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posted by n1 on Tuesday September 30 2014, @06:41PM   Printer-friendly
from the industry-standards dept.

On monday morning at 9:00am, lawyers from the Federal Trade Commission (FTC) will ask a judge in a Kansas City federal courtroom to impose a preliminary injunction on Butterfly Labs (BFL), the embattled Bitcoin miner manufacturer. This would extend the temporary restraining order set down earlier this month, leaving the company controlled by a court-appointed receiver.

For the last 15 months, Ars has followed BFL as it has gone from being a curious hardware startup in a nascent industry to becoming the target of a federal investigation.

The FTC believes the three named members of the company’s board of directors—Jody Drake (aka Darla Drake), Nasser Ghoseiri, and Sonny Vleisides—spent millions of dollars of corporate revenue on non-corporate expenses like saunas and guns, while leaving many customer orders either wholly unfulfilled or significantly delayed.

In a slew of new court documents filed Saturday, FTC lawyers allege for the first time that not only did BFL engage in deceptive practices, it specifically used customer-ordered machines to mine its own bitcoins before shipping the machines out. (BFL has specifically denied mining for its own benefit.) The FTC also claims that BFL had its employees mine for personal gain using machines that had been refused by their purchasers or that had been returned after having arrived too late to be worthwhile.

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  • (Score: 2, Interesting) by Anonymous Coward on Tuesday September 30 2014, @07:09PM

    by Anonymous Coward on Tuesday September 30 2014, @07:09PM (#100085)

    From the article they ran each machine for 2 days before shipping. That might be a bit long, but it does not seem excessive for a boutique manufacturer. Boutique systems are always more fragile than high-volume ones because they never really get past the v1.0 stage while the high-volume ones get plenty of opportunity to discover bugs and do engineering changes on later manufacturing runs.

    • (Score: 5, Informative) by hemocyanin on Tuesday September 30 2014, @07:18PM

      by hemocyanin (186) on Tuesday September 30 2014, @07:18PM (#100089) Journal

      Another former employee testified that some machines were "burned in" for up to two days, even though testing usually required only 10 to 30 minutes, and that Defendants generally did not ship out machines until they had manufactured machines to be burned in their place. ... In fact, 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.

      http://arstechnica.com/tech-policy/2014/09/feds-butterfly-labs-mined-bitcoins-on-customers-boxes-before-shipping/ [arstechnica.com]

      Major shareholder a convicted fraudster:

      Butterfly Labs' largest shareholder, Sonny Vleisides, had violated the terms of his probation from a previous lottery scam case. As a result, Vleisides’ probation—previously slated to end in September 2013—has been extended for another two years.

      http://arstechnica.com/tech-policy/2014/09/feds-label-bitcoin-miner-maker-butterfly-labs-as-systematic-deception/ [arstechnica.com]
      fraud story: http://arstechnica.com/tech-policy/2014/04/digging-for-answers-the-strong-smell-of-fraud-from-one-bitcoin-miner-maker/ [arstechnica.com]

      Then of course there is the whole "you pay us up front and we send you nothing, or obsolete damaged crap one year late" business model. These people reek of scam.

      • (Score: 0) by Anonymous Coward on Tuesday September 30 2014, @07:29PM

        by Anonymous Coward on Tuesday September 30 2014, @07:29PM (#100095)

        Yes, I saw that quote. But:

        (1) The idea that burn-ins were "until the next machine is available" doesn't jibe with the other part that claimed a specific 2-day burn-in period
        (2) I don't believe the part before your bolding that says only 10-30 minutes was necessary, that is absurdly low

        I am not informed enough to judge the rest of the article's claims, but I do have enough experience with boutique manufacturing to confidently say that a 48-hour burn-in period is not an indicator of fraud. If you told me they were running them for 2 weeks instead of 2 days, then I would agree that something was definitely up.

