UPDATE: Butterfly Labs Motion to Dismiss has been denied, presumably because they broke some rule on page limits. We should take that as their rant (covered below) was too long for THE MAN to take.

The Federal Trade Commission filed Case 4:14-cv-00815-BCW on September 15th, 2014. In their report, the FTC claims that BFL did a bunch of dumb things. These include:

–Refusing to refund payment, by flipping between two policies: No refunds, and refund offers that were never fulfilled.

–Josh Zerlan, Vice President of Product Development, testified that BFL used pre-paid rigs to mine for BTC before shipping (if they were even shipped). This may explain why some were broken messes by the time they got to customers.

–Because the products were shipped so late (or not at all), the rigs were incredibly outdated, and because of that, miners couldn’t use the rigs properly. (Via FTC):

–Refusing to ship the BitForce miner months after pre-orders, then using deceptive marketing to get people to buy or upgrade to a newer miner, the Monarch.

For these reasons, primarily, the FTC had temporarily shut down operations at Butterfly Labs (From what I understand, some operations have since resumed after a TRO elapsed. More on that later). The FTC has said in their later report:

Given their record of repeated law violations, Defendants [Butterfly Labs] cannot expect the Court simply to take their word for it that they have abandoned their illegal conduct for good Defendants business survives upon income obtained through misrepresentations about timely delivery and profitability that should be returned to their victims… [The] Defendants have failed to explain why the Court should permit them to resume operations and deplete assets available for consumer redress, especially in light of the Commissions likelihood of success on the merits. (Case 4:14-cv-00815-BCW Document 42)

Yeah.

About that last bit, the Success on the merits part. As detailed earlier, BFL is fucked. The FTC has multiple points (and evidence) on BFLs deceptive practices that are quite compelling. These include:

–BFL admitting that they were behind schedule, while using vague terms that didn’t set a firm ship date. Like, openly saying Two months or longer to consumers. Which is not considered “Qualifying language”, AKA Not some vague bullshit. BFL later admitted that, with Bitcoin mining, Time was of the essence. They ended up never shipping most of their orders, and the ones that did ship, as mentioned earlier, were outdated due to the difficulty rate constantly increasing. That basically means that because the miners weren’t delivered on time despite the company admitting that, in order for their product to be competitive, it had to be operational ASAP, the rare few who did receive their broken, piece of shit machines could not recoup their costs and, therefore, lost a ton of money.

–That stupid calculator they put everywhere, stupidly. (More below)

–The language used to explain shipping delays specifically was Feeble, and any excuses they use are bullshit because they clearly were not shipping anything or being reasonable in the meantime.

–They lied about testing the Monarch chip, saying it was nearly finished with “Taping” when, in fact, it was barely even beginning, with internal messages saying to expect shipment in early February 2014. This was November 2013.

–Around the same time they were panicking about the Monarch chip not being close to done, they sent an email blast promising early 2014 would be the ship date. This is, again, vague, not qualifying language, and also deceptive marketing, because it is claiming that a product that is not close to being done is close to being done, and pre-orders are open now! What a great source of revenue: people trying to jump into the mining game not knowing that BFL was supposed to ship that product months earlier!

–They claim to have a full refund policy for orders between August 9th-November 9th, 2013. Hilariously, they have no documents proving this, making this one of, if not BFL’s most blatant lie when you realize the FTC had to consult The Blogosphere to see how customers had to force refunds via Credit Card disputes or lawsuits. The main thing from all of the comments in each thread is simple: BFL did not willingly refund a single damn order, probably in part to their confusing refund policy explained earlier. We’ll call it “Kafkaesque”.

–Later on, they allowed consumers an option to upgrade their order without disclosing that by doing so, they would void their opportunity to get a refund. That is illegal, since you have to notify consumers when you change details like that. Its why you get an email from eBay or PayPal or Tumblr saying “Our Terms of Service have changed”.

– By the FTCs count, BFL had 3 major products that did not ship: BitForce, Monarch and their Cloud Mining service that charged $10/GHS using their Monarch miners. Yet they still advertised new products and accepted pre-orders.

