2014-01-28 usa v. vleisides transcript
TRANSCRIPT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1
UNITED STATES DISTRICT COURTWESTERN DISTRICT OF MISSOURI
WESTERN DIVISION
UNITED STATES OF AMERICA, ) Case No. 4:11-CR-00125-DKG-1)
Plaintiff, ))
VS. ))
SONNY CHRIS VLEISIDES, )) January 28, 2014
Defendant. ) Kansas City, Missouri
*****************************************
TRANSCRIPT OF SHOW CAUSE HEARINGBEFORE GREG KAYS
UNITED STATES DISTRICT JUDGE
*****************************************
APPEARANCES:For United States: Kathleen D. Mahoney
U.S. Attorney's Office400 East 9th StreetSuite 5510Kansas City, Missouri 64106
For Defendant: Jeffrey D. Morris[Defendant present.] Shazzie Naseem
Berkowitz, Oliver, Williams,Shaw & Eisenbrandt, LLP
2600 Grand BoulevardSuite 1200Kansas City, Missouri 64108
Regina A. McBride, RDR, CRROfficial Court Reporter
400 East 9th Street, Room 8652Kansas City, MO 64106
816.512.5623
Proceedings recorded by mechanical stenography, transcriptproduced by computer.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
2
I N D E X
Reporter Certificate - Page 117
WITNESSES:
COURTNEY PIERCEFurther Cross-Examination by Mr. Morris - Page 5Redirect Examination by Ms. Mahoney - Page 40Recross Examination by Mr. Morris - Page 45
BRUCE BOURNEDirect Examination by Mr. Naseem - Page 49Cross-Examination by Ms. Mahoney - Page 88Examination by the Court - Page 94Redirect Examination by Mr. Naseem - Page 100Recross Examination by Ms. Mahoney - Page 105
EXHIBITS
Defendant Exhibit 100 - Judgment & Probation CommitmentOrder - Page 6
Defendant Exhibit 101 - 9/3/13 violation report - Page 8Defendant Exhibit 102 - 12/17/13 hearing transcript - Page 9Defendant Exhibit 103 - Probation office financial
forms - Page 21Defendant Exhibit 104 - Portion of 2012 tax return - Page 19Defendant Exhibit 105 - Letter from Polsinelli law
firm - Page 23
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3
(Begin proceedings in open court at 9:29 a.m.)
THE COURT: Okay. This is Case 11-125-01, United
States of America versus Sonny Vleisides, defendant. This is
a case -- it's -- we're here today related to a violation
report dated September 13 -- September 3rd, 2013, related to a
supervised release violation.
The Court called this case earlier on December 17th,
2013. At that time we heard evidence through the direct
examination of Ms. Courtney Pierce, United States probation
officer. Upon the conclusion of her direct examination there
was new evidence that had just came out related to an
interview that she had conducted with a gentleman from PayPal,
Mr. Chad Williams, a global asset protection officer. And
since this was new information I gave the defendants a choice
of requesting a continuance so they could have an opportunity
to effectively cross-examine related to this information.
And I think the way we put it, I will show that this
case is continued to address these issues related to the new
information as to PayPal or any other issues you deem
appropriate. So I gave that direction to the defense counsel.
At this time I do note that we have appearing again
is the defendant who appears with his attorneys, Mr. Jeffrey
D. Morris, Mr. Shazzie Naseem. Also appearing today is
Assistant United States Attorney, Kathleen Mahoney, and United
States probation officer, Ms. Courtney Pierce.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
4
So we are at the beginning of the cross-examination
of Mr. -- of Ms. Pierce.
Is that how you would like to proceed today,
Mr. Morris.
MR. MORRIS: Yes, Your Honor.
THE COURT: All right. Ms. Pierce, would you please
come forward? Since it's been a while we'll give you another
oath.
THE WITNESS: Okay.
THE COURT: Just -- thank you.
COURTNEY PIERCE, GOVERNMENT WITNESS, SWORN
MR. MORRIS: And Your Honor, one quick change to the
people that were here -- that are here today as opposed to
last time. Today we also have Victoria Warren from our
office.
THE COURT: I'm sorry. Victoria who?
MS. MAHONEY: Warren.
THE COURT: Warren. Okay.
MS. MAHONEY: Victoria works in our office and is
thinking about going to law school. And this is her first
time in federal court.
THE COURT: Welcome.
MR. MORRIS: Shazzie and I are hoping we don't scare
her off.
THE COURT: Yeah. Are you sure this is the right
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
5
case for Ms. -- no. I'm sure it is. I'm sure it is.
Welcome, Ms. Warren.
Thank you, Mr. Morris.
FURTHER CROSS-EXAMINATION
BY MR. MORRIS:
Q. Good morning, Ms. Pierce.
A. Good morning.
Q. I have set some exhibits up there that I will discuss with
you today.
A. Okay.
MR. MORRIS: I've provided copies to Ms. Mahoney,
and I've also provided to you, Your Honor, a set of the
exhibits.
Q. I want to begin your examination by going to some basics.
And let's start with what's marked as Defendant's Exhibit 100.
Do you see that document before you?
A. Yes, I do.
Q. And would you agree with me that that document is the
judgment and probation commitment order for Mr. Vleisides that
sets forth the actual conditions of supervised release?
A. Yes.
Q. Okay.
MR. MORRIS: And I -- I move for the admission of
Exhibit 100.
THE COURT: Any objection to Exhibit 100?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
6
MS. MAHONEY: No, Your Honor.
THE COURT: Thank you. Exhibit 100 is admitted.
(Defendant Exhibit 100 admitted in evidence.)
Q. And would you agree with me, Ms. Pierce, that your
violation report is premised on the condition that begins at
the bottom of page 1, which is enumerated as condition number
3, which talks about what the defendant can and can't do?
A. Yes.
Q. Okay. Let's talk a little bit about -- I just want to
make sure that what we're not dealing with. We're not dealing
with allegations about a lending company; is that correct?
A. Right.
Q. We're not dealing with allegations about a gambling or a
gaming company; is that correct?
A. That is correct.
Q. And there's no telemarketing or investment programs or
cold calls that are involved in the allegation that we're
dealing with?
A. Not that I'm aware of, no.
Q. Okay. And so we are, in essence, dealing with the
reference to the solicitation of a business that involves the
solicitation of funds without the express approval of the
probation officer prior to engagement in such employment;
correct?
A. Right.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
7
Q. Okay. And so there is not a prohibition of Mr. Vleisides
engaging in business? It's a situation where if he's going to
do certain things, he has to talk with you about it and notify
you about that information; is that correct?
A. That is correct.
Q. Okay. And you would agree with me, would you not, that
almost all business and commerce involves some solicitation of
funds? You sell a product, you get money for that; is that
right?
A. Yes.
Q. Okay. And, in fact, Mr. Vleisides, while he was under
your supervision, worked for and was involved in a
construction company called Spartan Foundation; correct?
A. Yes.
Q. And he told you about that employment and what he was
doing; correct?
A. Yes, he did.
Q. They would bid jobs and receive money before the jobs to
partially pay for it, and they would go and they would do the
construction work and they would get paid; correct?
A. I wasn't aware of the intricacies.
Q. Okay.
A. But I could agree with that.
Q. And Mr. Vleisides was open with you about that work for
Spartan Foundation? In fact, I've seen instances where he
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
8
would actually send you photos from the job sites and things
like that?
A. Yes.
Q. Okay. And that work did not concern you; correct?
A. It did not.
Q. Okay. Now, let's look at Exhibit 101, which is the
violation report dated September 3rd, 2013. It should be the
next document in your stack.
A. I have it.
MR. MORRIS: I move for the admission of 101.
MS. MAHONEY: No objection.
THE COURT: Exhibit 101 is admitted.
(Defendant Exhibit 101 admitted in evidence.)
Q. And when we turn -- there's a variety of information
that's provided. But when we turn to page 2, towards the
upper part of that page, the real meat of your violation is
contained right there in the third paragraph, which says,
Vleisides did not seek the express approval of the probation
officer prior to engaging in a business that involves the
solicitation of funds through preorders.
Is that correct?
A. That is correct.
Q. Okay. Now, if you would, look at Exhibit 102. And I'll
represent to you, Ms. Pierce, that 102 is a copy of the
transcript from the hearing that was held in December, and
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
9
this is your testimony. I believe you have a copy of this
testimony; is that right?
A. Yes, I do.
Q. And have you reviewed the testimony prior to today?
A. Yes, I have.
Q. And do you recognize this as being page 17 of your
testimony and this accurately is a reflection of what you
testified to?
A. Yes, it is.
Q. Okay. And so when we look at --
MR. MORRIS: I move for the exhibit -- for the
admission of Exhibit 102.
MS. MAHONEY: No objection.
THE COURT: 102 is admitted.
(Defendant Exhibit 102 admitted in evidence.)
Q. And so Ms. Pierce, as we look at the upper portion of page
17 of your testimony, there's a question actually from the
Court, and he says, "So did Mr. Vleisides request permission
from you to engage in the business of Butterfly Labs?"
And you answered, "Yes. He -- I was involved all
along. I can remember him talking about it and talking about
getting investors. However, I was not fully informed of the
nature that the orders would come in. That would have caused
me concern."
Do you see that?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
10
A. Yes.
Q. Okay. So the -- the -- the violation report suggests that
Mr. Vleisides did not get approval to conduct a business. But
then when you testify you indicate that you were apprised of
the business that he was forming, and about information
concerning that business? You just wanted more details; is
that right?
A. In a way, yes.
Q. Okay.
A. I felt that I was not fully informed as to the nature of
the business, and without being fully informed I was not able
to give express approval.
