Bitcoin business Butterfly Labs, shut down as ‘bogus,’ settles charges for $15000

The federal government has gained a $38.6 million judgment against Butterfly Labs, a Leawood-based seller of bitcoin machines, but agreed to collect only $15,000.

Butterfly Labs consented to the judgment under terms that essentially excuse it from any additional payments because of its limited financial resources. The agreement is based on financial information the company presented in U.S District Court.

“We’re paying $15,000 to settle this case,” said Michael Foster, an attorney at the Polsinelli law firm representing Butterfly Labs.

Officially, the judgment is suspended but could be reinstated if the company is found to have misrepresented its financial condition, or “if we lied about our financials,” Foster said.

Bitcoin is a digital currency that has gained traction among some consumers, businesses and governments. Bitcoins exist only digitally and are “mined” by using sophisticated computer equipment to verify increasingly difficult calculations that verify bitcoin transactions.

The Federal Trade Commission agreed to the settlement a year and a half after persuading a federal judge to shut down Butterfly Labs as a bogus business. It said the company had taken 20,000 consumers for up to $50 million.

FTC agents said they acted without notice to the company to preserve money they feared would “go to Nordstrom, Bed Bath Beyond, gun stores and things like that.”

Butterfly Labs called the FTC’s actions “heavy-handed” and gained court approval to resume some parts of its business and later to remove a court-appointed receiver that was controlling the company.

A statement from the company said it remains in business and is trying to generate money to pay refunds and other debts. Its website also challenges “misperceptions” arising from the FTC charges.

Jeff Ownby, vice president of marketing, said that Butterfly Labs has no current operations and no payroll but that a remaining “core team” is trying to return to business.

Terms of the settlement prohibit the company from accepting advance payments for bitcoin generating machines, misrepresenting its products or services and other improper actions. It also imposes other conditions on operating and reporting its actions.

The FTC had said it acted after receiving hundreds of complaints by Butterfly Labs customers about its failure to deliver the machines and other problems. The agency also said the company used advance payments from customers to buy and use the machines to generate bitcoin for itself rather than deliver the machines to customers.

At one point, an FTC attorney carried into court a foam pitchfork that was stamped with the phrases “Y U NO SHIP!” and “BFL is late!” The agency said the pitchfork and similar foam torches were found at Butterfly Labs and mocked its customers’ complaints.

The $38.6 million judgment against the company also applies to Sonny Vleisides, who the FTC said was a part owner of Butterfly Labs. The FTC agreed to accept $4,000 from Vleisides and suspend the rest of the judgment because of his limited financial resources.

Darla “Jody” Drake, who also was named in the original court action, agreed to a $135,878 judgment. The settlement suspends the judgment in exchange for Drake selling all of the bitcoin she received from “using company machines” and pays the cash to the FTC, a release from the agency said.

Vleisides and Drake remain involved with Butterfly Labs, Ownby said.

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