–Not one BFL consumer, not a single one out of 20,000 paid-in-full consumers, got a BFL miner on its original ship date. And even if there was a reasonable delay, since this is supposedly very high-tech stuff were dealing with here, and delays do happen, BFL still has literal tons of Monarch orders left to ship almost a year after the original ship date. That’s unreasonable for any company with orders paid-in-full.

–Those stupid Y U NO SHIP pitchforks from our last article on BFL? The FTC sees that as the company mocking their customers. And its kinda hard to deny.

The calculator bit is an important one. For those not aware, BFL posted a calculator on its Facebook and Tumblr accounts, as well as its website and a few other official BFL pages, telling people they could see how much they could potentially earn with their rigs, based on the current difficulty level, exchange rate and how much electricity costs. The FTC says the calculator showed when someone would break even with the machine using the calculator. This is a problem, because since the machine never shipped, these calculations would equal an outdated and useless miner, if and when they finally got their machine. Theres also the fact that an employee of BFL has said they lied about how powerful the machines actually were, meaning the calculations outputted were always wrong, thereby misleading customers, a serious charge that will most likely be one of the main reasons BFL will crumble.

So, in the end, what is the FTC charging them under? The Federal Trade Commission Act of 1914, a law President Woodrow Wilson signed to stop monopolies and unfair trade practices. Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits unfair or deceptive acts or practices in or affecting commerce”, which, as demonstrated above, BFL has done in fucking spades. Here’s the full list of violations:

AND, before we get to BFLs rebuttal, lets not forget that BFL Co-Founder and Innovation Officer Sonny Vleisides engaged in mail fraud by participating in a lottery scheme run by his dad that, internationally, netted $25 Million dollars from victims. He was still on probation when all this insanity occurred, so out of all of them, his odds are the worst.

So… What was BFLs response?

Hilarity.

–BFL contends that the FTC is basically Dirty Harry, a good cop gone rogue because of their foaming at the mouth hatred of all things Bitcoin and Butterfly Labs, despite the fact that the FTC noted in its earlier report that the IRS has decided to let Bitcoin be counted as taxable property, and therefore okey-dokey.

–BFL called the FTC Kafkaesque, with the following footnote:

From a certain point onward there is no longer any turning back. That is the point that must be reached.  Franz Kafka, The Trial.

According to Wikiquote, that is actually from Kafkas 1918 work Aphorisms. Also, the FTC is not acting Kafkaesque, its doing its job. The refund thing from earlier? That is definitely Kafkaesque.

–The first footnote, the very first one, is very adamant about how much the FTC is on a Campaign to Destroy Butterfly Labs. The quote that follows inside the footnote is as docile as an actual butterflys queef:

We often see that when a new and little-understood opportunity like Bitcoin presents itself, scammers will find ways to capitalize on the publics excitement and interest, said Jessica Rich, director of the FTCs Bureau of Consumer Protection. Were pleased the court granted our request to halt this operation, and we look forward to putting the companys ill-gotten gains back in the hands of consumers.

Considering the harm these guys have done to thousands of paying customers, that is as calm and reasonable as it gets.

–Despite the FTCs pretty good explanation of what Bitcoin mining is in its first affidavit, BFL is claiming that THE MAN COULD NEVER UNDERSTAND THE BIGGER PICTURE, MAAAAAAAAN.

And here is the first page (of 2) from the FTC explaining the basics of Bitcoin:

Moreover, their argument that the FTC’s claims don’t matter because they don’t understand Bitcoin (They do) is bullshit as well, because you don’t need to understand something to know its a scam. I don’t know a thing about chemistry, but when I see con artists selling juice they claim cures AIDS, I know that’s bullshit. We all know buttsex is how you cure AIDS.

–I get a very weird Boston Legal-esque vibe from this motion to dismiss. Its like some guy at BFL handed in a megalomaniacal rant about how the government hates him and his company to a lawyer, and the lawyer was like I think I can translate this into legalese. Case in point:

That is an actual quote, from a real court document. That is so out-of-bounds rude for any case document Ive seen in a while. Even the Whitey Bulger trial docs had class, and that guy ran the Winter Hill Gang! They based Jack Nicholsons character from The Departed on him! Yes, that guy! This document is more offensive than Bulgers trial, and the fact that he actually killed people is on public record, in pretty graphic detail. Depictions of bodies are less offensive than this motion to dismiss. Im sure there are other motions on record somewhere with language this glaringly condescending, but I havent seen it. I think, side by side, this motion for dismissal will be used to teach law students how to lose a case before the trial has even begun.