      • (Score: 0) by Anonymous Coward on Tuesday September 30 2014, @07:34PM

        by Anonymous Coward on Tuesday September 30 2014, @07:34PM (#100099)

        Looking into it further, it looks like 10-30 minutes is what it takes to mine a bitcoin on the testnet block chain. That is a way for testing algorithmic correctness, but not hardware testing. It is analogous to checking that the turn signal in a car blinks ... once -- the circuits are connected correctly but does not check for intermittent connections in the circuit or heat related problems, or if the bulb has infant mortality problems.

        • (Score: 2) by nitehawk214 on Tuesday September 30 2014, @09:00PM

          by nitehawk214 (1304) on Tuesday September 30 2014, @09:00PM (#100121)

          Can't you just mine more than one block on the test block chain?

          --
          "Don't you ever miss the days when you used to be nostalgic?" -Loiosh
          • (Score: 0) by Anonymous Coward on Tuesday September 30 2014, @09:14PM

            by Anonymous Coward on Tuesday September 30 2014, @09:14PM (#100125)

            Yes, but then it would take more than just 10-30 minutes.

            But I think excessive mining on the test-chain would be counter-productive - the more bitcoins mined, the longer it takes to mine the next one. So if the testchain is for testing algorithmic correctness each time someone uses it to test something else like hardware robustness it marginally increases the time required to test for everyone else. I think somebody mining with 10% of the total throughput of the real blockchain would quickly make the testchain much less useful for everybody because it would increase their testing times.

            I could certainly be wrong, I'm only passingly familiar with bitcoins.

            • (Score: 1) by Lazarus on Tuesday September 30 2014, @09:47PM

              by Lazarus (2769) on Tuesday September 30 2014, @09:47PM (#100129)

              I don't know that much about Bitcoin mining either, but I would think that since a test-chain can exist, that new test-chains could be created when the current one gets large enough to slow testing.

      • (Score: 3, Insightful) by frojack on Tuesday September 30 2014, @08:09PM

        by frojack (1554) on Tuesday September 30 2014, @08:09PM (#100107) Journal

        Still not seeing a problem here.
        Admittedly, they might have done other things that warrant an investigation, but testing and burn in isn't one of those things.

        There is no standard for how long something has to burn in. If they charged the customers credit card while burning in before shipping, that might be grounds for complaint, but given how long a customer has to contest a charge, its not clear that would justify a complaint either. Most companies don't charge the credit card until they ship, but for large dollar value orders, a two day delay is not a big deal.

        The machines belonged to Butterfly until shipped. If they want to delay shipment, they pay the penalty of customer dissatisfaction. If they bill too long before they ship they might have committed a credit card violation. But I still don't see this as a legal issue IN AND OF ITSELF.

        --
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        • (Score: 0) by Anonymous Coward on Tuesday September 30 2014, @09:09PM

          by Anonymous Coward on Tuesday September 30 2014, @09:09PM (#100124)

          What they did was a 'tad' different.

          Lets say they had 100 'test stations'. All 100 are burning in. It takes 2 days.

          Lets say they can build 2 units in 2 days. Station 1-100 finish 'burning in' after 2 days. However they only have built 2 new boxes in those 2 days.

          They ship out 2 of the boxes. The other 98 sit and continue to 'burn in' the 2 new ones are swapped in to 'burn in'.

          2 days later 2 more are done they may or may not ship out the first 98 and pick two at random. They may continue to 'burn in'.

          Throw in a weekend and a few holidays a vacation or 3... etc.

          People were also pre paying for the boxes and then getting boxes 1-1.5 years later. Not a few weeks later.

          They were basically floating other peoples money to pay for the actual hardware and build. Then sitting on the boxes as long as they could to mine coins.

          They only shipped a box if they pulled one out of 'testing'. So depending on their build rate and the number of 'test racks' they had you could in theory have them shipping months late. Which is what was happening to people.

        • (Score: 2) by mojo chan on Wednesday October 01 2014, @12:13PM

          by mojo chan (266) on Wednesday October 01 2014, @12:13PM (#100412)

          Their boxes are essentially money printing presses. Their sole purpose is to mine Bitcoins. Unfortunately the more people mine Bitcoins, the harder it becomes to mine Bitcoins. At the very least they were reducing their customer's ability to profit from these machines. You could argue it was like making presses for the mint and then using them to print some "test" money for yourself first. Perhaps if they had given the mined BTC to the customers... But as it stands it looks like they were just using the payments customer's made to fund their own mining operation, before reluctantly shipping the hardware to them.