Q. Okay. So let's -- let's talk a little bit about that.
Mr. Vleisides told you that he was starting the business;
correct?
A. Yes.
Q. In fact, I've seen numerous emails where he's talking with
you about investors and hardware and technology and things
like that; correct?
A. Yes.
Q. Okay. And you actually even toured the Butterfly Labs
facility on more than one occasion; is that correct?
A. Yes. Oh, yes.
Q. Okay. So certainly Mr. Vleisides gave you transparency to
see what he was doing; correct? He didn't try to conceal the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
11
business or the nature of the business? In fact, he took you
to the business and walked you around; is that right?
A. Yeah.
Q. Is it safe to say that while you were touring the facility
and interacting with Mr. Vleisides, you could have asked any
question you wanted to about any particular detail at all?
A. Yes.
Q. And did you find that when you asked Mr. Vleisides
questions that he would answer them?
A. Yes.
Q. Okay. And did you -- did you ever believe that he was
trying to conceal something from you?
A. No.
Q. Now, as you -- as he provided you this transparency to the
business, I want to understand what you did understand at the
time. You understood that Butterfly Labs was making
essentially computer hardware; correct?
A. Yes.
Q. And you understood that it was advertising that for sale;
is that right?
A. Yes.
Q. And just like when I bought my Christmas gifts on Amazon,
I would order a product and give a credit card and pay for it,
and they would ultimately deliver it to me?
A. When I order off Amazon I have a definite date. Christmas
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
12
Eve was this year.
Q. Right.
A. And that's when it came.
Q. Okay. But in terms of how commerce worked and how
Butterfly Labs would sell something, that's how it sold
things?
A. Yes.
Q. And you knew that?
A. To a certain extent, yes.
Q. Okay. And when you said to me, "to a certain extent,"
what does that mean exactly?
A. It basically means that, first of all, I go back when you
were talking about me being aware of Mr. Vleisides getting
investors. I was aware that he initially had a start-up of, I
believe, 8 to $10,000 that he told me came from mostly family
members. I was aware of that as an investment. Not
soliciting money from people to be used as an investment to
develop the hardware, that I was not aware of.
Q. So your testimony is that Mr. Vleisides told you that he
was receiving funds from his family, but he did not apprise
you of other efforts to get investment funds?
A. I was aware --
Q. I'll represent to you we've attached, as exhibits to our
response to the violation report, emails that have that exact
content.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
13
A. Well, this is all prior -- this is all prior. At the time
of the filing of the violation report I didn't have those.
Q. Okay.
A. I knew that he had, like I said, a small investment to
start-up. And not even -- because I do know a little about
business, but computers and bitcoins, that is not my
specialty. So it was his responsibility to inform me of the
full nature.
Q. Well, you understood that he was engaged in a company
that -- that generated and made hardware computer products;
right?
A. Yes.
Q. And you understood that that company was involved in
selling hardware that was used in Bitcoin mining; correct?
A. Yes.
Q. In fact, you asked Mr. Vleisides if he would entertain
agents from the FBI to tour his facility and learn more about
bitcoins, because the government's -- the government's trying
to better understand this virtual currency; isn't it?
A. Yes.
Q. And when you made that request, Mr. Vleisides was happy to
entertain not only you but FBI agents, and this is prior to
your violation report; correct?
A. Yes.
Q. So -- so when you say that he should have told you more
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
14
about bitcoins, you certainly were present and involved in
exchanges with Mr. Vleisides that involved a discussion of
what his company was doing and what the computer hardware was
being used for, safe to say?
A. In a way, yes.
Q. Okay.
A. I was aware of bitcoins and that his company manufactured
mining equipment. He made me aware of all of that, because I
had never heard of either before. However, I was not aware
that they took preorders, used that money to develop the
hardware and just kept customers waiting for months and
months. There's no determinate date.
Q. So -- so the issue -- and I'm trying to make sure that I
understand what your concern is. The issue isn't that
Mr. Vleisides concealed the existence of the company or what
it did, because it sounds to me like he couldn't have been
more transparent giving you access to it whenever you wanted,
hosting FBI agents to tour the facility, answering the
questions you asked, and making it known to you, your concern
is that you weren't aware of complaints and problems with
production delays; is that right?
A. Well, I didn't make that his responsibility to -- to tell
me of those complaints. I was --
Q. Exactly.
A. -- not aware of the solicitation of funds through
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
15
preorders.
Q. How did you think that people were buying the hardware?
Do you think that they were -- they were ordering the piece of
hardware? And unlike any other type of business, that they
weren't going to pay anything until they actually received it?
Does Amazon do that or anybody else that you know of?
A. Well, like we discussed before, Amazon has a determinate
date. We're talking, I wouldn't expect you to order a shirt
and wait six to eight to ten months to eighteen months.
THE COURT: Let me shortcut this. I think her
position is, and correct me if I'm wrong, is that when people
order this they would get it in a timely fashion. That's --
that's the struggle, right, Ms. Pierce?
THE WITNESS: Yes, Your Honor.
MR. MORRIS: And Your Honor, if that's what she's
saying --
THE COURT: That's what she said.
MR. MORRIS: -- that is a different thing to say,
that she didn't understand the fact that they would take
orders and receive money just like any normal business would
do.
THE COURT: I think she -- I think she expected them
to receive money, but she expected the customer to receive
this in a very timely fashion, like Amazon.
MR. MORRIS: And that's fine.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
16
THE COURT: Forty-eight hours --
MR. MORRIS: That's fine.
THE COURT: -- for Prime members.
MR. MORRIS: Great.
THE COURT: Right?
Is that what you're saying?
THE WITNESS: That is it, Your Honor.
THE COURT: All right.
MR. MORRIS: Sure.
Q. So -- so -- and I'm trying to understand the heart of
this. Because there's a violation alleged and then there's
concerns; right?
A. Yes.
Q. Okay. And so when you testified before, you didn't really
testify about the violation report. You testified about what
you termed to be red flags. Do you remember that phrase you
used?
A. Yes.
Q. Okay. Before we -- we're going to talk about some of your
red flags. But before we do, I want to talk just a little bit
about Mr. Vleisides, because he is the person that's been on
supervision, and he's the person that you're trying to either
revoke or modify his supervision on. Would you say that Sonny
was cooperative while you were his supervisor?
A. Fully cooperative with me.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
17
Q. And, in fact, he talked with you numerous times about
Butterfly and was very -- and was and is very proud of the
company?
A. Yes.
Q. Okay. And would you describe him as being
entrepreneurial?
A. Oh, definitely.
Q. And during your exchanges with him as your supervision --
as your -- as his supervising officer, did you ever caution
him to not be entrepreneurial?
A. No. I had no reason to at that time.
Q. And when you toured the facility, I think you testified
before you had ample opportunity to ask any question you
wanted; correct?
A. Yes.
Q. And FBI agents were present and they could ask any
questions they wanted, and you always found Mr. Vleisides to
be responsive; is that right?
A. Yes.
Q. Now, do you understand that Butterfly Labs is a quite
significant going concern with hundreds of employees that far
exceed Mr. Vleisides? Do you understand that?
A. Well, can you rephrase that? What do you mean?
Q. Well, we've talked about Mr. Vleisides and Butterfly Labs
as almost as if it's just him. But you understand that it's
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
18
much more than just him; correct?
A. Oh, yes.
Q. Not only in terms of ownership but in terms of management
and actual employees?
A. Yes.
Q. And you've seen that firsthand when you toured the
facility more than once?
A. I have.
Q. And, in fact, you were aware of Butterfly Labs and had
toured the facility prior to the time that you requested this
Court order of the early termination of Mr. Vleisides'
supervision; is that correct?
A. I did not request early termination. I did not oppose it.
However, I did not request it.
Q. And in the vernacular of being a supervising officer, when
you don't oppose early termination, is that the same to say
that you supported his early termination of supervision?
A. No. If I --
Q. Would it have bothered you if the judge ordered his
supervision to be terminated?
A. At that time, no.
Q. Okay. And at that time you had already toured the
Butterfly Labs facility and had plenty of audiences with
Mr. Vleisides to discuss that business; correct?
A. Oh, yes. Of course. I just wasn't aware of the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
19
complaints at that time.
Q. So the red flags, primary of your red flags is the
complaints; right?
A. That is where it began, yes.
Q. Okay. We're going to get there. But first I want to talk
about in your testimony before, you referenced a company in
the Bahamas. Do you remember that?
A. Yes.
Q. Okay. And you referred to a document that you'd seen in
tax filings. But we didn't actually get to see the document.
Do you recall?
A. Yes.
Q. Okay. A little bit out of order, but Exhibit 104 in your
stack. Is Exhibit 104 the document that you were referring to
when you testified back in December?
A. Yes, it is.
Q. Okay. And Exhibit 104 is a portion of a tax return filed
for 2012 by Mr. Vleisides?
A. It is.
MR. MORRIS: I move for the admission of 104.
MS. MAHONEY: No objection.
THE COURT: 104 is admitted.
(Defendant Exhibit 104 admitted in evidence.)
Q. And to be clear, this was a -- this was in the materials
that were provided to you when you requested that
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
20
Mr. Vleisides provide to you tax return information; correct?
A. Yes.
Q. Okay. And above on the very top of this form, do you see
that there's the bold header that says, filed pursuant to
revenue procedure 92-70 for dormant foreign corporation?
A. I do.
Q. Okay. And what do you understand a dormant foreign
corporation to be?
A. Not active. And I'm just taking my own definition of
dormant.
Q. Okay. Now, I want to go back, because if I recall from
your testimony and reviewing the conditions, there was no
actual proactive duty by Mr. Vleisides to provide you
financial information. You had asked for it and he would
provide it from time to time; is that right?
