FTC Archives – hangletonweblogs

We’ve received word that Butterfly Labs will be resuming operations and reopening tomorrow morning after the company has been engaged in a legal battle with the FTC.

District Judge Brian C. Wimes issued his ruling to allow the company the ability to resume partial operations tomorrow morning much to the disappointment of many in the bitcoin community.

The company provided hangletonweblogs the following statement:

“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.”

On April 4, 2014, consumers filed a class action complaint against Defendant BF Labs Inc. (“BFL”) in the United States District Court for the District of Kansas on behalf of Kyle Alexander and Dylan Symington.

In their Complaint, consumers alleged BFL violated the Kansas Consumer Protection Act (“KCPA”), were unjustly enriched, made negligent misrepresentations, and committed conversion. Specifically, consumers alleged BFL collected pre-payments for non-existent Bitcoin mining equipment, failed to ship Bitcoin mining equipment orders for which consumers have pre-paid, misrepresented the date such equipment would ship to customers, and profited from Bitcoin mining for BFL’s own benefit by using customers’ equipment without permission or authorization from customers. Consumers seek damages and a constructive trust to recover the purchase price, the value of bitcoins paid to BFL, the loss of use of bitcoins, the loss of use of mining equipment that was never received or not received in a timely manner, the loss of bitcoins mined by BFL using consumers’ equipment, the diminution in value of mining equipment, costs of suit, attorney’s fees, and punitive damages.

Between April and September of 2014, consumers engaged in significant discovery and were in the process of negotiating a class settlement on behalf of a putative class consisting of “all persons who pre-paid Defendant for Bitcoin mining equipment.” Consumers and BFL engaged in settlement negotiations and agreed to mediate on November 5, 2014. Trial is scheduled for January 4, 2016.

On September 15, 2014, the FTC filed a complaint in this Court against BFL and other individuals seeking temporary, preliminary, and permanent injunctive relief, rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.

The attorneys have presented an argument to the court stating that the FTC action will cause damage to the separate actions of a class-action suit. The attorneys argument states:

The remedies sought by the FTC conflict with, frustrate, and deny remedies available to consumers, the FTC cannot adequately represent consumers’ interests. The FTC action, on its face, does not even purport to adequately represent consumers’ interests. The FTC is a civil enforcement agency that has no attorney-client relationship with consumers and has no fiduciary duty to act in any particular consumer’s best interests.

Here, consumers and the consumer class action provide the best mechanism to protect the interests of the consumer class. Consumers have already engaged in months of investigation and substantial progress in their suit. Procedurally, consumers already have survived the motion to dismiss stage, obtained a discovery framework (including a comprehensive protocol for the exchange of electronically stored information and a protective order), issued multiple subpoenas to non-parties (many of which are still pending), collected and reviewed hundreds of thousands of pages of relevant documents, engaged in meaningful settlement discussions, modeled complex scenarios that may involve cash and non-cash benefits for class members (cash, bitcoin, hardware, hashing), selected and retained a mediator, scheduled a mediation date with BFL, and obtained a trial setting.

It is virtually without question the consumer class has a strong interest relating to the property and transaction that is the subject of this action and the disposition of this action will likely both impair and impede the consumer class’s ability to protect its interest. The FTC’s desire to exclude the consumer class from having a voice in this action is at best, puzzling and demonstrates the existing parties to this action, will not adequately represent the interest of the consumer class. This Court should grant consumers’ Motion to Intervene and hear from people who actually paid for mining equipment, who actually engage in Bitcoin mining, and whose legal rights and property are actually at issue.

The attorneys state they are hoping to be heard and that they believe the FTC is not acting in the best interest of consumers in this case.

Counsel for the FTC indicated the FTC objects to the motion. Counsel for the receiver indicated he was not able to take a place until consulting with the receiver and the FTC. Butterfly Labs does not object to this motion as it could result in the FTC case taking a backseat to the already pending consumer class-action under which Butterfly Labs is most likely to come out more favorably versus the FTC actions.

This case continues to grow and become further complex as more parties seeking to protect themselves are likely to file more motions with the court.

Image from Butterfly Labs Management Portfolio

In a strange twist of events the General Manager of Butterfly Labs is claiming that due to personal asset freezes by the court order from the FTC she is now unable to even buy groceries.

Butterfly Labs requested the court allow what it calls five key witnesses to give live testimonial to the court.

Those witnesses now include a Representative of the Johnson County District Attorney’s Office; Mr. Bruce Bourne, Consultant to Company and Acting CFO;  Mr. Jeff Ownby, Vice President of Marketing and E-Commerce and Co-Founder of Company;  Ms. Jody Drake, General Manager;  and Ms. Linda M. Freeman, MarksNelson LLC.