          --
          const int one = 65536; (Silvermoon, Texture.cs)
    • (Score: 2) by VLM on Tuesday September 30 2014, @07:59PM

      by VLM (445) Subscriber Badge on Tuesday September 30 2014, @07:59PM (#100105)

      That might be a bit long, but it does not seem excessive for a boutique manufacturer.

      That's nothing compared to the things I did to hardware at a "major financial services company".

      Shove live traffic but on a test db thru systems for weeks. Daisy chain telecom systems together and shove live monitor traffic thru for a week with a protocol analyzer watching the far end and logging any errors. (say you loop back a T1 channel bank and send RX of 1 out the TX of 2 and RX of 2 out the 3, etc) This was all a long time ago and standards may have slipped since the "good ole days".

    • (Score: 3, Insightful) by sjames on Tuesday September 30 2014, @11:45PM

      by sjames (2882) on Tuesday September 30 2014, @11:45PM (#100178) Journal

      48 hours is a reasonable burn-in period. I have found a few faults in high volume machines that supposedly already passed a QA and burn-in that way.

      The other allegations are quite serious indeed, but I don't see where a 48 hour burn-in or utilizing a machine that was returned is even a problem.

  • (Score: 2) by GlennC on Tuesday September 30 2014, @07:14PM

    by GlennC (3656) on Tuesday September 30 2014, @07:14PM (#100086)

    I wonder how else they could perform system tests and verify functionality.

    If not, they'd likely be raked over the coals for making potentially non-functional devices.

    --
    Sorry folks...the world is bigger and more varied than you want it to be. Deal with it.
  • (Score: 5, Interesting) by Alfred on Tuesday September 30 2014, @07:21PM

    by Alfred (4006) on Tuesday September 30 2014, @07:21PM (#100090) Journal
    I would expect them to run the devices for some period of time at full load for testing and quality reasons. 2 days does not seem extreme at all. Now if they were mining for 2 months before shipping just to milk the time during testing then, yeah, they are scumbags.

    My opinion of bitcoin mining is that I have not heard an argument that shows it is profitable anymore compared to electricity paid to do it. Maybe it was, back in the day, but it is not something I would not get into now. And even back then it had this flash-in-the-pan fad look/feel to it such that I wouldn't have touched it.
    • (Score: 2) by Tork on Tuesday September 30 2014, @07:24PM

      by Tork (3914) Subscriber Badge on Tuesday September 30 2014, @07:24PM (#100091)

      My opinion of bitcoin mining is that I have not heard an argument that shows it is profitable anymore compared to electricity paid to do it.

      If the machine needed to be run at full speed anyway, like if it were being done as a burn-in test, then yes it would be profitable. That is, of course, assuming that it's actually a decent test and I really have no idea.

      --
      🏳️‍🌈 Proud Ally 🏳️‍🌈
    • (Score: 2) by tibman on Tuesday September 30 2014, @07:56PM

      by tibman (134) Subscriber Badge on Tuesday September 30 2014, @07:56PM (#100104)

      Something that is often forgotten is that 50 bitcoins back in the beginning were nearly worthless (less than 20$ for sure). Now those 50 bitcoins are worth over 15,000$. So at the time of mining they were less valuable than the cost to mine them. But now those coins could have paid for a solar panel install and "free" electricity for the next 15 years.

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      SN won't survive on lurkers alone. Write comments.
      • (Score: 1) by tftp on Tuesday September 30 2014, @09:44PM

        by tftp (806) on Tuesday September 30 2014, @09:44PM (#100128) Homepage

        Something that is often forgotten is that 50 bitcoins back in the beginning were nearly worthless (less than 20$ for sure). Now those 50 bitcoins are worth over 15,000$.