A. Yes.
Q. Okay. And would one of the main ways that you would get
financial information is for him to fill out a monthly
supervision report?
A. There's two ways. There was monthly supervision report,
and then there's monthly cash flow and a declaration of income
and assets form.
Q. Okay. So essentially three types of documents --
A. Yes.
Q. -- correct? And is Exhibit 103 that's there in your
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
21
stack, is that the kind of form that your office would use?
A. Yes.
Q. I printed it off from your website.
A. Yes. That's exactly it.
Q. Okay.
MR. MORRIS: I'll move for the admission of 103.
MS. MAHONEY: No objection.
THE COURT: 103 is admitted.
(Defendant Exhibit 103 admitted in evidence.)
Q. And -- and 103, this form, this form does not have any
type of space or -- or request that Mr. Vleisides indicate any
business ownership; would you agree with that?
A. Right.
Q. And when you talk about the other two financial forms, I'm
very familiar with those, and they -- they ask for questions
about cash flow and accounts and things like that; correct?
A. Yes.
Q. Okay. Now, just to be clear, the tax form that you're
talking about, which disclosed the existence of the company,
was something that Mr. Vleisides provided to you; correct?
A. Yes, it was.
Q. Okay. And also, did you ever ask any questions about
that? Did you ever try to find out any information about that
company?
A. I believe I Googled but didn't find anything.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
22
Q. Okay. And were you aware that the company was actually
formed by the Polsinelli law firm?
A. No, I was not.
Q. Okay. And were you aware that it has never been an active
company?
A. I was aware of nothing until I got -- saw it on the tax
return.
Q. Okay. And were you aware that it's never operated any
business, held no accounts, used any money, or had any
operations whatsoever?
A. I was aware of nothing about the company until I saw the
tax return.
Q. As part of your stack, ma'am, there's an Exhibit 105.
It's a letter from the Polsinelli law firm to me. I requested
that they provide me information about this. And I presume
that you've never talked with Mr. Fasel about the Bahamian
company?
A. No. I've never talked with anyone about it.
MR. MORRIS: Your Honor, I move for the admission of
105.
THE COURT: Any objection?
MS. MAHONEY: No objection. I would just ask a
question about the date on the top. Is that a misprint?
MR. MORRIS: It must be, because it's certainly not
February of 2014.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
23
MS. MAHONEY: Okay.
THE COURT: So just --
MR. MORRIS: If I answered that it wasn't, would
that change things?
THE COURT: So it's mostly February 27th of 2013; is
that --
MR. MORRIS: I requested the letter yesterday. I
requested the letter a couple days ago. I got the letter
yesterday.
THE COURT: Oh, it's January 27th, 2014. Okay.
Thank you.
(Government Exhibit 105 admitted in evidence.)
Q. And so to be clear about this Bahamian company, with
regards to the tax form that you testified about, that's a
form that Mr. Vleisides actually provided to you; correct?
A. Yes, it is.
Q. And then the forms that you would typically use to get
information from Mr. Vleisides, there are not blocks where he
would talk about ownership that are essentially nonactive
entities?
A. There is a form that he filled out after this, this entity
was began, and he did not mention that.
Q. Okay. Do you -- do you know whether he even knew that
this company had been created?
A. I do not.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
24
Q. Okay. Okay. And at all times when you interacted with
Mr. Vleisides and you requested things, did you find him to be
fairly responsive in trying to get you information?
A. Definitely.
Q. Okay. Do you really think that he was trying to conceal
something from you?
A. I don't know.
Q. Another red flag that you testified about before was a --
your interactions with PayPal?
A. Yes.
Q. Okay. And you testified that on the -- the morning of the
last hearing you reached out and talked to a Chad Williams
that's affiliated with PayPal through the global asset
protection unit?
A. Yes.
Q. How did you get his contact information?
A. I would have to check my chron notes. I do -- do not
know.
Q. How did you know to get ahold of him?
A. I was made aware that there were possibly some -- some
complaints regarding PayPal.
Q. Okay. But how did you choose to talk with Mr. Williams?
A. I don't recall.
Q. Had you spoken with him before the December hearing date?
A. I had not.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
25
Q. Okay.
A. I had not.
Q. Did someone give you his information and suggest you call
him?
A. I believe it came from Kate.
Q. Okay. So Ms. Mahoney said that you should talk with
Mr. Williams with PayPal?
A. That I would be able to talk to him, yes.
Q. Have you talked to -- did Ms. Mahoney coordinate the phone
call?
A. No. I called myself.
Q. Okay. But she's the one who gave you the contact
information?
A. I believe. So, yes.
Q. All right. And have you talked with Mr. Williams since
the December phone call?
A. Yes.
Q. How many times?
A. One.
Q. And let me guess, was it today?
A. No.
Q. Okay.
A. It was Friday.
Q. And tell us, because I'm sure I'll hear about it on
redirect, what did he tell you then? What did he tell you
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
when you spoke with him on Friday?
A. I contacted him to ask for clarification and -- and
follow-up and to see if there was any additional information.
He did not want to talk without a subpoena. He said that an
employee, he described as an account manager from Butterfly
Labs, called him and told him they were looking him up on
LinkedIn and trying to see if he had the right to speak to me
about their accounts.
Q. And did he tell you that he's never had any interaction
with the PayPal account involving Butterfly Labs?
A. All he told me was he -- what I just said.
Q. Did he tell you that PayPal told him that he should stop
talking about Butterfly Labs because he's never had any
interactions at all with PayPal's interaction with Butterfly
Labs?
A. He just told me what I just testified. That's it.
Q. And when you testified in December, you merely recited to
the judge what a person that you know as Chad Williams said to
you?
A. I looked him up to see if he was a global asset --
Q. That he was really affiliated with PayPal?
A. Yes. And I was under the impression he was.
Q. Did you speak with anyone else at PayPal to see whether or
not he was actually informed about interactions with Butterfly
Labs?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
27
A. No, I did not.
Q. And when you tried to call him last Friday he told you --
he told you that he couldn't speak with you?
A. Without a subpoena, no.
Q. Did you issue a subpoena?
A. I did not.
Q. And for purposes of the information that you provided to
the judge in the December hearing, did you do anything to
confirm what Mr. Williams told you and that you recited to the
judge?
A. I went to Butterfly Labs' website to see if, in fact,
PayPal had been removed as a vendor, because I was aware that
they were accepting PayPal, and I did not see PayPal as a way
to pay anymore.
Q. Any other investigation?
A. Not on that matter, no.
Q. Okay. Did you ever discuss with Mr. Vleisides any PayPal
issues?
A. No, I did not.
Q. Okay. And did you ever discuss with anyone at Butterfly
Labs interactions with PayPal?
A. No.
Q. Now, the one thing that we can be certain of is that there
are complaints. There have been complaints; right?
A. Thousands.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
28
Q. Yes. And you've talked about what Mr. Williams had told
you about for purposes of a PayPal account; correct?
A. Yes. Yes.
Q. And he talked about and you said that Mr. Williams at
least said there had been, for instance, three complaints that
day?
A. Yes.
Q. Did he -- did he talk with you at all about what the
nature of those complaints were?
A. Not those specifically, no.
Q. Okay. And is it your understanding that almost all of the
complaints that have come in have been complaints about delays
in production and people not getting the product that they
wanted on time?
A. Not receiving their merchandise is what I've been told.
Q. There haven't been complaints about the quality of their
merchandise, and when someone actually receive it -- receives
it that it does exactly what it's supposed to do? You haven't
heard that; have you?
A. Mr. Williams and I did not discuss that, no.
Q. Okay. Have you discussed that type of allegation with
anyone else?
A. I have seen complaints through a law enforcement website
that have alleged not good product, yes.
Q. And when you say law enforcement website, do you mean the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
29
FTC Sentinel website?
A. Consumer Sentinel, yes.
Q. Okay. And how many of those types of complaints did you
see?
A. I don't have them broken down like that.
Q. Okay. And do you know what the nature of the most recent
complaints are?
A. No.
Q. Okay. And certainly, when you'd had your conversation
with Mr. Williams you didn't discuss that kind of contact;
right?
A. He didn't have access to that at that time.
Q. Exhibit 106 is in your stack. Do you see that document?
A. Yes.
Q. And this is a complaint overview from the Better Business
Bureau, and it's a -- it's a -- when there's a complaint
raised, you can actually follow how it gets resolved. Are you
familiar with that process?
A. Yes.
Q. Okay. And have you seen these types of reviews for recent
complaints that relate to Butterfly Labs?
A. No.
Q. Okay. And as we look at this complaint as an example, we
see that someone has raised a complaint about the timing of
delivery; correct?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
30
A. Yes.
Q. And we see that this complaint, which was filed on
December 30th of '13, actually relates to an order placed on
December the 11th. Do you see that?
A. I do.
Q. Under the complaint detail?
A. Yes.
Q. And as we look through this type of document, we see that
the -- the complaint has been resolved, and it's been resolved
in that as indicated on the third page, the order was placed
on December 11th. It was shipped on January 3rd, and is
expected to be delivered January 6th. And then they actually
have the delivery confirmation to show that this was resolved.
Do you see that?
A. Yes. On this complaint I do.
Q. Okay. And so are you aware that almost all of the
complaints that are presently rolling in involve this type of
small time frame window where people want these machines so
badly when they don't get them immediately they file a
complaint, and it's usually solved within a week or two?
A. No. I'm not aware of that.
Q. Okay. Mr. Williams and you didn't discuss that?
A. Our last discussion was on December 17th.
Q. Are you aware, Ms. Pierce, that there is a significant
demand for the products that Butterfly Labs sells?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
31
A. Yes.
Q. Okay. And would you agree with me that when there are
complaints about the timing of delivery, there are a variety
of things that a company can do to address those complaints,
and one of them is to issue refunds?
