Talks underway in federal dispute with bitcoin company Butterfly Labs

Negotiations are underway between federal attorneys and area bitcoin company Butterfly Labs Inc. over resuming some of its operations.

The Overland Park-based business has been under the temporary control of a federally appointed receiver since Sept. 18. The Federal Trade Commission had charged that the company defrauded consumers of $20 million to $50 million.

A hearing Monday was to determine whether a more lasting order would replace the temporary one. Instead, the temporary order was extended through Friday and the attorneys began talks.

“I’m unable to comment on ongoing negotiations, but the parties continue to work together,” said Jim Humphrey, an attorney representing Butterfly Labs. “We remain optimistic that we will be able to serve our customers again soon.”

An attorney for the FTC declined to comment at the courthouse, and an agency spokesman did not provide a reply.

The talks began despite the FTC ratcheting up its complaint through court filings over the weekend.

Butterfly Labs, according to the FTC, took money from customers for computers that would allow them to earn bitcoins. Instead of delivering the machines to customers, the company used them to earn bitcoins for itself, the FTC alleged.

“Thus, defendants pocketed bitcoins that should have gone to their customers,” the filing said.

Bitcoin is a virtual currency that lacks government backing but is accepted by its followers in place of dollars or other government-backed currencies. A bitcoin trades for about $430.

The two sides began their talks under the prodding of U.S. District Judge Brian C. Wimes, who had issued the order that put a receiver in charge and froze company assets.

In court, Wimes extended his temporary order through Friday and asked both sides about a plan the receiver had worked on to allow the company to move forward. Attorneys for both sides praised the plan without referring to any of its details.

“What if we have a plan that’s acceptable, that’s a business plan?” Wimes asked the attorneys for both sides.

He then recessed the hearing, and the talks began among the FTC, the company and the receiver.

It was a different outcome than seemed likely after an FTC attorney carried a red foam pitchfork into the Kansas City courtroom Monday morning.

The pitchfork — much like a foam finger souvenir from a sporting event — was evidence of the company’s “disregard for” and “mocking” of its own customers, the FTC said in a weekend court filing.

Stamped on the pitchfork were the phrases “Y U NO SHIP!” and “BFL is late!”

The FTC filing also includes a photograph of a red foam torch with the same phrases. The items were discovered at the company after the receiver took control.

Humphrey, the Butterfly Labs attorney, declined to comment on the FTC’s filing.

Nor did talks seem likely when, during the hearing, Humphrey told Wimes that the company had not been in discussions with the FTC.

“The FTC called us ‘scammers’ and ‘bogus.’ There’s nothing to talk about if that’s their position,” Humphrey said.

Butterfly Labs, in court documents, has denied wrongdoing and said it has been working with the Johnson County district attorney’s office since last fall.

District Attorney Stephen Howe confirmed Monday that he began an investigation based on consumer complaints.

“They have cooperated with our investigation,” Howe said. “Our hope is ultimately that the consumers get taken care of.”

Howe said he hoped that the FTC’s action would not change what his office is able to accomplish but that “it’s too early to tell.”

Butterfly Labs has said in court filings that the FTC has been “heavy-handed” and sought the federally appointed receiver without contacting the company.

This story was originally published September 29, 2014 at 11:43 AM with the headline "Talks underway in federal dispute with bitcoin company Butterfly Labs."