They wanted to build an empire, until they got CAUGHT.

Butterfly Labs took money for machines it had not built. Twelve years later, the same structure is still moving through federal courts.

In September 2014, the Federal Trade Commission went into a federal court in Missouri and asked a judge to freeze a company’s assets without warning the company first.

The company was BF Labs Inc., trading as Butterfly Labs. It sold Bitcoin mining machines. Its customers had paid in full, up front, for hardware promised in weeks.

According to the FTC, Butterfly Labs “charged consumers thousands of dollars for its Bitcoin mining machines, but then failed to deliver the computers until they were practically useless, or in many cases, did not provide the computers at all.”

Read that twice. Not late. Practically useless. A mining machine delivered late is not simply delayed: network difficulty climbs while you wait, so every day of delay strips earnings that machine will never recover.

What the settlement actually cost

The case settled on 18 February 2016 in the Western District of Missouri. The judgment against Butterfly Labs and part-owner Sonny Vleisides was $38,615,161.

They paid $19,000.

The judgment was suspended once Butterfly Labs paid $15,000 and Vleisides paid $4,000. General manager Darla Drake’s separate $135,878 judgment was suspended on surrendering the cash value of Bitcoin she obtained using company machines.

That ratio is the part worth remembering. The headline number was thirty-eight million. The money that actually moved was nineteen thousand.

The model did not die. It changed shape.

Butterfly Labs sold you a machine it did not have. The generation that followed sold something harder to check: hashrate. You never saw a machine at all. You bought a share of computing power, and a dashboard told you what it earned.

On 12 February 2025, Sergei Potapenko and Ivan Turogin each pleaded guilty to one count of conspiracy to commit wire fraud over HashFlare, which sold $577 million in mining contracts between 2015 and 2019.

The Justice Department’s finding is the sentence that matters: HashFlare “did not possess the requisite computing capacity to perform the vast majority of the mining the defendants told HashFlare customers it performed.”

Over $400 million in assets was forfeited. The DOJ said the scheme victimised hundreds of thousands of people.

On 13 August 2025, Judge Robert Lasnik sentenced both men to time served, sixteen months, plus a $25,000 fine and 360 hours of community service. Prosecutors had asked for ten years and said afterwards they were weighing an appeal.

It is still going.

On 17 December 2025 the SEC filed Securities and Exchange Commission v. Danh C. Vo, case number 1:25-cv-01513, in the District of Delaware.

The SEC alleges that Vo, founder and chief executive of VBit Technologies, raised over $95.6 million from roughly 6,400 investors, misappropriated $48.5 million of it, and sold hosting agreements covering far more mining rigs than VBit actually operated. These are allegations. They have not been proven in court.

What all three have in common

Money first. Hashrate later.

In the Butterfly Labs case, in the HashFlare case, and in what the SEC alleges about VBit, the computing power did not exist at the moment the customer’s money was taken. The product was a promise about future hardware, sold as though the hardware were already running.

That is the structure. Not the branding, not the decade, and not whether the company calls itself a manufacturer, a cloud, or a host.

Four questions that cut through it

Can you identify your specific machine? A model, a serial number, a facility it physically sits in.

Is the power rate published in writing, per kilowatt-hour? A revenue share with no stated rate is not a price.

What happens when it goes down? Ask for the uptime figure and the remedy, not an adjective.

Who owns the hardware? If you own a contract rather than a machine, you are a creditor of the company, not the owner of equipment.

None of those questions are clever. Butterfly Labs customers could have asked all four in 2013. The reason this structure keeps working is not that it is sophisticated. It is that the questions feel rude to ask someone who is about to take your money.

Sources: FTC, “Operators of Bitcoin Mining Operation Butterfly Labs Agree to Settle FTC Charges They Deceived Consumers,” 18 February 2016. U.S. Department of Justice, “Two Estonian Nationals Plead Guilty in $577M Cryptocurrency Fraud Scheme,” 13 February 2025. SEC Litigation Release 26448, 17 December 2025.