A. I would agree, yes.
Q. And are you aware that refunds have been issued in
significant amounts by Butterfly Labs?
A. No.
Q. Okay. You haven't read the papers and the materials we
filed in opposition to your violation report?
A. Yes. I've read them.
Q. Okay. And would you agree with me another way that you
can try to protect customers when there's issues with delays
is you can actually escrow and reserve funds?
A. Yes.
Q. And that's your understanding of what PayPal did; is that
right?
A. Yes.
Q. And, in fact, PayPal always reserves a portion of funds.
They just started reserving a greater portion because of
issues with the complaints; isn't that correct?
A. I don't know what they normally reserve.
Q. Okay.
A. I just know what I was told they had on reserve --
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
32
Q. Okay.
A. -- on December 17th.
Q. Did you understand from your conversation with
Mr. Williams, at least, that PayPal for a period of time had
indicated to Butterfly Labs that it would be reserving a great
portion of funds and escrowing that fund away to protect
customers?
A. Can you rephrase that?
Q. It was a horrible question. Too many words. I'm sorry.
The -- the process of PayPal escrowing funds --
A. Uh-huh.
Q. -- took -- occurred over a period of time?
A. Are you talking about them holding their money?
Q. Yes.
A. It didn't just all happen at once?
Q. Yes.
A. I wasn't aware of that specifically, no.
Q. Okay. And you did understand from Mr. Williams that while
these funds were being preserved and escrowed, that that
number was being reduced?
A. Yes. I did definitely understand that.
Q. And it was being reduced because Pay -- Butterfly Labs was
still working with PayPal; correct?
A. Yes.
Q. Okay. So instead of Butterfly Labs saying, well, we're
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
33
having trouble with PayPal escrowing our funds, we just won't
do any more PayPal business, they continued to do PayPal
business and take orders when they knew those funds would be
escrowed to protect the customer; isn't that correct?
A. I don't know that they continued to take orders. I was
under the impression that they did not.
Q. And do you know where the PayPal relationship with
Butterfly Labs stands right now?
A. My last contact where I got information was December 17th.
At that time I was told that they did not want to do business
with Butterfly Labs.
Q. You were told that by Mr. Williams?
A. Yes.
Q. Would it surprise you to learn that that's completely
false?
A. I would be a little surprised, yes.
Q. Did it surprise you when you contacted Mr. Williams and
said, "I can't talk to you anymore"?
A. Was I surprised?
Q. Yeah.
A. A little.
Q. If someone called and wanted to talk to you about your job
you would be willing to talk about it, right, because it's
your job?
A. Probably, I would.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
34
Q. Uh-huh. So a way that you can handle complaints about
delays is to issue refunds and reserve funds and you would
also agree with me, wouldn't you, that you can ship more
product?
A. Of course.
Q. And isn't it true that Butterfly Labs has been shipping
more product and catching up on all those delays?
A. That is what I understand from you.
Q. Do you not understand it from all the customer information
we've provided to you and provided to this Court?
A. I saw -- I saw -- I know that you gave documentation, but
I saw one Better Business Bureau complaint -- or resolution,
but I also see default court judgments and other things coming
into play.
Q. Do you -- do you -- would you agree with me -- and I
understand your point. Would you agree with me that there are
people that are working on this issue?
A. I believe they are, yes.
Q. And those -- those people far exceed Mr. Vleisides?
A. Of course.
Q. Okay. And would you agree with me that there's nothing in
the special conditions of supervision that addresses whether
there's complaints about the timing of production and
delivery?
A. Oh, yes. Of course.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
35
Q. Okay. So let's talk about another red flag. You
testified in December about the company, Butterfly Labs,
owning a residence that Mr. Vleisides uses?
A. Yes.
Q. Okay. Mr. Vleisides told you about that residence;
correct?
A. Yes.
Q. You've been to that residence?
A. Several times.
Q. And Mr. Vleisides told you that the company owned that
residence?
A. Yes, he did.
Q. Did you ever tell him that the company's ownership of that
residence and his use of it was a violation of his
supervision?
A. No, I did not.
Q. And did you ever tell him that you were some day going to
appear in court and testify that that was a red flag that
might lead you to file a violation report?
A. It -- it was --
MS. MAHONEY: I'm going to object. That's pretty
argumentative, Judge.
THE COURT: Sustained. You know you are kind of
arguing with her --
MR. MORRIS: Sorry.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
36
THE COURT: -- Mr. Morris. I just want you to get
information from her.
MR. MORRIS: Very good.
THE COURT: Not try to convince her to your point of
view necessarily. Okay?
MR. MORRIS: Sorry. Natural inclination, Judge, but
I'll back it off.
THE COURT: I understand. So just ask questions,
please.
MR. MORRIS: Fair enough.
THE COURT: Thank you.
Q. Did you tell Mr. Vleisides it was a red flag?
A. No.
Q. Okay. And during your direct examination there was a
reference to the fact that you had reviewed Mr. Vleisides'
2012 tax return; correct?
A. His or the company's?
Q. His and the company's.
A. Yes.
Q. Okay. And counsel elicited from you a reference to the
fact that his tax return from 2012 didn't list or reflect any
personal income benefit for the benefit of having corporate
housing; is that right?
A. Yes.
Q. When was the house purchased by the company?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
37
A. If I could refer?
Q. If you want to refresh your recollection, Exhibit 114,
which is up there in the stack.
A. Is it?
Q. I should remind you that the house closed in December of
2012.
A. Oh, yes. December 6, 2012.
Q. And isn't it true that Mr. Vleisides didn't even reside in
the house until 2013?
A. I do not know when he began to live there, because he did
not report a move to me prior. I went to his mother's house
one day and called him and he said, "Oh, I moved." So I can't
confirm when he began to live there.
Q. Would you agree with me that if there was no benefit in
2012 to report it shouldn't be on the taxes?
A. If there wasn't any.
Q. There was also discussion during your direct examination
about a car that the company bought?
A. Yes.
Q. And you were aware of the car as well; correct?
A. Oh, yes.
Q. And did you ever advise him that that was a violation or a
red flag concerning his supervision?
A. No. I would never advise of a red flag.
Q. And the car itself is a -- is a 2006 car with 100 ,000
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
38
miles on it?
A. I don't know how many miles are on it.
Q. All right.
MR. MORRIS: May I approach briefly?
THE COURT: Yes, sir. Yes, sir.
MR. MORRIS: I meant to put it in the stack and I
forgot.
THE WITNESS: All right.
MR. MORRIS: Your Honor, may I approach you?
THE COURT: Yes, sir. Yes, sir.
Q. This is just to refresh your recollection, Ms. Pierce.
This is the transactional documents on the car which reflect a
2006 Audi. And when you turn to the second page and look in
the mileage box, it's 109,000 -- 109,690 -- excuse me, 109,000
miles. Do you see that?
A. Yes, I do.
Q. Okay. So this wasn't some extravagant vehicle? I mean,
he bought an extremely used car that cost $19,000; is that
right?
A. Yes.
Q. Okay. By my review of your earlier testimony, the other
red flag that you mentioned had to do with losses that were
reported by the company on taxes and shareholder loans. Do
you remember that?
A. Yes, I do.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
39
Q. Okay. The shareholder loans that you referenced are
reflected on the company's financial statements; is that
right?
A. Yes.
Q. And those financial statements were provided to you by
Mr. Vleisides; is that correct?
A. Oh, yes.
Q. Okay. So there's not a question about those being
concealed in some fashion?
A. No.
Q. And the tax returns and how they reflect loss for a
company, are you -- are you an accountant?
A. Definitely not.
Q. Okay. I'm not either. But would you agree with me that
there is sometimes a difference between tax accounting and how
it's reported versus business viability, revenues and cash
flow?
A. Yeah. I can imagine there is.
Q. Okay. Particularly in a start-up tech company?
A. Yes.
MR. MORRIS: Nothing further.
THE COURT: All right. Any redirect of this
witness?
MS. MAHONEY: Yes, Your Honor.
THE COURT: Now, did we admit 112? Did you ask for
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
40
that to be admitted? Do you want it admitted?
MR. MORRIS: I don't need it admitted. It's just
really just to refresh the recollection as to the age and use
of the car.
THE COURT: Okay. Sure. Very good.
MR. MORRIS: Thank you.
THE COURT: Yes, sir.
REDIRECT EXAMINATION
BY MS. MAHONEY:
Q. So this -- this 112, that reflects Sonny Vleisides buying
not Butterfly Labs, is that what you see?
A. That is what I see.
Q. That's what -- yeah. And it shows him as the buyer and
not Butterfly Labs?
A. Yes.
THE COURT: I'm sorry. You're talking about 112,
the Audi?
MS. MAHONEY: Yeah.
THE COURT: Okay.
Q. Is there another car maybe? Do you know of another car?
A. I do not.
Q. Okay. And Ms. Pierce, did you see or hear any explanation
between the discrepancies, very large discrepancies and losses
in the financial statement and the claimed tax loss?
A. You're asking if I see it?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
41
Q. I direct your attention that in the financial statement it
was stated in 2012 there is a loss of approximately 139,000,
whereas on the tax return it's 836,000.
A. Yes. That's -- that's all I see. I don't know the
reason.
Q. And you didn't get any kind of explanation or
understanding of --
A. No.
Q. -- that discrepancy? All right. Now, when you talked to
Mr. Williams with PayPal before he told you he needed a
subpoena to talk further. Did you ask him, you know, just to
check the accuracy of the statements that you had testified
to?