All five are expected to give testimonial in support of Butterfly Labs if allowed to give testimonial.

Rep from District Attorney’s Office

This witness, who is expected to be either an attorney or investigator from the DA’s office, will address aspects of its investigation into BF Labs, explain how the company has been cooperative during the investigation, has met all deadlines, and has been involved in ongoing negotiations toward settlement of the dispute over the application of the Kansas Consumer Protection Act, Kansas Consumer Protection Act.

Mr. Bruce Bourne

Mr. Bourne will tell the Court about why he was attracted to the opportunities presented by BF Labs, and his views on the former and current management team. He will address the allegations and claims made by the FTC and tackle head on the issues in the past and the future of the company if not already destroyed by the FTC’s heavy-handed tactics. Mr. Bourne will tell the Court why BF Labs is not a fraud, and why he put his talents to work at the company and made a personal investment of his time and energy in the opportunity.

Mr. Jeff Ownby

He will testify about the history of BF Labs and the early days of this start-up technology company. He will describe his role as one of three founders of BF Labs, the initial goals of the company, its operating history, and its future. Mr. Ownby also has helpful knowledge to share with the Court about bitcoin and the bitcoin mining industry. He will explain to the Court the opportunity he saw in the industry, how he helped breathe life into it, the criticisms of the company, and his hopes for the future of the company.

Ms. Jody Drake

Ms. Drake will describe her role at BF Labs. While she has been involved in customer service, shipping, human resources, and general office purchasing, she has never made policy at the company or been actively involved in management decision making. She will describe for the Court the shock and horror of being served with the FTC Complaint, facing a personal asset freeze, filling out financial forms that are totally unnecessary for someone in her role, and her meager assets. She will also describe her request that she be allowed to buy groceries and gas after being personally sued by the FTC.

Ms. Linda M. Freeman

She will testify about start-up companies, accounting, reporting, tax and other financial issues related to BF Labs. She can answer questions the Court may have about BF Labs finances. She will also testify and inform the Court about improvements made at BF Labs over time and the internal controls that have been implemented, along with efforts made (with supervision provided by Bruce Bourne) by the company to better itself and comply with all accounting and tax obligations under the laws of the United States of America.

The community has been ablaze about the news of Butterfly Labs and the FTC lawsuit against the embattled company and this morning hangletonweblogs has learned of more details before the hearing set to take place today.

Josh Zerlan the VP of Product Development has given his testimony in a deposition performed with the FTC and we’d like to take a few minutes to highlight a few key elements of that testimony that our readers might find interesting.

hangletonweblogs will be working throughout the case to get further information and will be posting new entries as further information is obtained.

Josh Zerlan gave testimony that he received a set of 10 Butterfly Lab Singles from the company as part of his compensation package.

We later would learn in the deposition that Mr. Zerlan personally generated about 15 BTC before returning the hardware to the company. He did not give a reason specifically why he had returned the hardware.

He was also promised by the company a Monarch but it has yet to be received.

Mr. Zerlan also used a company credit card to purchase guns for his own protection after receiving threats from the community.

After repeated denials from the company and Mr. Zerlan himself in the past on the Butterfly Labs website, the BFL website and other locations on the Internet that the company DOES NOT mine on customer purchased hardware before sending it out he gave new testimony indicating that those statements were false and that the company was mining using hardware that had already been purchased by customers.

The following pictures taken from Butterfly Labs shows customer equipment that was being actively used to mine bitcoins for the direct benefit of the company.

Elizabeth T. Han, an investigator with the Federal Trade Commission also gave the following statement regarding the user of customer miners for mining internally.

Butterfly Labs also purchased EMC Mining Pool and has failed to provide that wallet to the FTC and this has been noted later in the deposition.

hangletonweblogs is highly suggesting anyone currently mining on EMC please begin moving your miners as it is likely after today’s hearing these wallets will be taken over by the receiver based on later information in the deposition.

Chat transcripts internally show that the company was also actively working to defraud customers and find reasons to cancel orders.

They also show the company’s internal panic as other companies cropped up with better systems and the subsequent debates if they should lie about the progress they are making to deflate some of the announcements.

It also appears the company actively worked to defraud Dwoalla with transfers to personal accounts even suggesting they claim they were “customer accounts” in internal chat transcripts to make transfers immediate and in violation of Dwoalla’s TOS.

We also learn that the company knew how behind it was and began debating what lies to tell the public to manage shipping expectations.

The company was also aware internally they would not make the shipping times promised but continued to lie publicly.

