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Butterfly Labs Shut Down by Federal Trade Commission’s Complaint
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Butterfly Labs Shut Down by Federal Trade Commission’s Complaint

Summary: The Federal Trade Commission filed a complaint against Butterfly Labs, a Kansas company that sold bitcoins. The suit alleges fraud that has cost consumers millions of dollars.

According to the Kansas City Star, a Leawood bitcoin business plans to fight against federal shutdown. Butterfly Labs was sued by the Federal Trade Commission for allegedly ripping off 20,000 consumers in an amount of up to $50 million in a bitcoin scam.


Butterfly Labs sold computers that it claimed could generate bitcoin, which is a virtual form of currency, for buyers. However, the computers were never delivered, or the company sent “worthless equipment” instead, the complaint reads. The FTC also alleges that the delivery would be delayed so long that the equipment was ineffective at producing bitcoins by the time it arrived to the buyer.

The FTC said on Tuesday that the U.S. District Court in Kansas City issued a temporary restraining order that shut down the business. Aside from the business itself, the complaint named individuals Darla Drake, Nasser Ghoseiri and Sonny Vleisides. Butterfly Labs said it was “disappointed in the heavy-handed actions of the Federal Trade Commission.”

Butterfly Labs also claims that the shutdown has blocked current shipments of “completed products to fulfill the remaining millions of dollars of orders on our books and issuing requested refunds.” It added that it has “shipped more than $33 million in products to customers and voluntarily granted refunds approximating $17 million to customers for canceled orders. 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.”

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Butterfly Labs claims that it had dozens of employees, and its website includes links to articles in the Wall Street Journal, PC World, Bloomberg, and more that reference the company. The company also said, “Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real.”

Bitcoins are a fairly new concept that has gained popularity. They are a way to buy and sell goods without using government-issued currency. Computers create the bitcoins by resolving complex algorithmic formulas. As the formulas are resolved, the user earns the bitcoins. For the user to continue earning bitcoins, the formulas become more complex, requiring more powerful computers.

Businesses and individuals have the ability to do business using bitcoins in lieu of dollars. After earning bitcoins, the individuals or businesses can trade in the bitcoins on an exchange. Prices are quoted online, such as at Coindesk. According to Coindesk, the value varies, but is currently valued at $430.93.

Jessica Rich, director of the FTC’s consumer protection bureau, said, “We often see that when a new and little-understood like bitcoin presents itself, scammers will find ways to capitalize on the public’s excitement and interest. 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 states that it has received hundreds of direct complaints about Butterfly Labs, and thousands more indirectly. Butterfly Labs offered computers costing anywhere from $149 to $29,899. The price range depended on the power of the equipment. Some computers were named BitForce, and others were called Monarch. The FTC said that 20,000 consumers had not received machines purchased in September 2013.

On September 29, a hearing will be held during which the FTC will seek a preliminary injunction against the company and the named individuals. The temporary order currently in place has frozen their assets, and a temporary receiver has been appointed to take over the business’s operations.

Although Butterfly Labs has stated it is cooperating with the receiver, it plans to fight the injunction the FTC has requested.

Butterfly Labs is facing claims from more than just the FTC. Three lawsuits have been filed in Johnson County District Court, as well as a class action in a federal suit in Kansas. The class action claims that Vleisides holds most of the company’s stock and “was serving a term of supervised release for a felony conviction for mail fraud” in California. In addition, customers’ money was used to buy a residence and car for Vleisides, and provided loans to shareholders.

Butterfly Labs responded to the complaint by issuing a general denial. It also claimed that two consumers in the action were aware that they would have to wait for the machines. The buyers “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 also argued that Butterfly Labs’ website included a notice that refunds “would be handled case by case” and that “pre-ordered products are nonrefundable,” which was “clearly stated at the time of purchase.”

A judgment against the company has already been issued in one of the Johnson County cases in the amount of $12,454.92.

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