: [Uniswap's Defense Against SEC Regulatory Actions](https://www.gate.io/learn/articles/uniswaps-defense-against-sec-regulatory-actions/2688 "Uniswap's Defense Against SEC Regulatory Actions")

Ward and McNutt started GeosYN in 2021 with the aim of offering crypto mining services to investors who would outsource the company’s technical expertise, miner procurement as well as the crypto mining process. As expected, many individuals invested in the company.

Now, the key SEC accusation is that GeosYN defrauded 64 investors of over $5.6 million through a crypto mining investment deal. To achieve their goal Ward and McNutt misrepresented certain information to attract much investment.

First, GeosYN claimed that its mining business was profitable since it had contracts with electricity providers who would supply its power requirements at lower rates than usual. However, in reality the rates at which they obtained the electricity were 40-50% above the ones they stated.

The SEC also claims that GeosYN lied to its investors about its operational activities. For example, although it entered into service agreements to purchase 1,400 mining rigs on behalf of the investors it bought less than 400 during the entire period.

In addition, the agreements between the company and the investors stated that they could choose their cryptocurrencies of choice to mine. Nonetheless, later GeosYN rejected the requests by the investors to mine other cryptocurrencies other than <a href="/ar/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a>.

The SEC lawsuit claims that the company faked some documents to show that bitcoin mining was profitable. For example, they fabricated the bitcoin mining production rates and the profit generated. To cover for their misdeeds the company purchased additional bitcoin to distribute to the investors.

Read about other SEC’s lawsuits:
[SEC’s Lawsuit against Terraform and Do Kwon](https://www.gate.io/blog_detail/3436/sec-moves-to-summary-judgement-in-lawsuit-against-terraform-and-do-kwon "SEC’s Lawsuit against Terraform and Do Kwon")
[SEC vs Uniswap Legal Battle](https://www.gate.io/blog_detail/4071/sec-vs-uniswap-battle "SEC vs Uniswap Legal Battle")
[SEC vs Ripple Case](https://www.gate.io/blog_detail/3319/sec-vs-ripple-case-extended-to-end-2024 "SEC vs Ripple Case")
[LBRY against the SEC](https://www.gate.io/blog_detail/3221/lbry-vs-sec-etf-appeal-process "LBRY against the SEC")

As an example, the company distributed $354,500 worth of bitcoin to investors despite having mined only BTC valued at $320,000. Their motive was to deceive the investors into believing that the cryptocurrency mining operations were profitable.

Regarding this, [the SEC lawsuit stated](https://www.sec.gov/files/litigation/complaints/2024/comp25983.pdf "the SEC lawsuit stated"): “Geosyn also distributed bogus documents to investors to create the appearance of profitability. Ward prepared and sent investors monthly distribution statements showing fabricated mining production rates and profits for Geosyn and for the clients’ purported shares of the production.”

## Misappropriation of Investor Funds
The SEC also claims that the GeosYN founders misappropriated over $1.2 million of investor funds for personal use which include buying meals and guns as well as paying for their vacations and legal fees. The [SEC lawsuit stated](https://www.sec.gov/files/litigation/complaints/2024/comp25983.pdf "SEC lawsuit stated"):   “Ward misappropriated approximately $402,455.35 from Geosyn in the form of cash withdrawals, bank transfers, and company credit card charges.”

[It also added](https://www.sec.gov/files/litigation/complaints/2024/comp25983.pdf "It also added"): “McNutt misappropriated approximately $862,095.13 from Geosyn in the form of cash withdrawals, bank transfers, and company credit card charges.” According to the document McNutt used the funds to purchase goods such as construction material.

It is clear that the two Geosyn founders used part of the embezzled money to fund a lavish lifestyle. For example, they purchased expensive meals as well as other items like firearms and wrist watches. On top of that, they paid for entertainment services and vacation travel fees.

Unfortunately, towards the end of 2022 a strife occurred between the two Geosyn founders as Ward blamed McNutt for the collapse of the business. Due to the misunderstanding McNutt surrendered his ownership interest in the company after signing a release agreement. As a result, in December 2022, Ward reported McNutt to criminal authorities for embezzlement of the company funds. However, he did not give the details of the misappropriation of the funds and of the crypto mining rig scam.

Dwindling investor funds forced the company to halt its operations in 2023. Ward liquidated the Geosyn crypto asset wallet and remained with $57,000.

It is important to note that the [SEC also accuses the defendants](https://www.sec.gov/litigation/litreleases/lr-25983 "SEC also accuses the defendants") of infringing the “anti-fraud and securities-registration provisions of the federal securities laws”, where it is seeking “disgorgement with prejudgment interest, and civil penalties against Ward and McNutt.”

## The Consequences of Geosyn Mining's Actions
The SEC’s lawsuit against Geosyn mining brings much uncertainty and mistrust in the crypto sector. First, the accusations against the company reduces investor confidence within the crypto sector. This may result in a decline in crypto investment activity.

Many investors may decline to invest in the blockchain digital sector until a time when most countries, especially the United States, adopt clear crypto regulations. This also means investor confidence will rise if crypto businesses comply with existing financial legislation.

The SEC vs. Geosyn case may trigger wide investigations in the operations of many crypto mining firms which may disturb the proper running of some blockchains that depend on the proof-of-work consensus mechanism. As expected, many more SEC lawsuits may come in the future.

On a brighter note, the current SEC crackdown on unethical crypto projects like Geosyn may strongly indicate that firms in the sector should comply with cryptocurrency regulations, such as the anti-money laundering (AML) and Know Your Customer provisions.

## How to protect investors from fraud schemes
Crypto projects should implement several measures to protect investors' funds. However, governments should also play their part by introducing regulations that promote innovation in the sector yet protect investors. This also implies that crypto firms should follow government legislation, including implementing Anti-Money Laundering (AML) and Know-Your-Customer (KYC) laws.

Every crypto firm should implement high security measures which include two-factor authentication and robust encryption. They should also use multi-signature wallets and cold wallets to reduce hacking incidents.

Thirdly, crypto firms should educate their users on how to protect their digital assets as well as how to [identify crypto criminal activities](https://www.gate.io/learn/articles/10000-word-in-depth-investigation-how-did-cryptocurrency-become-a-tool-for-cybercriminals/1341 "identify crypto criminal activities") like phishing. However, the government and some other financial institutions should help in educating people about securing their digital assets and preventing scams similar to the Geosyn bitcoin miner fraud.

Read also: [Web3 Lost Over $53 Million to Hackers in April 2024](https://www.gate.io/post/CryptoNews_/status/5562154 "Web3 Lost Over $53 Million to Hackers in April 2024")

Lastly, different crypto industry stakeholders and other relevant players should cooperate to [prevent crypto fraud cases](https://www.gate.io/learn/articles/top-10-crypto-scams-and-how-to-avoid-them/2556 "prevent crypto fraud cases"). For example, exchanges, crypto firms, regulators and law enforcement agencies should collaborate to find ways of dealing with crypto criminal activities. They should have communication channels and global task forces which coordinate rapid responses to fraudulent activities such as hacking. With that they will be in a better position to recover much stolen cryptocurrencies.

## Conclusion 
On 24 April the US SEC filed a lawsuit against Geosyn for operating an unlicensed business as well as misappropriating investor funds. Ward and McNutt misappropriated more than $1.2 million of investor funds. They also used falsified statements and documents to mislead individuals to invest in their crypto mining business. Meanwhile, a concerted global effort may reduce the scope of crypto-criminal activities.

<div class="blog-details-info">
<div>Author:**Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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