It doesn't even make sense. How in the hell could they be counterfeit? They look nothing like US dollars!
That just means they're badly-done counterfeiting. They used dollar signs and certainly implied that they were valid U.S. currency. If I'm looking to use an alternate currency, I sure as Hell don't want a dollar sign on it. Seems to miss the point.
As an alternative currency product, Liberty Dollars suck ass. It's like they set out to make an alternative but didn't want to make it TOO much better than FRNs. The model seemed to appeal to the activist nature of people to want to train others to accept alternate currency in a manner that failed to take advantage of silver's ability to hedge against inflation. You know, probably the MAIN biggest reason to use alternate currency in the first place?
"We're going to put dollar signs on these so you can trick naive people into thinking they're legal currency and that will get people used to the idea alternate currencies after lots of these are in regular circulation. (And they had tips on how to deceive people without technically saying any outright lies.) Meanwhile, as FRNs get devalued, we'll take your Liberty Dollars and swap them out for coins with an upgraded FRN value (for a nice fee! Yum!)"
So all the while, they sell them at an insane markup over spot, and part of the justification was it might someday be necessary to make a lot of money to cover legal fees. So legal fees were supposedly built into the business model. Of course, they asked for donations when that time came-- selective memory.
All that said, I still didn't want them to lose. The proper "punishment" for their exploitative and deception-based racket would have been for them to ultimately fail in a free(r) market. I would have tried to spur a campaign of enlightenment and counter-propaganda. When someone tried to buy something from me with one, I'd offer them silver value plus a reasonable coinage rate for them, ignoring the dollar signs stamped on the coin (the bad counterfeiting). When they complain that they paid way more than that for it, I'd say "then you're a dumbass".