Bitcoin Miner Manufacturer Found Guilty of Fraud

A US District Court recently ruled that Simon Barber, and his company HashFast Technologies, was found guilty of violating the Unfair Competition Law (UCL) as well as committing fraud, in a court case initiated by Plaintiff Pete Morici, a Bitcoin miner.

The court supported the fraud claim based on the Unfair Competition Law (UCL), which prohibits unlawful, unfair, or fraudulent business practices. The ruling was based on “statements Barber made regarding the Baby Jet shipping date”  and “the availability of refunds in Bitcoin.”

Bitcoin mining hardware companies have often taken money in full for pre-orders, in return for a product on a specified date. During any delays in delivery, the bitcoin hash rate tends to rise, making mining less profitable every day. Eventually the hardware becomes unprofitable to run.

HashFast had some unclear issues with the Dec. 2013 bitcoin price spike, and they were apparently unable to pay their customer refunds in Bitcoin, offering customer refunds in US dollars. Morici successfully proved in court that this aspect of the HashFast business is unlawful.

Morici had ordered two ‘Baby Jet’ Bitcoin mining rigs in August 2013, after learning about their soon-to-be-launched hardware, on the popular Bitcointalk forum. Based on information from HashFast’s website, the product was “in stock,” with shipments starting “October 20-30.”

Morici paid for his order in Bitcoin, the order in USD was worth $11,507.38. He was assured by multiple people from HashFast that delivery would be on time. After failing to deliver, HashFast then changed its delivery date to mid-November. He then received another delay notification on November 7, 2013, stating that delivery would be delayed till mid-December. To this day, no customers have reported receiving their product from HashFast.

At that point, during the greatest price climb in bitcoins history, Morici canceled his order and requested a refund of the bitcoin he paid. At the time of purchase, HashFast initially had a “reasonable” refund policy, and stated that refunds would be in bitcoin. However, after failing to deliver the products repeatedly, they introduced terms and conditions that made it much harder for any customers to obtain refunds. They also changed the policy for refunding in USD.

During that time, bitcoin’s price had increased dramatically, rising from about $100 in August 2013 to $283 on November 7 and rapidly rising to over $1000 by the end of November. A refund in dollars would mean HashFast would profit from the rise in bitcoins price, and Morci lost out on substantial capital returns.

After multiple failed repeated attempts to get his refund, Morici initiated a lawsuit on January 7, 2014, against HashFast and its officers, Simon Barber and Eduardo deCastro.

The court recognized that the shipment date was important, and that Morici suffered damages because he did not receive the Baby Jets, which lose value at a rapid rate within the timeframe promised. Barber therefore knowingly defrauded customers by promising October delivery date of Baby Jet.

“Plaintiff alleges he paid for a product that loses value daily. When he did not receive it on the date he was promised, he lost money. That is not a speculative theory.”
— – Court Document

At the time HashFast solicited customer orders, they did not have enough capitalization to undertake the production and development of the bitcoin mining equipment they advertised. Proceeds from pre-order sales were used to pay manufacturers and vendors to produce the machines, the court found.

HashFast did not retain any bitcoin to ensure the ability to refund customers. However, Barber “personally benefited from the unlawful business practices by taking salary bonuses from the proceeds received on undelivered Baby Jet orders.” Morici successfully proved that Barber knew that his statements regarding the delivery date and refunds were false.

Not all motions, both by the defendant or the plaintiff, were granted. Some allegations were harder to prove and were summarily dismissed by the court. Although there were no awards nor sentencing given in this court case, it is at least clear that California courts are likely to side with the victims of mining hardware companies that do not deliver on their promises.

Bitcoin mining hardware is no stranger to companies failing to deliver on such promises. Butterfly Labs was the first and most popular. On September 23, 2014, at the request of the Federal Trade Commission (FTC), a Missouri court shut down Butterfly Labs, for allegedly deceptively marketing mining equipment.

The FTC’s complaint alleges that Butterfly Labs charged consumers thousands of dollars for its hardware, but then failed to deliver them until they were practically useless, or in many cases, did not deliver them at all.

In June 2012, Butterfly Labs started pre-selling their BitForce mining hardware, a product line which was priced from $149 to $29,899, and upfront payment was required in full. According to the FTC’s complaint, as of September 2013, more than 20,000 customers had not received their products.

Despite failing to deliver their first batches of ASIC product, in August 2013, Butterfly Labs announced a new, more powerful ASIC chip to mine Bitcoins with, called the Monarch, priced between $2,499 and $4,680. Only a few Monarchs were delivered, if any, as of August 2014 according to the FTC’s complaint. Even where Butterfly Labs did deliver a product, they arrived too late to be profitable for the miners.

A more successful ASIC mining hardware company based in Sweden, KNCMiner Global, has a similar lawsuit in the works for certain product lines that they produced. This class-action lawsuit doesn’t affect all of their product lines and they have many miners running to this day, but several product lines have complaints of underperformance, also due to being late to market.

Anyone in any country can file their claim against Swedish Bitcoin ASIC Manufacturer KnCMiner for purchasing their Titan, Titan Mini, Neptune, Jupiter or Cloud Mining rigs which were shown to be either defective or underperforming. This class action is to bring KnCMiner in front of a Swedish court, to answer to consumer’s grievances across the globe.

GAW Miners and its CEO Josh Garza are often brought up in conversations about bitcoin mining fraud. Having previously made waves for innovation in the cloud mining space, an $8 Million hardware company acquisition, investing in startup GoCoin, and even creating its’ own altcoin called Paycoin, Garza quickly fell from grace, lost the business, and is under investigation from the SEC, while simultaneously being sued by the Mississippi Power Company. His whereabouts today are unknown.

To his credit, GAW Miners’ hardware production schedule was not the problem this time. Garza’s issues started early this year when it was found that their altcoin Paycoin was being manipulated, perhaps by Garza himself, which caused a panic in price, and then Garza failed to follow through with his promise to fulfill “a guarantee” to buy back any and all coins at a $20 floor.

This post-facto renegotiation seems to have started a downward spiral and lost faith in GAW Miners that, coupled with the announced end of their popular Hashlet line of miners, it appears to have destroyed the entire business.

Finally, there came a lawsuit against GAW Miners from the Mississippi utility company in June of this year, alleging that Garza skipped out on a bill for over $346 thousand dollars for GAW Miner operations. Garza did not show up to the court proceedings and has not been heard from in the bitcoin community since.

It is certainly damaging to bitcoin’s reputation for so many bitcoin mining companies to be involved in fraudulent activities and be helmed by shady characters. At least now the game is changing, and we can see multiple courts have ruled against them.