While the storm over Mt. Gox is far from over, now Butterfly Labs’ mining equipment saga is joining the party.
The Bitcoin scandals continue in April with another enterprise in court over multiple counts of fraud. Its main shareholder Sonny Vleisides, also an employee and board member, stands accused of deliberately accepting funds for orders which were subsequently never fulfilled.
History of deception
An article by Ars Technica describes how in December 2012 a customer filed a complaint against Butterfly Labs for a US$62,000 order which he never received. In November the following year, the company lost a civil case by default in Kansas’ Johnson County Court and the customer was awarded US$13,000 compensation.
This was just the start of the mess involving Vleisides, with another complaint filed this month by customers Kyle Alexander and Dylan Symington alleging “deceptive and unconscionable business practices” on the part of Butterfly Labs.
The nature of these practices were listed as including “collecting pre-payments for non-existent Bitcoin mining equipment, failing to ship Bitcoin mining equipment orders for which consumers have pre-paid” and “misrepresenting the date such equipment is to ship to customers”.
Additionally the two allege “profiting from Bitcoin mining for [Butterfly Labs’] own benefit using customers’ equipment without permission or authorization from customers”.
This came at a time when the company was reporting spiraling revenue of US$25-30 million for 2013.
Following investigations resulting from a probation complaint attached to a previous lawsuit involving Vleisides, it was uncovered that Butterfly Labs had acquired Kansas Bitcoin mining pool Eclipse Mining Consortium in 2012 for US$100,000. Prosecutors then allege that the company “earns mining income from their burn testing of machines as well as service fees charged to Eclipse customers”.
“Burn testing” as the article points out is explicitly “the company […] using its own hardware to profit privately before sending miners to people who actually paid for them.”
Coupled with the fact that it was revealed PayPal, acting as payment merchant, had frozen Butterfly Labs’ account in September 2013 containing US$11 million, it is unsurprising that the case filed on behalf of Alexander and Symington resulted in a judge telling Vleisides,
“Now, there is a stench coming from Butterfly Labs. It's a strong smell. […]You need to get your toothbrush and get your things in order, because fraud will not be tolerated, you understand that? So I would work very hard to make these consumers happy consumers who you've dealt with.”
The question whether Butterfly Labs is a wholly fraudulent outfit remains unanswered, and the case continues.
The community, however, will have to deal with yet another revelation of dubious business practices facing Bitcoin consumers, at a time when the currency needs all the support it can get in order to gain popularity with the public and find a suitable position with governments and the IMF, among others.
You can read the full Ars Technica article here
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