A. Yes. I started off like that.
Q. And did he reaffirm the accuracy to the extent he was --
he talked to you, those few questions?
A. Yes, with an um-hum. I said, I went to court per our
conversation. You know, I just wanted to clarify that there
were -- this is the amount of money the 11 million held and
what it went down to, and he confirmed with an um-hum. But
when I asked questions is when he told me no.
Q. Okay. Now, Mr. Morris referenced a visit with FBI out to
Butterfly Labs and apparently you all visiting. At that point
did Mr. Vleisides say that he was not an officer of the
corporation?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
42
A. My recollection is that he said no. He was the
mouthpiece. I don't know that he used those exact words. But
it had something to do with being a mouthpiece for the
company.
Q. Okay. You talked a little bit that there are some
lawsuits. Could you describe those for Judge Kays, what you
know of?
A. I know of two that I have found, and I'll have to go to my
file. I have, in Johnson County, Kansas, a lawsuit brought by
a William, it looks like Lolli, L-O-L-L-I, alleging -- he's a
California resident. That has had an issue with the delivery
of his mining equipment. And it's a default judgment that he
got for $16,000 and change.
Q. What was the date of that default judgment?
A. I believe it's 10-25-13. No. 11-27 of '13.
Q. All right. And you said there was another one you're
aware of?
A. Yes. I am aware of one more that I just became aware of
this morning filed in the District Court in Kansas by an
individual residing in China that has the same sort of issue.
This individual is suing for future profitability. But same
thing.
Q. Which is the nondelivery of products ordered and paid for?
A. Yes.
Q. Mr. Morris had you look at a Better Business Bureau
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
43
complaint that had been resolved. Did you look to see if what
the -- if Butterfly Labs had a ranking with Better Business
Bureau?
A. I did. I looked Butterfly Labs up. They had an F
ranking, and there were more than 100 complaints on there with
the same sort of shipping and delivery issues.
Q. So is it your understanding Better Business Bureau ranks
from A as in Adam to F as in Frank, and they had an F?
A. That's what I understand, yes.
Q. And you also mentioned on cross-examination that there
were FTC complaints as well?
A. Yes.
Q. And so those are available on a law enforcement database
Consumer Sentinel?
A. Consumer Sentinel, yes.
Q. Do many of those complaints include language such as no
refund, final sale, refusal to refund?
A. Oh, yes. I -- I have looked them over and I know that
they can't be brought into exhibits. But consistently people
say that when they've asked for a refund, they've been told
that all orders are final.
Q. All right. So Mr. Morris gave you the example of Amazon,
and just as an analogy. If -- if a customer orders from
Amazon and then they don't get their product for say eight to
ten months and asked for a refund and Amazon doesn't give them
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
44
a refund, would you consider that a proper business model?
A. No.
Q. All right. And is that what is being reported to happen
there?
A. Yes.
Q. And is it a concern for you, especially when you see some
self dealing in that while not shipping product or often
refunds to some customers, there are undocumented loans being
made to officers?
A. Oh, definitely. Yes.
Q. And then there also is property being bought by the
company for use by the officers?
A. Yes.
Q. Such as a house and a car?
A. Definitely.
Q. All right.
MS. MAHONEY: No further.
A. Kate, can I --
Q. Yes.
A. -- just further on the loans? Mr. Vleisides, if he got --
it's a gray area. But if he got a loan, it should have been
reported to me. In the past he has asked if he wanted to get
a $500 Home Depot card, he asked me. And when his
girlfriend's car went out, he emailed me asking for approval
to get a loan, because per his conditions he cannot apply
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
45
without it. So it's -- it's problematic.
Q. What is the amount of the undocumented loan?
A. The documentation I got from him says 65,000, I believe.
Q. Have you received any documentation as to the terms of the
loan or the paperwork?
A. No.
MS. MAHONEY: All right.
THE COURT: For the record it's in document 23.1,
page 4 of 7. It's question 6. Which shareholder received a
$242,000 loan from Butterfly Labs? There's $65,977.19
attributed to the defendant, and the annual rate is .22
percent. That's in that document. Okay.
Q. And so my question was, did you have the underlying
paperwork of the terms of the loan, the -- what -- what --
A. No.
Q. -- what somebody would see the payment -- rate of payment
to be made?
A. No. I don't have anything.
THE COURT: All right. Mr. Morris, sir?
MR. MORRIS: Just briefly, Judge.
RECROSS EXAMINATION
BY MR. MORRIS:
Q. You were asked about the undocumented loan and you
answered, when he gave me the documentation it showed X. The
loans for the shareholders are reflected on the company's
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
46
financials, right?
A. I did not receive that prior to. I mean --
Q. Did you ask him for it?
A. No. He should ask me before -- like I said before, he's
known per his conditions. He's asked, can I get a Home Depot
card to replace my washer, or a vehicle loan.
Q. And you did receive from Mr. Vleisides on a fairly regular
basis an accounting of how much money he would get from the
company; right? He would show you that he would make $500
every two weeks or a certain amount?
A. All I ever remember is his salary staying steady at $500.
And then around the time of this violation it got reported
that it went up a little bit. Not 65,000.
Q. Okay. And have you ever gone back to check to see whether
or not he was actually showing you the amounts of money that
he was getting and then there was a determination of how to
classify that as income or shareholder loan? Have you ever
had that discussion with him?
A. Have I looked back to see or have I had the discussion?
Q. Both. Do you recall any such discussion?
A. No. No. We never discussed any sort of loans to him from
the company.
Q. Okay. And for purposes of when you asked for financials
from the company, you did receive the financials and they
showed at least this book value for the shareholder loan;
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
47
correct?
A. Yes. You can say that.
Q. And you don't know how that number accumulated over time
or anything like that?
A. No.
Q. You testified about the house and the car as being
problematic, but you knew all about the house and the car;
right?
A. I think that me saying red flag, you took to mean that I
took each one of these individually. I looked at a totality
of the circumstances as far as income for what the company was
doing or not doing. His prior offense, everything plays into,
like I said, it's just the totality of the circumstances.
Q. And you mentioned something new. You mentioned two
lawsuits. Are those lawsuits against Mr. Vleisides?
A. They're -- they're against the company obviously.
Q. Against the company?
A. Yes.
Q. And is there any reference to Mr. Vleisides in any of the
allegations that are made?
A. Not him specifically, no. All against the company.
Q. If Mr. Vleisides worked -- worked at H&R Block in
management --
MS. MAHONEY: I'm going to object to argumentative
here. I mean, I think this is a very good place for argument.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
48
THE COURT: Yeah. Sustained.
MR. MORRIS: I'll leave it alone. Based on the
redirect, nothing further, Your Honor.
THE COURT: Thank you. All right. Thank you,
Ms. Pierce.
MR. MORRIS: Thank you, Ms. Pierce.
THE COURT: All right. Call your next witness.
MS. MAHONEY: No further evidence from the
government, Your Honor.
THE COURT: All right. Mr. Morris, do you wish to
present evidence?
MR. MORRIS: We do, Your Honor. Mr. Naseem will
call the next witness.
THE COURT: All right. Mr. Naseem, sir.
MR. NASEEM: Thank you, Judge. I'm going to call
Mr. Bruce Bourne to the stand.
THE COURT: All RIGHT. Mr. Bourne, would you please
come forward, face our clerk, raise your right hand and be
sworn, sir?
BRUCE BOURNE, DEFENDANT WITNESS, SWORN
THE COURT: Mr. Bourne, if you'll please have a
seat, sir. Mr. Bourne, would you please begin, sir, by
speaking your full name and spelling your last name for us?
THE WITNESS: Yes, sir. My name is Bruce Bourne.
Last name is spelled B-O-U-R-N-E.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
49
THE COURT: Thank you, sir.
Mr. Naseem, sir.
MR. NASEEM: Thank you, Judge.
DIRECT EXAMINATION
BY MR. NASEEM:
Q. Mr. Bourne, let's start by talking about your current
affiliation with Butterfly Labs. What is your relationship to
the company?
A. I've been working with Butterfly Labs on a contract basis
since the beginning of September 2013, essentially serving in
the role of chief financial officer and providing financial
and general management consulting services.
Q. And are you actually an employee of Butterfly Labs?
A. I am not an employee.
Q. So you operate your own independent consulting company;
right?
A. That's correct.
Q. How many hours a week would you say that you spend with
Butterfly Labs?
A. I spend about 75 percent of my time per month working with
Butterfly. I come out to San Fran -- or to Kansas City two to
three weeks out of every four weeks.
Q. So your -- your home base of operations is San Francisco?
A. Correct.
Q. Can you briefly describe some of your daily duties with
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
50
the company? You've touched on some of them, but maybe we can
dive a little deeper into that.
A. It's -- it's become a little bit of everything. I oversee
the accounting and financial reporting. I have been involved
with the financing aspect with the PayPal relationship. I
work with their VP of marketing on press releases and their
account manager on new client deals. I've worked with the
attorneys on the lawsuits. So I've got involved in more or
less every aspect of the company at this point.
Q. So it's fair to say, then, that you have a firm
understanding of the company's day-to-day operations and of
its finances?
A. Largely, that would be correct.
Q. Okay. Before we dive into the nuts and bolts of Butterfly
Labs and their operations, let's talk briefly about your
background. What's your educational background?
A. My undergraduate degree is I have a bachelor in science
degree in accounting, summa cum laude from Florida State
University. I have a master's --
Q. Congratulations on the --
A. Thank you.
Q. -- national championship.
A. I have a master's in business administration, with honors
from Harvard business school.
Q. And after you got done with your college degree, what did
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
51
you do?
