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A Butterfly Labs exec loses a probation hearing, but details from the case are worse.
by Cyrus Farivar – Apr 22, 2014 Four:00 am UTC
Buying a pool and an Audi
Vleisides appealed before US District Court Judge David Kays on December 17, 2013 to response Pierce’s probation claims. There, government prosecutors submitted a seven-page document from Vleisides’ lawyers detailing the structure of BFL and Vleisides’ relationship to it.
One of the noteworthy revelations is that Butterfly Labs acquired a local Kansas-based Bitcoin mining pool, Eclipse Mining Consortium, for $100,000 te 2012. The pool’s founder, Josh Zerlan, is now a vice voorzitter at BFL. (Zerlan publicly announced that he took a job with BFL te 2012, but he did not mention that he actually sold his company to BFL. Zerlan did not react to a request for comment for this article.)
The revelations get murkier from there. For the very first time, the public learned that Butterfly Labs runs its own Bitcoin mining pool for “testing” purposes—and the company uses this test pool to make money. “[BFL] earns mining income from their burn testing of machines spil well spil service fees charged to Eclipse customers,” documents state. This revelation represents some of the worst fears held by skeptics of BFL—that the company is using its own hardware to profit privately before sending miners to people who actually paid for them.
Also coming to light during testimony wasgoed the depth of BFL customer frustration. Te court, probation officer Pierce talked about how she uncovered thousands of complaints filed against BFL at the Federal Trade Commission and PayPal. She said that Chad Williams, a PayPal global asset protection officer, told hier that spil of September 2013, PayPal froze BFL’s account containing $11 million and that PayPal received 6,000 complaints ter total. Notably, 200 more complaints were filed inbetween mid-November and mid-December 2013, and, on the day of court testimony alone, three more complaints were filed.
“Butterfly Labs is permanently barred from accepting PayPal spil payment for their products,” Pierce added. (PayPal spokesperson Anuj Nayar declined to comment specifically on Butterfly Labs, but he did say that the company is “no longer processing payments through PayPal.”)
“PayPal is not the only place wij have received complaints from,” Pierce told the court. “There is [the Federal Trade Commission] Consumer Sentinel, a law enforcement webstek where people can get online and submit complaints about different companies. Spil of October Legal of this year, there had bot 173 complaints submitted online to Consumer Sentinel, with a total of overheen $600,000 complained to being losses from Butterfly Labs.”
Pierce testified that Vleisides’ 2012 tax comes back vertoning his ownership rente te a Bahamas corporation called Future Engineering that wasgoed incorporated November Two, 2012. A ccording to BFL’s tax comes back, the company lost more than $800,000 ter 2012, Pierce said—and yet the letterteken from Vleisides’ lawyers notes that the company loaned $150,000 to CEO/CTO Nasser Ghosieri, $26,000 to VP Jeff Ownby, and $65,000 to Vleisides himself. Those loans all came ter below market rates and all were “based on expected future profitability.”
CEO Ghosieri, an Iranian who lives te France, previously told Ars he never met Vleisides and has never bot to visit the BFL operation te Kansas. (This photo from Ghosieri’s Facebook pagina dated April 2014 shows up to showcase him with Vleisides ter person at BFL’s headquarters, albeit it could have bot altered.)
Furthermore, Pierce noted that “Vleisides’ finances have bot te question for the past several months,” particularly because his residence “wasgoed recently purchased by BFL for approximately $400,000 te metselspecie.” BFL even bought him an “expensive voertuig” (an Audi) that Vleisides uses.
“I’m pulling for you”
During the hearings, Vleisides’ lawyers made the case that thesis were all normal business operations. The Bahamas corporation, they said, wasgoed created by a law rock hard which represented Butterfly Labs previously, but it wasgoed now a “dormant corporation.” And den facto Butterfly Labs CFO Bruce Bourne, who resides te San Francisco but commutes to Kansas City two weeks each month, took the stand to explain Vleisides’ house and car situation.
“The car itself, you know, my understanding is that this is not the very first car that the company has wielded and that the original car that the company possessed when customers came from out of town to visit the facilities, the company loaned them the voertuig to use instead of them having to rent a car,” he testified. “Other executives who traveled from Chicago—I come from San Francisco—had access to using that car. Other people who are employed by the company come to town from out of town are able to stay at the corporate residence.”
The thicker punt centers around BFL’s core operations and all those delays after taking people’s pre-order money. Bourne described the company’s current operations and past financial show, telling that BFL had a peak of 110 employees, but it’s smaller now.
“At current time, because we’ve manufactured and shipped all the products ter the backlog and wij are not yet producing the next version of the product, wij have downsized, laid off staff who were assembling parts and components that are not necessary right now,” he said. “So at this point the company is about 60 people. But our expectation is when wij do start to construct the next iteration of thesis products, [wij] will increase staff to manage that production.”
“You need to get your toothbrush and get your things ter order, because fraud will not be tolerated.”
Spil for revenue, ter 2012 BFL earned $Two.Five million. “For 2013 wij have not finalized the financial statements, but I expect that the revenue for 2013 is going to be inbetween $25 and $30 million,” he said, adding that BFL’s liabilities are “north of $Ten million.”
Bourne also provided more details about resolving the PayPal situation by shipping long-delayed products to customers.
