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Bitcoin Mining Company Butterfly Labs Settles Case With Federal Trade Commission for $38.6M

Mining - Bitcoin Mining Company Butterfly Labs Settles Case With Federal Trade Commission for $38.6M

This article is by Rebecca Campbell.

Butterfly Labs has agreed to settle the Federal Trade Commission’s charges of making misleading claims about their products to their customers.

In a lawsuit that has dragged on since September 2014, the Kansas-based Bitcoin company presold computer hardware that was optimized for mining Bitcoin, charging as much as $30,000 for the specialized hardware.

According to the U.S. trade watchdog FTC, Butterfly Labs was taking orders for Bitcoin mining machines, but very few machines were actually shipped, as Butterfly Labs was building and using the hardware to mine bitcoin for itself. In the few cases that the machines were shipped to customers, they had already been used by the company beforehand, generating valuable bitcoin for Butterfly Labs instead of the customer who had already paid for the hardware.

The charges filed against Butterfly Labs include that it failed to disclose to customers that it was using the machines, and that it kept upfront payments from customers even when it failed to deliver the hardware.

“BFL tested equipment on the live network generally from less than two hours to two days in the event units were in production over a weekend,” Butterfly Labs said in a statement. “This insured that customers received reliable and working equipment avoiding unnecessary down time. Customer shipments were not delayed for burn testing.”

After the FTC received 500 complaints from customers who failed to receive their orders, Butterfly Labs was temporarily shut down. It is alleged that the company took around $50 million in orders it failed to deliver. As a consequence, the FTC obtained a court order freezing the assets of Butterfly Labs in 2014. The company was later reopened following court approval in 2015. Despite this, BFL says that it successfully engineered, manufactured and shipped more than 50,000 Bitcoin machines through five product generations over four years to thousands of customers.

In a bid to wrap the case up and to provide refunds to customers, the FTC has forced the company into a $39 million out-of-court settlement. However, that out-of-court amount will be suspended once the company pays $15,000 and co-founder Sonny Vleisides pays an additional $4,000. Darla Drake, Butterfly Labs general manager, will also have her judgment of $135,878 suspended once she surrenders the cash value of all bitcoins she attained using machines from the company.

But while the judgements were suspended based on the defendant’s inability to pay, they will become due should the defendants be found to have lied about their financial situation.

“Even in the fast-moving world of virtual currencies like Bitcoin, companies can’t deceive people about their products,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “These settlements will prevent the defendants from misleading consumers.”

It has been alleged that the three named members of Butterfly Lab’s board of directors – Drake, Nasser Ghoseiri and Vleisides – spent millions of dollars of the company’s revenue on non-business expenses such as guns and saunas instead of focusing on many orders from customers that were delayed or unfulfilled.

Furthermore, amid the alleged fraud, Butterfly Labs has been accused of printing foam pitchforks to make fun of its intensely frustrated customers. 

Helen Wong, an FTC attorney said:

“…instead of fulfilling orders immediately, Defendants used their customers’ machines to mine bitcoins for themselves before shipping the now-used machines to their customers. … Further demonstrating Defendants’ disregard for their customers, they used corporate funds to make and mass order red foam pitchforks mocking their own customers, emblazoned with the words, “Y U NO SHIP – BFL IS LATE!”

While the company is operating, the settlement with the FTC means that the defendants have been prohibited from making any misleading claims about their Bitcoin mining products in the future and are banned from taking upfront payments from customers unless the products are available and will be delivered within 30 days. If they fail to do this, they must provide a refund.

Butterfly Labs continues to dispute FTC’s suit and is focusing on refunding customers.

“BFL continues to believe that the FTC case had no merit, but agreed to settle for $15,000 to avoid ongoing litigation expenses and conserve remaining assets for payment of refunds to consumers,” a BFL spokesperson stated.

In a statement from January, Butterfly Labs claims to have “insufficient funds to pay out all refund requests at the present time.” That same statement goes on to say that in 2014 and 2015 the company had refunded a total of $16.6 million to customers; however, a lack of finances at present had significantly impacted paying refunds.