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‘Scared’ witness must testify before SEC

 

It’s surely no fun getting grilled by lawyers from the U.S. Securities and Exchange Commission.

But Carlos R. Garza insists he was positively “frightened” when he was called to testify at the SEC’s regional office in Boston on Aug. 14.

In fact, he was apparently so scared that he failed to provide any real answers when questioned by SEC lawyers about the activities of his former employer, virtual currency company GAW Miners LLC.

Unfortunately for Garza, the SEC doesn’t fool around when it comes to investigating securities fraud, and “fear” is not a ground for failing to comply with an administrative subpoena issued by a federal agency.

The latter conclusion is implicit in a recent order by U.S. District Court Judge Richard G. Stearns compelling Garza to reappear before the SEC and provide testimony in compliance with the agency’s subpoena.

The SEC is investigating whether GAW Miners and others violated federal securities laws in connection with the company’s sale of shares in the profits from alleged virtual currency “mining” operations.

Virtual currency is a digital representation of value that can be traded on online exchanges for conventional currencies, or used to purchase goods and services. The most widely recognized virtual currency is bitcoin. “Mining” for bitcoin involves using computer resources to solve complex equations that verify groups of bitcoin transactions, thereby earning virtual currency.

Garza, of Brattleboro, Vermont, is the brother of the GAW Miners’ CEO. The SEC alleges that Garza was a salesman for GAW Miners and has knowledge of the company’s potential misrepresentations to individuals who purchased shares in the mining operations. The SEC also alleges that Garza has knowledge relevant to locating the bitcoin and other virtual currency that GAW Miners received as payment.

The SEC subpoenaed Garza to appear at the agency’s Boston office and provide testimony in connection with the GAW Miners investigation. Garza appeared for the hearing on the morning of Aug. 14 without an attorney, and in 81 minutes of testimony failed to provide any substantive answers to the questions posed by the two SEC attorneys who conducted the examination.

While under oath, Garza repeatedly protested that he was “scared” and “frightened,” couldn’t afford an attorney, and didn’t understand securities law, what the SEC did, or what the agency’s investigation was all about. Garza was so frightened, he claimed, that he somehow managed to avoid answering the simplest of questions — like whether he worked for GAW Miners at any point in 2014.

Commission counsel suspended testimony when it became clear that an impasse had been reached, and subsequently filed an action in federal court seeking an order compelling Garza to provide testimony in response to the subpoena.

In its application, the SEC pointed out that the agency had no obligation to provide Garza with counsel. Moreover, the SEC underscored the point that Garza had failed to assert a valid privilege — such as his Fifth Amendment rights — in refusing to answer questions.

“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,” wrote SEC trial counsel Kathleen B. Shields in the agency’s brief.

Stearns granted the SEC’s application on Aug. 19, directing Garza to comply with the agency’s subpoena or show cause why he shouldn’t have to do so.

Shields, who works in the SEC’s Boston regional office, declined to comment on the case through an agency spokesperson.

Waltham business litigator John J. Tumilty has no connection with the case, but he has represented clients in SEC investigations.

Tumilty isn’t surprised that Garza’s claims that he was frightened by the process did not resonate with the judge.

“If the witness is going to appear, their only options are to answer the questions or assert a privilege, like the attorney-client privilege or, more commonly, the Fifth Amendment,” says Tumilty, of Morse, Barnes-Brown, Pendleton.

Yet Tumilty says he understands the apprehension experienced by laypeople who find themselves before the SEC.

“For SEC attorneys and other attorneys who practice in the area on a daily basis, sometimes we forget how intimidating it can be for a true third party who’s not familiar with the process,” he says.

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