What it sold
Butterfly Labs sold purpose-built bitcoin mining machines on pre-order. A customer paid in full before anything was built, and the company shipped later. In a market where every new generation of chip made the previous one earn less, that arrangement put the whole timing risk on the buyer.
The Federal Trade Commission's amended complaint, filed on 14 May 2015 in the Western District of Missouri, records BF Labs, Inc., trading as Butterfly Labs, as a Wyoming corporation with its principal place of business in Johnson County, Kansas. It names Nasser Ghoseiri as president and chief technology officer, Sonny Vleisides as a founder and innovation officer, and Darla Drake as general manager, secretary and treasurer.
The product line was the BitForce, advertised from June 2012 at prices the FTC gives as $149 to $29,899 depending on the computing power claimed. The complaint states that the company told customers the machines would ship in October 2012, delivered none that month, and had still not delivered a single BitForce by 1 April 2013. It records that in September 2013 the company acknowledged failing to ship to more than 20,000 customers who had paid in full. In August 2013, with those orders outstanding, it opened orders on a newer machine called the Monarch at $2,499 to $4,680, and by August 2014 had delivered few if any.
Why the delay mattered is arithmetic, not opinion. Mining difficulty rises as hash rate joins the network, so a machine bought at a fixed price earns less for every week it sits undelivered. A company representative, quoted in the FTC's September 2014 announcement, said the passage of time had left some of the machines as effective as a "room heater".
On the record
On 18 September 2014 the US District Court for the Western District of Missouri granted the FTC an ex parte temporary restraining order in Federal Trade Commission v. BF Labs, Inc., civil action 4:14-cv-00815-BCW. The order required the defendants to stop the alleged misrepresentations and froze their assets. Announcing it on 23 September 2014, the FTC noted that it files a complaint on a "reason to believe" standard and that "the case will be decided by the court".
The court never decided it. On 18 February 2016 the FTC filed stipulated final orders settling with the company, Vleisides and Drake. They bar the defendants from misrepresenting whether a product can generate bitcoin, when a buyer will receive it, and whether it is new or used, and bar the company and Vleisides from taking payment up front for mining hardware unless it ships within 30 days. The judgment against Butterfly Labs and Vleisides is $38,615,161, suspended on payment of $15,000 by the company and $4,000 by Vleisides. Against Drake it is $135,878, suspended once she surrendered the cash value of the bitcoin she obtained using company machines. The FTC states the suspensions rest on the defendants' inability to pay and become due if they misrepresented their finances.
The order itself records that "Defendants neither admit nor deny the allegations in the Complaint". No court or regulator made a finding of fraud, which is why this entry carries Scandal and not that tag. The company did not resume selling, and butterflylabs.com no longer resolves to it.