Also read "We need to talk about Butterfly Labs"
This past week, the FTC slapped Butterfly Labs, a Kansas bitcoin miner manufacturer, with a lawsuit. In the civil lawsuit, the FTC found that Butterfly Labs had contravened section 5(a) of the FTC Act by engaging in “unfair or deceptive business practices in or affecting commerce.”
The suit named Butterfly Labs, and the three directors of the company Jody Drake, Nasser Ghoseiri and Sonny Vleisides as defendants. In the lawsuit, the company charged “between $149 and $29,899 upfront” for the mining equipment. However, consumers complained that they never received the machines after payment.
In June 2012, Butterfly Labs started marketing a mining machine branded the 'BitForce', which they described as "cutting-edge, powerful and efficient." As of September 2013, more than 20,000 consumers had not received their BitForce machines. Despite failing to deliver on the BitForce, the company went ahead and introduced a more powerful machine which called the Monarch in August 2013. The Monarch was available for sale for between $2,499 and $4,680, and very few of the machines had been delivered as of August 2014.
Butterfly Labs also offered a service in December 2013 where consumers would pay for mining services. By August 2014, the FTC alleges, the company had not provided any Bitcoin mining services to consumers in spite of having received hundreds of thousands of dollars for the services.
In the FTC statement, director of the FTC’s Bureau of Consumer Protection Jessica Rich explained that when a “new and little-understood opportunity like Bitcoin” presents itself, scammers often find ways of committing fraud to feed off of public interest and excitement. She added that the FTC looks forward to “putting the company’s ill-gotten gains back in the hands of consumers.”
The court order prohibits the company from doing business, places a freeze on their assets and places the company in receivership.
It is not the first time that Butterfly Lab is having problems with the law. In December 2013, the company was sued over a $62,000 order that was never fulfilled. Mr Martin Meissner, had ordered two 1500 gigahash-per-second Bitcoin miners from Butterfly Labs in March 2013, but did not receive either the machines or a refund for his payment. In the lawsuit, he had accused Butterfly Labs of breach of contract, fraud and negligent representation.
In addition one of the directors and largest shareholder Sonny Vleisides, lost a probation hearing early in 2014, when a federal judge in Kansas ruled that he Sonny Vleisides, had violated the terms of his probation in 2010. Under the terms of his probation, he was not to engage in (among other things) “any other business involving the solicitation of funds or cold-calls to customers without the express approval of the Probation Officer prior to engagement in such employment.” In September 2013, the probation officer handling his case filed a violation report alleging that he had broken those terms.
The court-ordered shut down brings to an end the tumultuous relationship that Butterfly Labs has had with its customers. Attention will now focus on what other remedies the courts will avail the thousands of customers who may have lost money to Butterfly Labs.
Butterfly Labs has responded to its shutdown by the FTC. In a statement issued Tuesday, the company described the actions of the FTC as being "heavy-handed", and accused the FTC of "going to war on bitcoin ... starting with Butterfly Labs."
Butterfly Labs claimed that they were a "very real" company, having shipped more than $33 million in products to customers and voluntarily granted refunds approximating $17 million to customers for cancelled orders.
The company further added that they were fully cooperating with the Temporary Receiver appointed by the court. They also asked the court to allow them to present testimony from key company witnesses during a hearing set for September 29th.
Update - September 30th 2014
A court in Kansas has appointed a magistrate to mediate discussions between Butterfly Labs Inc., and the Federal Trade Commission. U.S. District Court Judge Brian Wimes asked both parties to come up with a plan that would allow Butterfly Labs to resume operations, but still also protect consumers.
He however declined to lift the restraining order, and instead extended it to Friday, October 3rd. He appointed U.S. Magistrate John Maughmer to mediate the discussions. Both parties were present in court Monday.
Images from Shutterstock.
Last modified (UTC): September 30, 2014 7:07 PM