        One can speculate with all kinds of goods. BTC, as a newcomer, had no set price, that's why we see such volatility. In terms of worth, BTC - as money - has no inherent worth. Otherwise BTC is neither better nor worse than tulip bulbs, or shares of South Sea Company.

        As a special kind of good, BTC - and any paper currency - is worth only as much as other people are willing to give for it. Today we have people who give goods for BTC. Tomorrow we may have none. I, personally, wouldn't give a broken penny for a BTC, unless I get the speculator's bug. In a stable, healthy society there is little need for BTC. In a failed state, like Zimbabwe or Iraq, there may not be sufficient access to Internet to facilitate BTC economy. In those countries the best currency is precious metals (brass and lead, to be exact.) Even if you have foreign currency there, you don't keep it in the bank of Mosul. (Not anymore, at least.)

        • (Score: 2) by tibman on Tuesday September 30 2014, @11:48PM

          by tibman (134) Subscriber Badge on Tuesday September 30 2014, @11:48PM (#100183)

          The best currency in Iraq is USD. Then probably Kuwait Dinar. Somewhere down the line is Iraq Dinar which is trading just as good today as it was three years ago. People don't buy their food with metals in Iraq, they buy it with paper currency. I have certainly seen a lot of barter though. This item for that item but not in the form of metals or stones. More like farmers' markets but extended to clothes, beds, tools and so on. Some valuable things you can barter with would be gasoline or propane. But it's easier to just carry money. Anyone with a lot of money kept it in a metal safe. A lot of people are also speculating on the Iraqi Dinar too (not i but i wish them luck!).

          There is also internet access in every Iraq town/city i have visited (satellite connection). Iraq internet is cheaper than what i pay in the US. Though the bandwidth and latency blows. Paying in cash each month also blows. I don't know about Zimbabwe but Iraq isn't all that bad. I like it anyways. The people are cool, the weather is warm, the food is good, there is so much history laying about that few people care to maintain it. Its a libertarian paradise probably (though i'm not one myself). Westerners think of Iraq as a solid nation-state but that is something we projected onto them. From the inside it feels more like a collection of city-states with very very long histories.

          My personal experiences.

          --
          SN won't survive on lurkers alone. Write comments.
    • (Score: 2) by mojo chan on Wednesday October 01 2014, @12:16PM

      by mojo chan (266) on Wednesday October 01 2014, @12:16PM (#100413)

      You can still make small amounts of money with ASIC miners, but not much. When BFL started it would have been extremely profitable, but due to the massive delays their rather expensive hardware is little more than a space heater now.

      --
      const int one = 65536; (Silvermoon, Texture.cs)
  • (Score: 4, Informative) by captain_nifty on Tuesday September 30 2014, @08:19PM

    by captain_nifty (4252) on Tuesday September 30 2014, @08:19PM (#100108)

    I actually purchased one of their smaller units for which I paid $280, and they did actually deliver... 8 months later.

    All the while they had a number of special offers going out to people who had already ordered, you could pay an additional small fee, of $50-200 to get the newest production run with increased capacity (and small print stated that this would send you to the end of the queue)

    They had very little if any customer service, their forum was interesting, it mostly consisted of people demnding their products, and since some of them had prepaid ~$20,000 or more for the large mining rigs I could understand their complaints.

    Viewing their forum and doing some research it was clear this was a small company, with few employess, which greatly oversold their manufacturing capacity.

    Having dealt with them it doesn't surprise me in the least that they would be found doing their own mining and other disreputable things.

    Long story short ,by the time I finally got my miner, the difficulty level had gone up so much it was going to be barely profitable to operate, so I sold it on ebay for $350.

    Like all great gold rushes the miners don't make any money, the merchant selling shovels and supplies make the money.

    • (Score: 2) by tynin on Wednesday October 01 2014, @08:47PM

      by tynin (2013) on Wednesday October 01 2014, @08:47PM (#100647) Journal

      I've the same basic story as you with BFL, though I went in a little further.