It now appears we are just barely scratching the surface on what remains to be an even larger story. More information will be coming in the near future.

Butterfly Labs has provided an official response via Public Relations firm Blanc & Otus about earlier reporting that the FTC has launched an official investigation against the company.

“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.”

hangletonweblogs had contributors in DC over the weekend working with the FTC to get the documents unsealed and provided to the public after first reporting late last week about a FTC investigation. We will continue to watch this story for further developments and will have contributors in the first hearing if the court allows to bring the latest information.

Full scanned complaint appears at bottom.

At the request of the Federal Trade Commission, a federal court has shut down Butterfly Labs, a Missouri-based company that allegedly deceptively marketed specialized computers designed to produce Bitcoins, a payment system sometimes referred to as “virtual currency.”

The FTC’s complaint against the company and its corporate officers alleges that Butterfly Labs charged consumers thousands of dollars for its Bitcoin computers, but then failed to provide the computers until they were practically useless, or in many cases, did not provide the computers at all.

A company representative said that the passage of time rendered some of their machines as effective as a “room heater.” The FTC charged that this cost the consumers potentially large sums of money, on top of the amount they had paid to purchase the computers, due to the nature of how Bitcoins are made available to the public.

“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,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “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’s complaint alleges that Butterfly Labs marketed Bitcoin mining machines. Starting in June 2012, Butterfly Labs touted the computers, which they called BitForce, as cutting-edge, powerful and efficient. Consumers who bought the computers were required to pay in full, up front. The computers ranged in price from $149 to $29,899 based on the computers’ purported computing power. According to the FTC’s complaint, as of September 2013, more than 20,000 consumers had not received the computers they had purchased.

Despite failing to deliver tens of thousands of BitForce computers, the complaint alleges that Butterfly Labs in August 2013 announced a new, more powerful computer to mine Bitcoins called the Monarch, which was available for sale for $2,499 to $4,680. According to the FTC’s complaint, the company had delivered few, if any, Monarch computers as of August 2014.

Even where Butterfly Labs did deliver a Bitcoin mining computer to a consumer, the complaint notes that because of the unique nature of the Bitcoin system, the outdated computers were useless for their intended purpose. While more Bitcoins are being mined each day, the total number of Bitcoins available to mine is reduced in half each year. Combined with the fact that each new generation of computing technology used to mine Bitcoins renders previous generations essentially obsolete, the delay in delivering computers to consumers meant that the Bitcoin mining computers could never generate the amount of Bitcoins that Butterfly Labs promised consumers.

Butterfly Labs, the complaint alleges, also offered a service beginning in December 2013 in which consumers would pay up front for Bitcoin “mining services” in which the company would provide Bitcoins to consumers in exchange for payment for computing time. The complaint notes that by August 2014, Butterfly Labs had not provided any Bitcoin mining services to consumers, despite some having paid thousands of dollars for the services.

The court’s order in the case requires the defendants to immediately stop making misrepresentations about their products and services, and places a freeze on their assets.

The defendants in the case are BF Labs, Inc., doing business as Butterfly Labs; Darla Drake; Nasser Ghoseiri and Sonny Vlesides.

The Commission vote authorizing the staff to file the complaint was 5-0. The complaint and request for a temporary restraining order was filed in the U.S. District Court for the Western District of Missouri. The court granted the order on Sept. 18, 2014.

UPDATE AT 9:57am Tuesday:

This story has turned out to be FACT. Full story is here.

This morning hangletonweblogs received an unconfirmed report about Butterfly Labs stating that the company had been raided by the US Marshal’s Service in addition to the FTC.

A post also was created on Bitcoin Talk from a user reporting to be a former employee of the company who was receiving information from others.

This post along with a thread posted on /r/bitcoin on reddit has led to rampant speculation to the validity of the claims.

hangletonweblogs has been in contact with the US Marshals Service this morning and early afternoon in Kansas that would be directly responsible for this raid and received an official word that none of the agents operating out of the District of Kansas offices and were told via the telephone that from several agents including the head of the office,

None of our agents at this time are involved in any field operations about Butterfly Labs. We are not typically involved in cases with other agencies such as the FTC unless ordered by a judge and those orders come very rarely baring some sort of illegal drug activities.

hangletonweblogs reached out to the FTC who stated via the public information offices on Monday at 2:25pm the following:

At this time we are unable to respond to this story or any court ordered actions that may have been issued in regards to this company for the date given. If and when this changes an official statement will be provided to your organization.

On Tuesday morning the FTC changed gears and reissued a new statement stating:

“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,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “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.”

This story will be updated as more information becomes available and via our Twitter: @CoinFireBlog

Image courtesy of BTC Keychain