FTC: Butterfly Labs Case Not Part of 'War on Bitcoin'

NEWS
Stan Higgins
Sep 24, 2014 at 16:25 UTC  |  Updated  Sep 25, 2014 at 16:36 UTC

Butterfly Labs

The Federal Trade Commission (FTC) announced yesterday that it had shut down Butterfly Labs following approval by a US judge, and for many outraged customers, the closure is the end of a long period of uncertainty.

Though initially a market leader in the bitcoin mining space, the last few months of the Missouri-based company's operations were defined by manufacturing delaystroubled public image efforts and looming legal problems.

Speaking to CoinDesk, FTC attorney Leah Frazier, who works for the agency's Division of Financial Practices, said that the investigation began after it received a groundswell of consumer complaints. The FTC itself serves as a repository for US consumers who wish to report instances of fraud, identity theft or unfair business practices, though it cannot resolve individual complaints.

Frazier said that the investigation into Butterfly Labs had less to do with its involvement in the digital currency industry, and was more about uncovering whether a US business was engaging in illegal activities. Ultimately, she said that Butterfly Labs failed to meet the commitments it made to its customers.

Frazier explained:

"Even though the case involves bitcoin, [the investigation] is about a company that made misrepresentations to consumers about when machines would be delivered and failed to delivery by that time or deliver at all."

Representatives from the mining product manufacturer issued a statement contesting both the closure and the agency's characterization of Butterfly Labs as a "bogus" company. Further, it called the move part of the agency's forthcoming "war on bitcoin", which it predicted would begin with its company.

Asset seizure underway

The FTC has indicated that Butterfly Labs' assets have been temporarily frozen until a 29th September hearing. The 10-day restraining order could be extended, during which time investigators will continue developing their case against Butterfly Labs.

Notably, the FTC revealed that the Butterfly Labs leadership – composed of board members Darla Drake, Sonny Vleisides and Nasser Ghoseiri – may have collected as much as $50m in customer funds for products that were never delivered.

During a Twitter Q&A, one user asked if the FTC was investigating allegations that Butterfly Labs owns secret bitcoin wallets. The agency said only that it was "tracing the company's assets".

Refund interruption fears

The FTC's move to freeze the company's finances has raised concerns regarding the future of its refund payments, which many customers are still seeking.

Frazier told CoinDesk that currently, all funds previously in control of Butterfly Labs are being held until the hearing later this month.

She said:

"The accounts are frozen right now and the receiver is in control of the business. So, we can't make any predictions on an ongoing basis as to the status of the refunds. A lot of that will hinge on the court's decision."

When asked if the move to place the company in receivership was in the best interest of the company's customers, Frazier noted that Butterfly Labs hadn't made good on its promises to issue refunds to date.

Butterfly Labs refutes closure

Hours after the FTC action was announced, Butterfly Labs went on the offensive to denounce the US government agency, alleging that it "acted as judge, jury and executioner" by freezing its assets.

Butterfly Labs explained:

"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 $33m in products to customers and voluntarily granted refunds approximating $17m to customers for cancelled orders."

The company said that, prior to being shutdown by the FTC, it was in the process of sending out shipments and filing refunds "when the FTC effectively closed the doors of Butterfly Labs without any chance to be heard in court".

When asked if the FTC was in effect calling Butterfly Labs a fraudulent company, Frazier said that the agency acted based on how the business was behaving toward its customers.

She concluded:

"We just look at the misrepresentations that the company makes [to] consumers and whether, ultimately, it fulfilled the promises it made. So, whether or not the company is bogus or a scam isn't the issue. The issue is about whether they accurately represent information that would be material to consumers making decisions."

Image credit: Cvandyke / Shutterstock.com

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