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Bogus Bitcoin Mining Operation Shut Down by FTC: Update

| 30 Sep 2014 12:47
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Update: According to new allegations made by Federal authorities, when Butterfly did ship mining machines to customers, it sent them used goods. Butterfly's practice was to use its machines to mine Bitcoins for Butterfly, and then send those machines on to the customers who had purchased them.

"Specifically, the testimony of several former employees and vice president of Product Development Josh Zerlan shows that instead of fulfilling orders immediately, defendants used their customers' machines to mine Bitcoins for themselves before shipping the now-used machines to their customers," FTC attorney Helen Wong told the court. "Thus, defendants pocketed Bitcoins that should have gone to their customers."

Wong went on to claim that Butterfly mocked its customers with foam pitchforks.

"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!"

Source: Ars Technica

Some of Butterfly's machines were no better than room heaters, says the FTC.

At the Federal Trade Commission's request, a federal court has shut down Missouri-based Butterfly Labs, a company whose stated purpose was to market specialized Bitcoin mining computers. Butterfly was ripping off consumers to the tune of thousands of dollars per machine, according to the official complaint, and that was when Butterfly bothered to supply the machine at all.

Bitcoins need to be mined, and that requires significant computing power. Butterfly said it could supply machines dedicated to Bitcoin mining, and charged as much as $29,899 per machine. Its most efficient machine, at least according to Butterfly, was its Monarch, for which it asked customers to pay somewhere between $2,499 and $4,680 up front. At first the Monarchs were supposed to arrive by the end of 2013, then by April 2014. It's now well into August; guess how many customers have received the Monarch they paid for?

Did you guess none? Well done. There's some confusion as to whether Butterfly has a refund policy. The official complaint states that Butterfly has claimed to have a refund policy, and also said it had a no-refund policy. Often, when customers call Butterfly, nobody picks up the phone.

Before Monarch there was BitForce, another miner that, in 2012, was supposed to be in its final stages of development. The most expensive BitForce variant was the $29,899 model, but a cheap BitForce could be had for $149. Though plenty of people placed orders, over 20,000 customers were still waiting for their BitForce in September 2013. By November 2013 Butterfly insisted all BitForces had shipped, but its customers complained that they were still waiting for their machines.

That said, even if the machines had shipped there was no guarantee they would be worth the money. Bitcoin mining technology goes obsolete very quickly; according to the FTC, one Butterfly representative said that the passage of time rendered some of their machines as effective as a "room heater."

"We're pleased the court granted our request to halt this operation," says FTC director Jessica Rich, "And we look forward to putting the company's ill-gotten gains back in the hands of consumers."

The defendants - Butterfly Labs General Manager and Treasurer Darla Drake, President and CTO Nasser Ghoseiri, and Sonny Vlesides, Founder and Innovation Officer - have been ordered to immediately stop making misrepresentations about their products and services, and a freeze has been put on their assets.

Butterfly has said it is deeply disappointed, calling the FTC action a rush to judgment, with the FTC as judge, jury and executioner. "It appears the FTC has decided to go to war on Bitcoin overall and is starting with Butterfly Labs," it said in an official response.

Source: Federal Trade Commission

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