The Federal Trade Commission has sued a Leawood company, alleging it took more than 20,000 consumers for as much as $50 million in a bogus bitcoin business.
The company, Butterfly Labs, sold computers that it said could generate the virtual currency for the buyers but failed to deliver the machines or sent worthless equipment, according to the agency’s complaint in U.S. District Court in Kansas City.
A statement Tuesday from the FTC said the court issued a temporary restraining order that had shut down the business. Its complaint named BF Labs Inc., Darla Drake, Nasser Ghoseiri and Sonny Vleisides.
A statement by the company said it was “disappointed in the heavy-handed actions of the Federal Trade Commission.”
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It also said the government action blocked Butterfly Labs’ imminent shipment of “completed products to fulfill the remaining millions of dollars of orders on our books and issuing requested refunds.”
Butterfly Labs has “shipped more than $33 million in products to customers and voluntarily granted refunds approximating $17 million to customers for canceled orders,” the company’s statement said. “The government wants to shut Butterfly Labs down, and we are not going away without a fight to vindicate bitcoin, our company, and our employees.”
Butterfly Labs’ website lists its address as 10770 El Monte St. in Leawood, and the company’s statement said it had dozens of employees. The company also links to articles in which it is featured or mentioned from publications including the Wall Street Journal, Bloomberg, PC World and others.
“Butterfly Labs is being portrayed by the FTC as a bogus and fake company,” the statement said. “To the contrary, Butterfly Labs is very real.”
Bitcoins have gained traction as a way to buy and sell some goods and services instead of using dollars or other government-issued money.
They are created by computers set up to resolve complex algorithmic formulas. As the formulas are resolved, the computer user earns bitcoins. To continue earning bitcoins, the formulas become ever more complex, and increasingly more powerful computers are needed.
Businesses and individuals can agree to do business using bitcoins instead of dollars. They can then trade them for dollars on an exchange. The prices of bitcoins are quoted online, for example, with Coindesk citing prices from five exchanges.
A bitcoin’s value fluctuates widely and currently is $430.93, according to Coindesk.
“We often see that when a new and little-understood opportunity like bitcoin presents itself, scammers will find ways to capitalize on the public’s excitement and interest,” Jessica Rich, director of the FTC’s consumer protection bureau, said in a release. “We’re pleased the court granted our request to halt this operation, and we look forward to putting the company’s ill-gotten gains back in the hands of consumers.”
The FTC contends that Butterfly Labs failed to deliver equipment that consumers had paid for in advance or delayed delivery so long that the equipment was ineffective for producing bitcoins.
FTC staff outlined the breadth of the operation by answering questions about the case on Twitter. The agency said it had received hundreds of complaints about Butterfly Labs directly and thousands indirectly.
The federal complaint said Butterfly Labs offered computers for $149 to $29,899, varying with the power of the equipment, some called BitForce and others Monarch. The statement said more than 20,000 consumers had not received the machines they bought as of September 2013.
One FTC staff tweet said the case did not involve a judgment about the virtual currency bitcoins.
The FTC said a hearing was set for Sept. 29 at which it would ask for a preliminary injunction against the company and individuals. The temporary order has frozen their assets and appointed a temporary receiver to take charge of the business.
Butterfly Labs said it was cooperating with the receiver but would fight the injuction sought by the FTC.
Butterfly Labs was the subject of a report by the website Ars Technica last year in which it called the company “the world’s most mysterious” bitcoin mining company.
BF Labs also faces three lawsuits Johnson County District Court as well as a federal suit in Kansas seeking class action status.
The class action complaint said Vleisides held the majority of BF Lab’s stock and “was serving a term of supervised release for a felony conviction for mail fraud” in California.
It also said the money customers prepaid for their computers had been used to buy a Leawood residence and an automobile for Vleisides and to fund loans to the company’s shareholders.
Butterfly Labs generally denied the claims in the class action complaint and further said the two consumers who filed it knew they would have to wait for their machines.
The buyers, it said, “understood that all sales were final and that there was a backlog of orders and production and delivery of any order may take two months or longer.”
It said that the company’s website included a notice that refund requests would be handled case by case and that “pre-ordered products are nonrefundable” and that this was “clearly stated at the time of purchase.”
In one of the Johnson County court cases, the court issued a judgment against BF Labs for $12,454.92. The attorney representing the consumer said that the case was settled after the judgment but that he could not discuss the terms of the settlement.
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Butterfly Labs’ statement
“Butterfly Labs is disappointed in the heavy-handed actions of the Federal Trade Commission. In a rush to judgment, the FTC has acted as judge, jury and executioner, contrary to our intended system of governmental checks and balances. The FTC’s current actions are negatively impacting our thousands of customers and our dozens of employees. Their current media campaign should only further alarm a knowing citizenry and raise questions as to why the FTC wouldn’t simply let this case play out through the judicial system. That is what Butterfly Labs intends to do.
“It appears the FTC has decided to go to war on bitcoin overall, and is starting with Butterfly Labs. Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real. As pointed out in court filings Butterfly Labs made last night, Butterfly Labs has shipped more than $33 million in products to customers and voluntarily granted refunds approximating $17 million to customers for cancelled orders. Butterfly Labs was literally in the midst of shipping out completed products to fulfill the remaining millions of dollars of orders on our books and issuing requested refunds, when the FTC effectively closed the doors of Butterfly Labs without any chance to be heard in court.
“At this time, Butterfly Labs is cooperating fully with the Temporary Receiver appointed by the Court. A hearing is set for September 29 and Butterfly Labs has asked the Court to allow it to present testimony from key witnesses for the company. Butterfly Labs intends to defend our business and our nascent and promising industry. The government wants to shut Butterfly Labs down, and we are not going away without a fight to vindicate bitcoin, our company, and our employees. Our continued focus is our customers and finding a way to continue to deliver products and processing refunds for those who have requested them.”