A. First thing I did I was an Army officer for four years.
Army finance corps. Subsequent to that I went to Arthur
Andersen and was a certified public accountant for four and a
half years in the audit division. After that I left and went
into private industry. Over the last 25 years or so I have
been the chief financial officer of two companies on a
permanent basis, and at least three to five others on a
contract basis. I've had general management, operating jobs,
senior vice president of strategic planning. I've worked in a
variety of industries, companies from two guys with a business
plan up to about $2 billion in revenue.
Q. Tell us how you came to work for Butterfly Labs.
A. A client that I did work with about 15 years ago was a
childhood friend of one of Mr. Vleisides' co-founders of
Butterfly Labs. He introduced me, because the co-founder was
interested in getting some financial help for the company
because they had had some challenges.
Q. Approximately when did those conversations occur? When
did you find out about the possibility of their need for you?
A. I believe they reached out to me in probably early June of
2013. I first met with the company at the end of June, and I
started working with them at the beginning of September.
Q. Did you do any kind of due diligence into what Butterfly
Labs was about before you decided to -- to interview with
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
52
them?
A. Yes, I did.
Q. What -- tell us a little bit about that.
A. In my initial call with Jeff Ownby, who's the co-founder,
Jeff told me what the company did. I went to the website,
looked through the website, Googled the company. He also
revealed that Sonny had some legal problems in the past. So I
did some research on Mr. Vleisides and was familiar with the
background of his -- the previous reasons we're here today.
Q. And did you have a chance to actually meet with
Mr. Vleisides before becoming employed with Butterfly Labs --
A. Yes, I did.
Q. -- before working with them? Okay. Were you familiar at
all with the computer hardware that they produced before you
came to work for them?
A. Not at all.
Q. In all of the experience that you've had with some of the
companies that you've mentioned, which are both small and
large, and you're out in the San Francisco area, which is a --
a tech heavy location, you had never heard of this type of --
of computer hardware?
A. I had not.
Q. Okay. Let's shift now to the focus of what Butterfly Labs
does. Tell me, as best as you can describe it, what is the
product that Butterfly Labs produces?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
53
A. So their -- their innovation was the creation of a
specialized computer chip, which does extremely high speed
mathematical calculations that are used to verify transactions
or validate transactions. Around that chip they envisioned
and created a process control board and an enclosure that goes
around that, and you attach this to a computer. You plug it
into an electrical source and it runs these high speed
calculations. The calculations are actually -- they have
several different applications in different industries, but
the most common use for it and the majority of the purchases
of their equipment have gone towards mining bitcoins, which
are created or released through the completion of these
calculations.
Q. Okay. And I'm going to show you --
MR. NASEEM: What exhibit are we on?
MR. MORRIS: Just use 120.
MR. NASEEM: Okay. I'm just going to use 120, Your
Honor, for identification purposes only. I'm not going to
admit this piece of hardware.
Q. But Mr. Bourne, I'm going to show you what we've marked as
Exhibit 120 for identification.
MR. NASEEM: May I approach?
THE COURT: Yes, sir. Please.
Q. I've placed Exhibit 120 in front of you. Is that the
computer hardware that we have just been describing?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
54
A. It's one of several different products in the product
line. But this is one of Butterfly's products.
Q. Okay. And you say one of the products in the line. Do
they -- do they manufacture -- manufacture several different
types of products like that?
A. They do. They all have the same -- the same basic
function and the same basic technology. It's just a matter of
how much power, how much processing power, and how much
electrical power it needs. The -- the products range from
approximately half this size to about eight times this size.
Q. Okay.
MR. NASEEM: I'm going to retrieve that exhibit,
Your Honor. I'm going to show this to the Government. I
don't know if you've seen that.
MS. MAHONEY: No.
MR. NASEEM: Judge, do you want to see it?
THE COURT: Sure. Sure. Thank you.
Q. All right. Now, these products, do they vary in price as
well?
A. They do.
Q. So this particular unit that the judge is holding right
now, how much does that run, do you know?
A. Well, the prices have changed over time. But I think
currently you could buy that for about $1200.
Q. Okay. So the products are very unique, as we were talking
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
55
about, and are you aware that the demand for these particular
products was high?
A. Yes.
Q. Okay. Do you know why the demand for that product is so
high?
A. There are not a lot of products that people perceive as
being something they can buy and make money with that product.
This product, to the extent that Bitcoin has value and people
believe that it will continue to have value, this product is
used to obtain bitcoins. And the reason that the demand for
this product is so high, I would attribute to, one, it can
have a return on investment. Unlike buying a suit or a shirt,
this is something that can give you a financial return.
The other aspect of it is the comp -- this was not
the company's first product. Their previous products had
worked and worked effectively. So I believe that part of why
there was such demand was that Butterfly was coming out with
an improvement on their old technology, and the expectation
was that this would function extremely well.
Q. And so this is a highly specialized piece of computer
hardware that is designed to mine Bitcoin; correct?
A. It's designed to run calculations that are applicable in a
number of different applications. But its primary use has
turned out to be mining bitcoins.
Q. But the company itself does not produce bitcoins; right?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
56
A. No.
Q. It produces computer hardware?
A. That's right.
Q. A physical product?
A. Correct.
Q. And this is what people are -- when they go to the website
to order, this is what they are ordering or some variation of
that?
A. That's right.
Q. Okay. How large is the company?
A. There's different ways to measure how large a company is.
The two typical ones are how many employees and how much
revenue. Butterfly, since I've been there, peaked at about
110 employees when we were in full manufacturing swing. At
current time, because we've manufactured and shipped all the
products in the backlog, and we are not yet producing the next
version of the product, we have downsized, laid off staff who
were assembling parts and components that are not necessary
right now.
So at this point the company is about 60 people.
But our expectation is when we do begin to construct the next
iteration of these products will increase staff to manage that
production.
Q. And how many facilities are involved just locally with the
manufacture of that product?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
57
A. There -- the primary manufacturing spot and company
headquarters is in Leawood. That's the primary manufacturing
site. There is a -- a warehouse where there's some parts and
there's some component assembling that's done that's also in
the vicinity.
I want to return for just a moment. You asked me
about how large is the company, and I said there were two
measures. I talked about employees. In terms of revenue, in
2012 the company did about $2 and a half million of revenue.
For 2013 we have not finalized the financial statements, but I
expect that the revenue for 2013 is going to be between 25 and
$30 million.
Q. Okay. So fair to say that that is a -- a significant
increase from where it was just even a year and a half ago?
A. It's very dramatic growth. As I mentioned, I do live out
in San Francisco. I do work with some tech companies, and
that type of growth is -- you know, it's not unheard of. But
it -- it's an exceptional growth rate. And generally it's
very difficult to grow at that rate and do it without some
hiccups.
Q. Would it be fair to characterize some of the growth that
you've seen here on par with some of the growths -- the growth
that happens out in Silicon Valley would --
A. Yes.
Q. -- in your experience?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
58
A. Yes.
Q. Okay. Now there have been some discussions regarding
customer complaints and PayPal and kind of the ordering
process. So I want to focus your attention now on PayPal,
because that seems to be one of the largest issues. In your
capacity as the CFO, have you had a chance to work with PayPal
on some of the issues that have been testified to here
previously?
A. Yes, I have.
Q. Tell us, what does PayPal do as its primary business.
A. PayPal -- PayPal largely serves as an escrow agent.
They're a payment facilitator. If you are a -- if you're a
person who has set up a PayPal account, you have given them
either your credit card information or your bank account
information, and if you order an item or a service from a
company who uses PayPal, PayPal remits payment to the company,
but they draw that payment either off of your credit card or
from your bank account. So they serve as a middleman.
Basically it's to create trust between buyer and seller. The
seller, that they're going to get paid, and the buyer, that
they are not going to get scammed.
Q. So, in other words, within that discussion you describe
almost two ways that you could purchase a product, and tell me
if I'm characterizing this fairly. One would be to go to the
company website and purchase it directly, in which case you
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
59
would directly give them funds. That's one way; right?
A. Correct.
Q. And the other way, through the interaction of PayPal, is
to set up this escrow account whereby the protection the
customer seeks is given through PayPal by putting the money
essentially in escrow, and the company does not receive it
directly?
A. That's -- that's correct. Although typically an escrow
account means that the escrow agent is going to hold those
funds until they're notified to release them. PayPal works a
little differently. It -- it gives the buyer assurance, to
some extent, that they can recover their money. But there
isn't a formal release of the funds based on performance.
That's -- that's not typically the arrangement.
Q. Okay. Now, describe how a typical transaction may work
between the customer to PayPal and then PayPal to Butterfly
Labs.
A. The customer sets up their PayPal account in advance.
They may have purchased multiple times from other suppliers of
any sort of good or service that accepts PayPal. The customer
would go to the company's website, fill out the order form,
decide what they wanted, create their shopping cart, use
PayPal as their payment mechanism, and click submit. That
puts their order into the cue to be produced in the future.
And the company -- at the beginning the company
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
60
would have received that money in fairly short order. Later
on in the relationship, when the complaints level increased,
PayPal stopped allowing the company to draw money from the
company's PayPal account.
Q. And that's where I want to go next. Let's talk about,
we've heard some discussion about money being frozen with
PayPal. Can you talk a little bit about what it means to have
a frozen account with PayPal?
A. Sure. In the same way that an insurance company collects
premiums from a lot of people and expects to have claims, but
not claims from a hundred percent of those people, the
insurance company holds a portion of all the money that it
collected as a reserve for claims, and the rest of that money
is available to pay their expenses and hire people and
dividends to their shareholders.
PayPal works more or less the same way. They
collect payments from everybody who is paying, ordering from a
particular company. And generally they hold back a portion of
those funds and release the rest to the company for whatever
purposes the company chooses to use the money.