      I had about 20 GPUs running by the time ASICs hit the scene. I kicked myself that I didn't have the money on hand to get a batch 1 Avalon, so I took that money and tossed it across several other ASIC makers over the next few months. BFL got an order for a few Japs, all of which showed up ~9 months later. I mined with them and eventually broke even. At which point I took some BTC and ordered a slew of those USB block erruptors, they never ROI'd. Sold them on Ebay. I then took more cash and put in an order with Terrahash, which went under with the whole Yifu not shipping out the Avalon chips to the various builders. Still haven't seen a penny refunded. Since the S1 Antminers were seemingly successful, I ordered a pile of them and mined for a few months before flipping them on Ebay.

      I moved my GPUs on to scrypt for a long time. It was the new crypto liquid gold for GPUs for many months earning me more than my sha256 ASICs. When ASIC came to scrypt I convinced myself to pick up more than a hundred of the 5 chip gridseeds the day they came out because they are so energy efficient. Got them at ~$280 each, and within a few months was selling them on ebay for ~$40 as the market was obviously unrecoverable tanking. I blame the scrypt multipools that let you mine scrypt and gave you the earnings in bitcoin. Since their were so many multipools doing this and selling every altcoin the moment they got it, it crushed the prices to the floor. But ultimately, I think I knew scrypt was doomed since everyone and there brother was making new scrypt altcoins every day, and I was being greedy.

      Today I have no more GPU's or ASICs doing any hashing. Everything got sent to ebay to be someone elses problem about 3 months ago. In the process of it all I solved a bitcoin block last year, which was nice as I needed a car at the time as mine blew up, and it helped me feel better about losing ~$6k with Terrahash. But that was last year and I've not done the math on how much I lost on the gridseeds this year. Going to have a lot of work to do this tax season to figure out my standing.

      If I was going to do it again, I would simply buy bitcoins and not mine them. The ongoing maintenance to keep your miners running, the roaring noise of screaming fans, and the intense heat you have to find creative ways of managing in the summer will not be missed. I say this as someone with extensive knowledge in running a datacenter and supporting thousands of servers.

      • (Score: 0) by Anonymous Coward on Friday October 03 2014, @08:28PM

        by Anonymous Coward on Friday October 03 2014, @08:28PM (#101511)

        Back in 2011 or 2012 running an OpenCL 1.0 capable card. At the time BTC were at 11/unit and my ROI was basically my energy expense. Given that it was doubling as a space heater over the winter, it was actually probably worth a bit more than that given that it helped offset some of the otherwise wasteful heating costs.) By January or so the difficulty had risen enough that you either needed a high end 'current gen' GPU (I think it was the HD6000 and GT5xx series at the time.) to profitably mine or one of the newfangled ASICs that were just coming out (I think the Avalon 1's were already out and had done like a million point jump in difficulty, but not enough to make everything else completely worthless. Their ROI was under 30 days at that point however.) Given that I didn't even have enough to get a Jalapeno and given the shadiness around most of the ASIC manufacturers that otherwise might've convinced me to recruit some investment capital, I switched to lightcoin.

        I forget if it was the following 3 months, or 3 months the next winter, but I managed to mine a whole 1 LTC over the same period. At the time they were worth like 1-2 dollars equivalent if transferred into bitcoins, which made them not even worth the cost of the electricity to produce them.

        And that ended my initial foray into the wild west world of altcoin mining.

        That said there have been a few interesting coins coming out in the past year that might cause me to rethink my view. The issue with all of them is the 'dwindling returns' attitude to coin mining. That one factor makes it a ponzi scheme rather than a legitimate currency. A legitimate currency would normally grow over time and a steady quantity of bitcoins being mined regardless of difficulty would both better keep up with demand as well as ensure both a steady supply as well as a consistent price (assuming of course the network wasn't allowed to become as unbalanced as the bitcoin network currently is.)

        Purchasing bitcoins at this point in time seems like a sucker's bet however. Besides the loss in value the only value they really have over prepaid credit cards or checking or visa is potential anonymity of single-transactions per wallet, and purchasing them from a major reseller defeats that purpose.