The main problem with the language is the condescension. It is clear that whoever wrote the rant that was translated into legal babble thinks he understands Bitcoin than anyone else, even Satoshi, and just KNOWS that no one inside the FTC could possibly understand such a broad concept as digital currency, because OBAMA. I’d be willing to bet .000001 BTC that whoever decided to add condescension to their motion against the federal government’s case is probably one of the three main BFL officers listed in the original trial docs.

In fact, going through this whole document, it reads less like a professional defense of a company accused by the government of defrauding investors, and more like if you took the out of touch and not at all accurate legal advice from the comments posted on /r/Bitcoin, got said comments complied into one dump of quotes, and shipped it to a law firm with some of the more confident Libertarians standing in the room, bull-headed as ever, demanding their constitutionally protected day in court be as close to Perry Mason Syndrome as possible.

–They did ship some of their Jalapeno units, and, in fact, did ship other products as well. It isn’t disputed that some product was shipped. However, there doesn’t seem to be any documentation saying it was 45,000 units. There really isn’t any proof of that 45,000 unit number besides them just making it up. Note that there is no footnote, and there isn’t one on any other page mentioning that number. They are blatantly lying in their motion to dismiss against the FTC. I don’t know if that’s a felony or not, but I hope to God it is.

But thats not the point. They very well may have shipped 45,000 units, but in the meantime they were refusing to refund customers, mining BTC with pre-ordered machines, not shipping paid-in-full units to customers, and then mocked said paying customers with those stupid foam pitchforks. According to the FTC, BFL didnt ship anything to something like 20,000 people who had already paid for their machines. Thats the point: That they conspired to use customer funds to make equipment for themselves, and then ship it off to the customers when they were done. If that wasn’t their plan in the beginning, it certainly became their plan after, lets say, 2 days.

–This:

Oh, so NOW the FTC wants to protect consumers, even though we were already being sued for our deceptive practices by someone else! They should have stopped us sooner! Well, its too late now, and thats how law works, so I think were in the clear.

And for those wondering about the footnote, well

If Plaintiff already knew about the District of Kansas putative class action when it filed its ex parte papers, it had an ethical obligation to inform the Court of the existence of that case.

Basically, the FTC should have known they were already being sued in Kansas, and by not putting that in their briefing theyre basically liars, even though the FTC did mention that there were at least 2 lawsuits against BFL in the past, in its first report.

–They seem to have lost touch with reality. This, by the way, was the best part of their whole motion:

I seriously cannot fathom the stupidity it must take to write that second paragraph. BFL is basically saying The FTC CLAIMS that we stole up to $50 Million dollars from thousands of customers, yet they let us reopen our doors! They must have finally opened their eyes to the future of Bitcoin! It was all just a big mistake!”

Lets explain: On September 23rd, the FTC announced that, through court order, BFL was shut down through a Temporary Restraining Order, or TRO, on the grounds that the three main officers, Darla Drake, Nasser Ghoseiri, and Sonny Vleisides, respectively the treasurer, CTO and Innovation officer, had done all the fun stuff weve covered. Because it was so blatantly obvious that BFL was going to continue doing what it was doing (And, based on the language here, they DEFINITELY would, since they don’t seem to see what they did wrong), the FTC got a TEMPORARY restraining order, meaning that for a short period of time, operations would cease.

What they are contending in that second paragraph is that because a temporary restraining order lapsed, the FTC has no case. Because, as we all know, when time elapses on a legal matter law.

There is absolutely no point to their contention here. Because the TRO ended, and the Judge decided he wasnt going to renew it, they win. Because law.

We’ll be keeping track of this story, and any updates will be posted on our new main site, ButtcoinFoundation.org, or by following us on Twitter. Or don’t, I don’t give a shit.