Once the volume of complaints had risen to a point
that it was getting higher level management attention at
PayPal, PayPal decided to start holding a hundred percent of
the money, not a lesser percent of the money. So they froze
the account in a sense that Butterfly could not draw from the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
61
account. But at that time new orders could be placed using
PayPal so the amount in that account could continue to -- to
grow.
At a later point in time PayPal removed the
company's ability to -- to take large orders using PayPal, and
then about a month after that they said you can no longer take
any orders using PayPal.
Q. So, in essence, then, you had this pile of money that was
sitting with PayPal; correct?
A. That's correct.
Q. Okay. And because the company was not able to access that
money, there was probably some conversation that occurred
between Butterfly Labs and PayPal; would that -- would that be
fair to say?
A. Yes.
Q. And when you came to work for Butterfly Labs, that was one
of the first issues that you probably dealt with?
A. In -- in late August PayPal had limited the dollar amount
of an order that could be placed using PayPal. I started
beginning of September. September 20th PayPal cut off all new
orders from the company. Their concern was that the amount of
money they were holding and the amount of orders that needed
to be satisfied was imbalanced, and they therefore wanted to
hold a hundred percent of the money that they had. So this
was my first and primary activity with the company.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
62
Q. Tell us what you did to look into what could be done.
A. So the company had begun shipping products in late April,
but the production volume was very slow. Very small in April,
May and June. Actually in June and July they started shipping
a bit more product. By September the production line, the
supply of parts, the assembly process was getting resolved to
the point where the production volumes were coming up.
So I spoke to our PayPal account manager. The way
PayPal works, you know, they have thousands of companies that
take PayPal, if not 10s of thousands. You get -- if you're a
company who uses PayPal, if you have a question you call like
a call center and you talk to someone. If you're a
significant customer, in the top one or two percent in terms
of charged volume with PayPal, you get assigned an individual
account manager, who's your primary point of contact.
Butterfly Labs has that qualification. They're a one to two
percent charge.
We have an account manager. So I spoke to him and I
said, "Look. What are we -- what do we need to do?" The
situation at that point in time was that PayPal was holding
between 11 and $12 million. The account was frozen. And
Butterfly needed to satisfy about 16 or $17 million worth of
orders. So had a hundred percent of those orders come back
for refund, PayPal didn't have enough money. And that's what
they were worried about was that we're underreserved.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
63
What they said was, "Well, look. Either you got to
ship these people their product, or you need to refund them
their money." So what I did is created a report using our
online order system and our online shipping system that listed
every order that had been paid through PayPal, whether it had
been shipped or not. And for those that had been shipped what
was the shipping tracking number, so that we could match
orders placed and dollars paid against orders shipped and
dollars earned more or less.
At that point in time there were 23,000 PayPal
orders, of which about 2,000 had been shipped. About a
million and a half dollars out of 19 million total.
That's mid September. Every week after that I
updated that report so that we could show them progress
against reducing that backlog and lowering PayPal's exposure,
although there were 5 million more in orders than there was in
money held. So it took a while to get down to where that
backlog was -- was even with the amount they were holding. We
reached that point in about mid November.
After that, as we continued to ship -- and by this
time our shipping was between 1 and a half and $2 million a
week. After mid November once the backlog was below the
amount of the reserve, I said to them, "Okay. Look. Your
exposure is less than a hundred percent. You need to start
releasing part of this money." And they worked with us
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
64
cooperatively to release -- there wasn't a hard and fast rule.
But generally if we shipped a million and a half dollars, I
asked them to release a million dollars out of the reserve.
So that's what brought the account down by mid December, to
about 7 million held versus the 11 million that they initially
had it at.
Q. Where is that -- and so now this is probably about a month
later. Where are we on that number now?
A. So there are actually three ways to satisfy an order. One
is to refund the individual, the second is to ship the goods,
the third is that some people decided, the company's coming
out with a new line of this product similar, same function,
but a different form factor, a different shape. Some people
chose to transfer their order for that equipment to an order
for the new equipment. That equipment is not due to be
shipped until March or April.
So where we stand today is out of that 19 million,
about a million and a half has transferred into future product
orders. All but about $2500 of the remainder has either been
shipped or refunded. So the remaining amount that PayPal
needs to hold is the million and a half for the future orders,
plus about $2500.
As of last Friday PayPal was holding $6 million. I
sent them the report that showed where we were at that point
in time. At that point in time it was the million and a half
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
65
plus a hundred thousand of backlog. So they were holding 6
million against a little more than a million and a half. They
immediately released $3 million to us as of last Friday. So
today they are holding 3 million against a million and a half,
and I've requested that they release that other 1.5 million.
Because at this point, they certainly don't need more than a
hundred percent.
I would add that the total refunds that we've made
related to PayPal, out of $19 million we've refunded $1.5
million. 1,550,000.
Q. And those are to customers, though, the refund to
customers who had an issue with the supply at some point in
time?
A. That's right. It was -- I mean, all of it was refunds to
customers for, you know, a variety of reasons. But generally
people were unhappy with the amount of time they had to wait.
Now some of these were refunds. When you use
PayPal, as a vendor, PayPal can elect to make a refund on your
behalf. They don't necessarily ask your permission. So, to a
large extent, those refunds would have been involuntary
refunds, but to some extent we would have gotten involved.
There's a difference between whether the person requests their
money back in -- within 10 days, or within 45 days, or beyond
45 days. At any rate, we've refunded about 8 percent of the
total volume of orders. So if you use that as a guideline,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
66
they should be holding about $150,000.
Q. Versus the three million?
A. Versus the three million.
Q. And has PayPal indicated to you in your discussions with
your account manager that they would like to do -- continue to
work with you not only on doing refunds, but maybe going
forward? Is there any indication that they want to
permanently bar you from doing business with them?
A. No indication of permanent barment. We are currently
suspended. They will not allow us to use PayPal for any new
orders. I have talked to them several times about how we can
get to the point of being able to use this. Because, look,
their customers are our customers. And we want to provide our
customers an easy way to pay for the company's products. So
as a convenience to our customers, we would certainly like to
use PayPal.
Where we stand with them today is that, you know,
the -- the issue of the complaints, the bad press that we've
gotten they have currently suspended the account. As I
mentioned earlier we haven't been able to produce full
financial statements for the complete 12 months of 2013.
They've requested that information. They've asked for tax
returns. We've provided them everything that's been created.
They need to do due diligence on any company, especially one
where they've had some exposure to be sure that the company's
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
67
financially viable. They have said that they are a hundred
percent willing to evaluate that information once we submit it
to them. But presently we are on hold.
Q. Is it fair to say that there is a level of transparency in
terms of providing financial statements and tax returns that
exists between Butterfly Labs and PayPal?
A. Absolutely. We've reported to them. With -- with respect
to the shipping and refund information we report on almost a
weekly basis. At this point the backlog's done, so I'm no
longer sending them weekly reports. We have provided them
everything that they asked for as soon as we were able to
produce it.
Q. And what would you calculate for all the products that
you've shipped, this $19 million worth of -- of product,
what's the rate of return on -- on the product that actually
goes out the door? Have you looked at that?
A. In -- in broad terms, about 2 percent. We had a
production meeting about a month ago to talk about, all right.
We're coming to the end of this product line's life. How many
spares do we need to create in case we get returns? And the
people in the room, which included, you know, marketing and
production and purchasing, shipping, the consensus, and it's
sort of anecdotal. I haven't studied the numbers, but the
consensus was if we produced two percent of what we had
shipped out and held those as backups or replacements, that
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
68
would be sufficient.
Q. To satisfy those who maybe had a problem with that order,
you know, it broke or whatever?
A. In terms of -- in terms of returns for, you know, quality
or -- or operation problems.
Q. Okay. Now, you've described a lot of communication with
PayPal. You've described having account managers. In all of
the time that you were working with your account managers at
PayPal, did you ever work with someone named Chad Williams?
A. No, I didn't.
Q. Okay. Was -- was Chad Williams ever on any documentation
that you ever received from PayPal?
A. No. When his name first came up I -- I knew I hadn't
dealt with him. I asked. We have one account manager who
deals with large accounts and we have a customer service
department which is about 10 or 12 people. They work with
PayPal. I asked the manager of that department and I heard
her ask the department, no one has ever had any interaction
with Chad Williams.
Q. Okay.
THE COURT: Now you're not saying Chad Williams
doesn't exist at PayPal, you're just saying the people you
dealt with haven't talked to Chad Williams? Or what are you
saying, I guess?
THE WITNESS: Well, Your Honor, that's -- that's
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
69
correct. In fact, I'm confident he does exist at PayPal
because I asked our account manager, whose name is Matt Popov
(phonetic), about Chad Williams, and he said, "Let me check."
And he came back to me and he said, "Yes, we have a Chad
Williams who's a asset protection investigator."
Q. Let's -- let's shift now to talk about some of the
financial issues that are associated with -- with Butterfly
Labs, and specifically I want to focus now on this issue of
taxable income versus cash flow. First, can you talk about
what the difference is between those two terms?
A. Sure. Taxable income is calculated under the IRS
regulations, which are dictated by Congressional tax law.
It -- it is used to calculate what the company or individual's
obligation to pay in taxes on their income or other activities
is. It is separate from financial reporting, which is
dictated by generally accepted accounting principles, and
those two are different from the actual cash flow to the
company, which is really, you know, at the end of a period of
time, do you have more or less cash? I would broaden that to
say, more or -- more assets than you started with or more
liabilities than you started with.
