Feds order Bitcoin scam company shuttered, 20,000 customers fleeced

The Federal Trade Commission, in conjunction with a federal judge in Missouri, ordered Butterfly Labs, a Bitcoin “mining” operation, to shutter operations Tuesday. The feds said the disgraced outfit fleeced 20,000 consumers in what turned out to be a serious fraud scheme, according to a criminal complaint.

The criminal complaint illustrates the FTC ambiguity about the Bitcoin ecosystem. Indeed, in the criminal complaint, the feds wrote, “The Internal Revenue Service has stated that Bitcoins are not currency, but rather, are taxable as valued property.” Because Bitcoins don’t use, or have, a central bank, like the Federal Reserve, Bitcoins can only be “generated” through the a process called “mining.”

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According to the federal complaint:

“As more miners have joined the Bitcoin network, it has become increasingly difficult to solve the computational puzzles before another miner and make a profit. Therefore, miners must seek faster and faster equipment, and must seek efficiencies to cut their operating costs, which includes high electricity bills and wear-and-tear of the mining machine.”

Missouri-based Butterfly Labs failed to deliver “tens of thousands” of what the disgraced company called Bitforce computers. Prices for the machines ran from $2,499 to nearly $5,000. Although the company announced the new computers last summer, as of August of this year, the FTC said Butterfly Labs failed to deliver even a few, if any.

In their criminal complaint, the feds singled out Butterfly Labs general manager Darla Drake, also identified in court papers as Jody Drake, president and CTO Nasser Ghoseiri and founder Sonny Vleisides as the brains behind the outfit and ensuing fraud.

According to the complaint:

“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 few Bitforce computers that were delivered, and the FTC stressed few, were obsolete. Or more specifically, according to the complaint: “[T]he outdated computers were useless for their intended purpose…..As a result, consumers have not been able to use the machines to generate a profit or return on investment. Defendants also frequently have not provided refunds to consumers who have not received the machines or who have received the machines after a substantial delay.”

Per the federal court order, the defendants, listed above, have had their assets frozen. They also must begin the process of restitution of those who were stiffed. However, if you’ve purchased a Butterfly Labs mining machine, don’t hold your breath for a refund check. Sounds like the next episode of the American Greed series.