Recently, it became big news that the Federal government sued and temporarily shut down the notorious bitcoin mining company, Butterfly Labs, but a federal judge ruled on Thursday that the company can resume limited operations. We tried to find out what the vague limited operations included, but we were unable to come up with anything.
We emailed Butterfly labs for comment, but Butterfly Lab’s publicist just referred us to a public statement the company had made on the ruling, leaving our question unanswered.
The company’s official statement released on October 2 is as follows:
“Although Butterfly Labs is still disturbed with the Federal Trade Commission’s rush to judgment and labeling of the company as bogus and scammers, Butterfly Labs is pleased by the Court’s entry of a Stipulated Interim Order, which allows the company to reopen its doors for limited operations. While the Order does not allow Butterfly Labs to fully serve our customers as desired, it is a step in the right direction and will allow for limited order fulfillment. During the period of the Court’s Order, Butterfly Labs will continue to cooperate closely with the Court-appointed Temporary Receiver.
“Butterfly Labs views the Order as a promising sign for the future of our company, our customers, and our employees. This lawsuit has severely damaged our reputation and it is up to Butterfly Labs to attempt to repair that damage.
“There are a number of unsubstantiated claims circulating about Butterfly Labs. We intend to address all inaccuracies in due course, including the false claims around burn-in testing and Butterfly Labs inappropriately mining bitcoins with customer equipment.
“Butterfly Labs thanks its many customers, employees, and business partners for staying with us during this challenging time.”
It is quite shocking that U.S. District Judge Brian C. Wimes, allowed the company to reopen operations. The company has been around for two years, and has continued to fail to supply customers, who have already paid, with the product they ordered. Additionally, the same year the company was opened, one of the founders, Sonny Vleisides, plead guilty to mail fraud for his “involvement in an international, multi-million dollar lottery scam.”
On September 23, the company was severed a temporary restraining order by a federal court, and the company was forced to cease operations, and its assets were frozen. This was the result of an investigation by the Federal Trade Commission (FTC). The FTC is accusing Butterfly Labs of deceptively marketing its bitcoin mining hardware, as well as failing to deliver the hardware it promised to customers, on time or at all.
More than 20,000 consumers have not received the miner they already paid for. The mining rigs ranged in price from US$149 to US$29,899. The mining difficulty for bitcoin moves very fast, and according to a company representative, by the time customers received the miners, they were little more than “room heaters.” Between US$20 million and US$50 million was gathered from customers in preorders before the company actually shipped any products.
The company, has also been accused of using deceptive tactics to shut down critics of its services. The company bought buttcoin.com, a bitcoin satire site, that had numerous articles making fun of the company. The owner sold the website to and gave control to Butterfly Labs, but thought the company would honor their agreement, that would let the former owner of the site to continue to post for the next 30 days, but according to the owner they didn’t keep their word.
Federal Trade Commission called the company a “bogus Bitcoin mining operation” in its press release related to the case. According to FTC attorney Helen Wong, the company owners repeatedly misused the company's funds. The FTC claims that the owners of the company used funds to go on buying sprees at Nordstroms and Bed, Bath & Beyond as well as take a relaxing day from a stressful day of getting free money to get massages and go to saunas. The company owners even allegedly used money to buy guns.
The day Paypal announced its integration of Bitcoin through a partnership with Bitpay, Coinbase, and Gocoin, they also announced that they had dropped Butterfly Labs. Paypal was servicing the company, and allowing users to pay Butterfly Labs with their service. But with the news from the FTC, Paypal decided that they will not be working with Butterfly Labs, or any company that pre-sells Bitcoin mining hardware.
The complaints about butterfly labs have been a constant part of the dialogue around Bitcoin, and suspicion of fraud has been strong during the company’s four year history. Yet, it took the FTC this long, not to fully stop the company, but to simply take it to court. Butterfly labs still might live past these court hearings but its reputation continues to take major blows.