“By [September 2013] there were 23,000 PayPal orders, of which about Two,000 had bot shipped. About $1.Five million out of $Nineteen million total,” he said. “That’s mid-September. Every week after that I updated that report so that wij could showcase them progress against reducing the backlog and lowering PayPal’s exposure, albeit there were $Five million more te orders than there wasgoed ter money held. So it took a while to get down to where that backlog was—even with the amount they were holding. Wij reached that point ter about mid-November.”
Ars contacted Bourne, who declined to be interviewed te person or by phone spil he wasgoed “ter a different time zone and working some long hours.” At Bourne’s suggestion, Ars submitted questions via e-mail, but has not yet received a reply.
Despite the testimony of Bourne and other witnesses, Judge Kays voiced clear reservations about BFL’s business and Vleisides’ involvement ter a company taking so much specie up vuurlijn. He ordered two supplementary years of supervision for Vleisides, along with a fresh set of conditions that include regular government access to his ” person, his property, house, residence, office, voertuig, papers, rekentuig, other electronic communication or gegevens, storage devices or media, and effects.” He said Vleisides voorwaarde work with Pierce “to communicate, create transparencies. Any loan, especially $64,000 or whatever it is, is something she needs to know about before it’s made, no matter [what].”
The judge’s most damning comments, however, centered on his overall BFL observations:
Now, there is a stench coming from Butterfly Labs. It’s a strong smell. It’s not enough to send you to prison today, because, to be fairly fair with you, if it wasgoed, wij’d be talking about 24 months ter prison. It’s not—I think it’s too close. I think [defense witness] Mr. Bourne did a very good job of testifying, and it assisted your defense greatly. But if I find out that there is this fraud word involved ter this part, you know, Mr. Vleisides, spil wij say here at the courthouse, you need to get your toothbrush and get your things te order, because fraud will not be tolerated, you understand that? So I would work very hard to make thesis consumers blessed consumers who you’ve dealt with.
The wheels of justice
On the high-heeled shoes of Vleisides’ probation, BFL now moves instantaneously to the fresh lawsuit. Kyle Alexander, and Dylan Symington et reeds. v. BF Labs (PDF) describes two attempted purchases made by the named plaintiffs. Alexander claims that he paid $308 to BFL ter June 2013 for a low-end mining machine. However, despite repeated inquiries to BFL, Alexander wasgoed simply told “shipping had begun”—yet his opbergruimte didn’t arrive.
Ter March 2014, Alexander again asked about his order and wasgoed simply informed that it wasgoed switched to a “Mining by the GH” (gigahash) product, an as-yet-unreleased product from BFL.
“Plaintiff Kyle Alexander never switched or modified his order and never talent Defendant permission to use the equipment he ordered to mine bitcoins for itself or for anyone else,” says his complaint. “To date, Plaintiff Kyle Alexander has not received any mining equipment from Defendant. Since Plaintiff Kyle Alexander pre-paid for his order of mining equipment from Defendant te June of 2013, numerous bitcoins have bot mined by others, and the difficulty of mining fresh bitcoins has substantially enlargened overheen such time.”
The other named plaintiff, Dylan Symington, paid $1,333.00 to BFL te April 2013 but did not receive his order for seven months.
Both boys allege that BFL engaged ter deception under the Kansas Consumer Protection Act, received unjust enrichment, and made negligent misrepresentation. BFL has yet to formally react to the fresh charges.
Jody Drake, BFL’s general manager and one of the three members of BFL’s houtvezelplaat of directors (Vleisides and Ghoseiri being the other two), told Ars that the company “shipped 45,000 units last year.” Despite many lawsuits alleging the opposite, she said that “everyone received their orders after much delay.”
When asked how BFL got involved with Vleisides to start with, Drake simply said: “I know his family,” before ending the call. Te hier September Nineteen, 2013 affidavit spil part of Vleisides’ court filings, Drake said that she worked for his stepmother for their commercial photo-finishing business and has known the family for 25 years.
Despite the “strong smell” coming from the Vleisides’ probation hearing, it’s still not exactly clear whether BFL is an out-and-out scam. Butterfly Labs’ refusal to reaction basic questions—such spil how a man convicted of mail fraud came to do business with another man ter France that he’s never met—does not engender confidence. But spil more complaints pile up, some are now turning into lawsuits. And te light of a federal judge specifically calling out a co-founder’s questionable deeds, the evidence is mounting. The questions of fraud surrounding BFL may get answered sooner rather than zometeen.
- frankbaird Smack-Fu Master, te training leap to postbode
Cyrus Farivar / Cyrus is a Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Gegevens, about the legal cases overheen the last 50 years that have had an outsized influence on surveillance and privacy law ter America, is due out ter May 2018 from Melville House. He is based ter Oakland, California.
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Which mining pools do not require account creation?
I know Eligius doesn’t have a lengthly setup process, you just use your payout address spil the username.
Which other pools are this effortless to embark with?
And P2Pool.informatie does not keep fees, they redistribute it ,)
Te general you don’t have to subscribe to P2P Pool (just search for “p2p bitcoin pool”).
Ok, I’m going to iterate overheen this list. Albeit I think it is not very clear what “account creation” would imply, I list the ones that just want your Bitcoin address.
Ones I found that do not require account creation:
And ones that do:
50BTC, but I’m pretty sure they take some fees, while Eligius is takes transaction fees instead.