New court documents filed by the US Federal Trade Commission (FTC) against Butterfly Labs allege that the manufacturer mined bitcoins using customer-purchased equipment prior to shipment.

The documents, filed on 27th September, further allege that Butterfly Labs employees mined bitcoin for personal gain using machines purchased and later returned to the company. The agency says this assertion is supported by the testimony of several former employees.

As a result of the findings, the FTC asked a Kansas City federal judge to impose a preliminary injunction on Butterfly Labs that would extend the temporary restraining order it filed earlier this month. The company will now be controlled by a court-appointed receiver.

The official document reads:

“[Butterfly Labs] misrepresented the delivery and profitability of the BitForce machine, and then made the same misrepresentations to induce consumers to purchase the Monarch, and did so yet again to sell their cloud mining services. They should not get a fourth change (or a fifth chance, in the case of one of the defendants).”

According to the 17-page filing, Butterfly Labs exhibited a “repeated pattern of advertising new and allegedly innovative equipment” and failed repeatedly to deliver on its claims, so closing the company is necessary on these grounds.

The news comes just one week after the manufacturer was shutdown by the US government amid accusations of fraud and public misrepresentation. The FTC was earlier given permission to seize the company’s assets and close its operations pending a formal trial.

Butterfly Labs subsequently alleged that the FTC overreached in its decision to close the company’s operations, suggesting it was in the process of issuing customer refunds – though these refunds would not negate its law violations.

The FTC strongly rebutted these claims in statements to CoinDesk, asserting it acted in the best interests of consumers.

At press time, Butterfly Labs indicated that it would be issuing official comment on the developments later today.

Mining for profit

The FTC alleges that Butterfly Labs was slow to complete the product of its mining units, and that when it did so, it conducted a process known informally as ‘burning in’ wherein equipment was tested and the bitcoins mined as a result were kept for company gain.

One former employee, the FTC said, suggested Butterfly Labs would conduct this process with 500 mining machines operating in three separate ‘burn-in rooms’, meaning as many as 1,500 were in operation in total. Another said that such testing went on for two days – a process that should have taken only 10–30 minutes.

Statements from at least one employee suggest that Butterfly Labs knowingly conducted this process to boost its bottom line. The document reads:

“One employee inquired with company management as to why they chose to test by mining rather than using the test-net, and was told that the company would not make any money using a test-net.”

The FTC claims that no Butterfly Labs customer ever received products on the shipping date originally advertised. In addition, despite the company’s claims that it provided a “full product shipment or refund” to customers who ordered between 9th August and 9th November 2013, Butterfly Labs has not provided supporting evidence to this claim.

Deceptive promotional practices

The FTC went on to suggest that Butterfly Labs used deceptive promotional practices to encourage consumer investment in its products.

According to the agency, defendants also posted a mining return-on-investment (ROI) calculator to the company’s social media profiles, encouraging potential buyers to use the tool to measure the potential profitability of its mining rigs. It dismissed Butterfly Labs’ assertions that it was not responsible for such representations as it did not create the calculator.

Questioning Butterfly Labs’ original estimates about the capabilities of its mining hardware, the release stated:

“A former employee’s declaration asserts that the BitForce Mini-rig had less handing power and consumed more electricity than advertised.”

The FTC also attacked the company’s claims that Butterfly Labs had a “reasonable basis” for the original representations of the estimated delivery dates for their mining rigs.

Further, it suggested that is has firm legal footing to assert that Butterfly Labs could be liable for failing to deliver on its advertisements, citing past precedent.

“The law is well-settled that the FTC need not prove that defendants acted with intent to defraud or in bad faith to prevail,” the statement said.

Hat tip to Ars Technica

FTC Image via Shutterstock