For many crypto-minded libertarians, Bitcoin is the future of money. But that dream hasn't been helped much by the numerous high-profile legal cases involving the currency in recent years: The Bitcoin Savings and Trust hedge fund collapsed; uncertainty fueled the implosion of Mt. Gox, the currency's largest exchange; and the high-profile Silk Road takedown is a treacherous story combining Bitcoin, drugs, and alleged murders.

For now, though, one company sits above all others when it comes to cultivating a new level of direct customer mistrust in the Bitcoin community: Butterfly Labs.

For the past year, the Kansas-based Bitcoin miner maker has been embroiled in numerous accusations of fraud. Customer orders, totaling millions of dollars, were significantly delayed or never fulfilled. Through it all, the company insisted that mere manufacturing delays were to blame. However, suspicion never died down. In fact, it's getting worse after it came to light that Butterfly Labs' largest shareholder—a man who is a company co-founder, current "Innovation Officer," and member of the board of directors—pled guilty in 2010 to one count of mail fraud (PDF) for his involvement in an international, multi-million dollar lottery scam.

Now, the company's critics have fresh ammunition because of this same executive. A federal judge in Kansas has ruled that the man in question, Sonny Vleisides, violated the terms of his probation in the lottery scam case. As a result, Vleisides’ probation—previously slated to end in September 2013—will now continue for another two years. This ruling is Butterfly Labs' least concern. In light of new details from the recently published transcript of that January 2014 probation hearing, the legitimacy of the Butterfly Labs operation could soon be decided once and for all.

“I’m on a good track now”

According to the United States Postal Inspection Service, victims collectively lost more than $25 million during the lottery scam Vleisides participated in. The government accused his father, James Ray Houston (who has since passed away in prison), of being the mastermind behind the entire scheme. As the USPIS wrote in January 2011:

According to the indictment, the victims were purchasing “positions” in tickets for lotteries that would be grouped together or “pooled” to buy larger blocks of tickets, thereby increasing their chances of winning. Funds received from victims were not used to purchase tickets, but to pay “winnings” to other victims, to fund the scheme, and to benefit the defendants. Victims were sent checks falsely represented as lottery “winnings;" however, the amount of the alleged “winnings” was far less than the amount the victim had sent in.

Vleisides and three others were also implicated in the scam, and he took a plea deal. In a post on Bitcoin Forum in September 2012, Vleisides described the experience this way:

After two and a half years preparing, we neared trial. The prosecutor calls for a meeting and offers me a deal. I can go home if I accept a single count of mail fraud and skip the trial. They would drop 23 charges and leave me with a simple postal violation (lesser count of mail fraud). I thought about it and it didn't take long for me to agree to get the shackles off. I signed and went home to my mother's house in Kansas City. I sat there looking at the wall for a long time. I didn't feel like leaving the house much. It was difficult to get over the emotional loss. My life was ruined. Mom got me an account on match.com and encouraged me to date. I met a wonderful girl and we had a little boy. We named him Indy. My life continued and I started to look for a new project to begin again. A fresh start. I'm on a good track now, trying to put the past behind me.

When Vleisides moved to Missouri, his case was transferred to that federal district for judicial supervision of his probation, which included this “special condition”:

The defendant shall not engage, as whole or partial owner, employee or otherwise, in any business involving loan programs, gambling or gaming activities, telemarketing activities, investment programs, or any other business involving the solicitation of funds or cold-calls to customers without the express approval of the Probation Officer prior to engagement in such employment. Further, the defendant shall provide the Probation Officer with access to any and all business records, client lists, and other records pertaining to the operation of any business owned, in whole or in part, by the defendant, as directed by the Probation Officer.

Vleisides recovered from his mental slump and soon helped start Butterfly Labs. According to a 2012 court document, Vleisides’ lawyers say that BFL “began on napkins, scraps of paper, and spare parts on his kitchen table," adding that "the hours that Mr. Vleisides has put in to develop the product have been long and arduous. There have been times when he arrived before the sun came up and left after it went down." While Vleisides was "remorseful about what has occurred," he was looking toward a better future, they added. "The justice system could not ask for more from a person that has been punished."

Revenue and a growing rap sheet

But on September 3, 2013, Vleisides’ probation officer, Courtney Pierce, filed a violation report with the Missouri federal judge handling his case (just over two months after Ars published our first articles about Butterfly Labs and its mining machines). In her memo to the judge, Pierce wrote that Vleisides was now an employee of and the dominant shareholder in BFL, a company which "advertises all of its technology for purchase through pre-order... Vleisides did not seek the express approval of the probation officer prior to engaging in a business that involves the solicitation of funds through pre-orders."

She continued:

The Probation Office has been notified by the US Postal Inspection Service that hundreds of complaints have been filed against BFL from individuals who have placed pre-orders for hardware from BFL. The seriousness of Vleisides' instant offense [the lottery scam], coupled with his current involvement in a somewhat similar business enterprise are cause for concern.

Before Vleisides' violation, BFL was already facing accusations of fraud and mismanagement. In December 2013, a German-Polish man who lives in China filed a lawsuit over a $62,000 order that was never fulfilled; he accused BFL of breach of contract, fraud, and negligent representation. And Butterfly Labs lost a civil case by default in Kansas’ Johnson County Court in late November 2013. The plaintiff, a Californian named William Lolli, won a judgment of more than $13,000 but told Ars that he has not yet collected the award.

The company's troubles may only worsen from here. A new lawsuit filed in early April 2014 (read the 21-page complaint) accuses BFL of engaging in “deceptive and unconscionable business practices.” The suit, which seeks class-action status, was filed earlier this month in Kansas. It accuses BFL of collecting payment for “non-existent Bitcoin mining equipment, failing to ship Bitcoin mining equipment orders for which consumers have pre-paid, misrepresenting the date such equipment is to ship to customers, and profiting from Bitcoin mining for Defendant’s own benefit using customers’ equipment without permission or authorization from customers.”

BFL, its corporate attorney, Vleisides, and Vleisides' criminal attorney all failed to respond to Ars’ repeated requests for comment. But it's clear that despite all the legal wrangling, the company is doing well. According to testimony from BFL’s de facto chief financial officer, the company expected to earn $25-$30 million in revenue in 2013.