Q. Okay. And in terms of how Butterfly Labs has been
accounting for these types of taxable issues that come up in
the course of business and cash issues, have they been working
with an accounting firm to keep track of these things?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
70
A. Yes, they have.
Q. What's the name of that accounting firm?
A. It's a rel -- it's a long name, but it starts with
MarksNelson, and that's how we referred to them. That's how I
know them is MarksNelson.
Q. Okay. And have you had a chance to work with MarksNelson
on -- on tax issues related to the company since you've
arrived?
A. I have, starting with the 2012 tax return.
Q. And have you been satisfied, at least in your, you know,
limited exposure here, with the disclosures that -- that
Butterfly Labs as a company has been making to the accountants
as to how they should characterize income and -- and
characterize the books?
A. Can you repeat?
Q. I'm sorry. In your experience, have you so far with the
company, have you been comfortable with the amount of
information that -- that you were providing to MarksNelson?
A. Certainly.
Q. Would you say that you are holding something back from
them as far as what needs to be disclosed?
A. Not on my watch.
Q. Okay. So when we talk about the concept of -- of cash,
how does a business view its importance in terms of its
day-to-day operations?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
71
A. Well, the company has no lines of credit, no debt
facility. It has -- the company has no means of financing its
operations, other than through internally generated profits at
this point. While they're -- the total capitalization of the
company at the beginning was $10,000. And, in fact, that
$10,000, you know, it's not much when you're doing $20 million
of revenue and having to pay the people and buy the components
it takes to do that.
So for a company like Butterfly, or specifically
Butterfly, cash flow is crucial.
Q. So I want to shift then in the concept of this idea of the
prepaid orders we've been talking a little bit about that
today. Tell us what your opinion is about the function of
prepaid orders in a start-up business like Butterfly Labs.
A. It is -- it's sort of viewed -- any sort of prepaid
business model from -- from an entrepreneurial's point of
view, from a point of view of operating a company, it's kind
of the ideal or holy grail sort of business model. It is a
way to finance the company that doesn't involve getting
outside investors. It doesn't mean putting in a huge amount
of your own capital. It -- it provides -- assuming you've
been able to price your product properly to allow for some
profit, it ensures that the company should be viable as long
as you can continue to produce and sell that product. So it's
a -- among the different methods of financing a business, it's
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
72
seen as probably the most desirable.
Q. And when a company receives preorders, are there
representations made to customers about wait times or -- or
anything associated with the production of the product?
A. Specifically at Butterfly Labs?
Q. At Butterfly.
A. Yes. I -- I didn't come to the company before September,
but my understanding in reviewing screen shots and talking
with company executives is that all along they have said to
people, you know, this is a preorder, preorder terms,
nonrefundable. Delivery of your product may take quite some
time, two months or longer. Essentially don't order the
product if you're not willing to wait the amount of time it
takes.
Q. And are you aware of efforts that Butterfly Labs made to
try to keep customers informed through its website about what
was happening with the process?
A. Yes. With this product, in particular, there was a delay
from the expected initial delivery date that caused the
company to have to say, this -- you know, we need to do some
rework on the product.
Once they had a handle on the redesign of their chip
or the -- the reengineering of the power that was being
consumed and the heat that the chip was producing, they put an
advisory on their website that said, Okay. We're -- you know,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
73
we're nearly at the point of producing at full scale. It's
still going to take a while. We have orders dating back
several months. So if you're in line, we're going to give you
an opportunity now to get out of line by taking a refund. Or
you can elect to stay in line for future delivery of this
product.
And then for people who ordered after that date,
when -- when you were ready to place your order, one of the
terms of sale, you had to check a box that said, essentially,
I acknowledge that this could be a multi-month delay and I do
choose to -- to stay in line for my product.
Q. So it sounds like there's some active communication going
on with PayPal, but it sounds also like there's some active
communication directly from Butterfly Labs to the customer
about what kinds of issues Butterfly Labs is facing with
respect to production?
A. Yes. For any customer with a paid order prior to May 1st,
they received an active outreach to them saying, you know, we
need you to reaffirm your order, or take a refund. And for
anyone who ordered after May 1st that showed as a pop-up on
their order screen.
Q. Did you ever have a customer support center in place at
Butterfly Labs? Was there ever anything like that put in
place?
A. There's a customer service department that operates in the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
74
headquarters, same place where we do the manufacturing.
Q. And would that customer service department also field
calls from -- from consumers about timing, expected delivery,
maybe complaints about the product itself?
A. Yes. Although I would say not phone calls, unlike a call
center. Everything with Butterfly, as is typical with a lot
of tech start-ups, is done via email. So the customer service
center received inbound emails. Very rarely was there an
actual phone call.
Q. Okay. Let's move now also to the issue of these
promissory loans, I'm sorry, the shareholder loans that were
-- were discussed. These were made obviously before you got
to the -- to the company. But have you had a chance to look
into that issue?
A. Yes, I have.
Q. What have you learned?
A. So they are on the books as shareholder loans. They're
not so much loans in the typical sense where you would go to a
bank and get $100,000 in one lump sum. They're what I would
characterize as advances. They're -- as opposed to someone
coming and saying, I want to buy something large and I need
a -- a -- a sum of money. This has been moneys advanced when
an executive has a credit card, and they use that credit card.
They are supposed to use it for company purposes. It's not
infrequent in a small company or a privately held company that
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
75
they use it for personal purposes as well.
It's actually a very effective mechanism from an
accounting point of view or an accounting department's point
of view to -- when the credit card statement comes in to look
at the charges on there, and anything that isn't clearly
business to put it into an account for the holder of the
credit card. That is a personal debt to the company. It --
it's a way, from CFO's point of view, to force people who
usually are too busy to pay attention to paperwork to sit down
and go through all these charges and say, this one's for this,
this one's for this. You then move those from that
shareholder advance account to business expense, or, it is a
personal expense and then it's something that the shareholder
needs to pay back to the company.
So what I learned is early on Sonny was -- in fact,
no one at the company was employed in the beginning. They
were all kind of set up as consultants. Sonny's pay was
essentially advanced as a shareholder advance. In the same
way if it was legally a partnership, you would have a partner
draw. They were working that way for the first few months.
That eventually got changed, got a payroll service, people
went on payroll, so those payroll advances. That stopped.
There were payments for a variety of different
things. There were payments for business items that got put
into that account, subsequently moved out. There are payments
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
76
for personal items that went into that account and stayed in
that account.
That practice has continued, but I would say it's a
lot cleaner now because before I started working with the
company, I said to Sonny, well, look, if I come to work with
you guys, one of the things that I think is important to do is
that we begin to operate like a more disciplined established
mature company, as opposed to some of the things that get done
in a start-up environment.
Q. And how is that shareholder either distribution or loan,
or when the company pays for it, treated as far as tax returns
are concerned for the individual and then also for the
company? That's probably a loaded question.
A. Actually --
Q. How should -- how should it be treated for an individual
on their tax return?
A. So for an individual, a loan is a loan. A loan is a
personal loan. So to the extent there's interest on the loan,
it's not deductible on an individual's tax return. So even
though the individual may owe the interest to the company, it
will not show up on the individual's tax return. It's not a
deductible item. For the company the interest is income to
the company and it's reported on the company's tax return.
The -- the moneys that are sitting in that account
are not deducted by the company from its taxes, because --
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
77
it's -- it's a loan to a shareholder. It's an asset as far as
the company is concerned. So it's not an expense and it's not
income other than the interest from the company's perspective.
On the individual side, it -- it really wouldn't show up on
the individual's taxes if it's in that account until they
repaid that. And then to the extent any of those expenditures
were tax deductible, it would show up on their tax return. I
will say largely those types of expenses are not tax
deductible.
Q. Okay.
THE COURT: We're going to take a recess. We've
been at this for about an hour and a half. We're going to
take a 10-minute recess.
MR. NASEEM: Thank you, Your Honor.
(Recess at 11:02 until 11:12 a.m.)
THE COURT: Mr. Bourne, we'd like you to retake the
witness stand, sir. Okay. Mr. Naseem, we'll wait on him.
Are you going to take over?
MR. MORRIS: I am not.
THE COURT: Okay.
MR. MORRIS: Mr. Naseem is using the restroom.
THE COURT: Okay.
MR. MORRIS: But I did want to inform the Court, I
have to go to a medical appointment.
THE COURT: Sure.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
78
MR. MORRIS: And if I leave --
THE COURT: That's fine.
MR. MORRIS: -- Mr. Naseem will be handling
everything from here out.
THE COURT: Sure.
MR. MORRIS: But if I get up and depart, it is not a
reflection on the Court or anyone else.
THE COURT: We enjoyed working with you.
At around 11:45, 11:50, if we're still going, I will
have to go.
THE COURT: Yes, sir.
MR. MORRIS: Thank you, Judge.
THE COURT: Thank you.
All right. Mr. Naseem, if you would please
continue, sir.
MR. NASEEM: Yes, sir.
Q. Mr. Bourne, we were talking about what appears on the tax
return as it relates to the -- to the shareholder loans. I
want to continue on with the other investigation that you did
in regard to any documentation that may have existed for those
loans. What were you able to find?
A. So they're -- the company had a controller. I'm not sure
when she started, but she left the company in late May or
early June of 2013. I was able to find in her files from
March, there was an email to the shareholders who had loans
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
79
from the company that had a form of a note attached. This was
mid March. She advised that, you know, we need to get these
loans documented. Here's a form of note. Take a look at this
and get it signed.
The next day there was a follow-up email from her
saying, well, there was some concerns about the wording of
that draft note, so don't sign what she had sent out. There
was also a second version of that note that was clearly a -- a
much better effort at putting together a formal promissory
note. However, I could not find any signed version of those
notes. So it appears there was discussion and, in fact, what
I heard from one of the other people there told me that they
had intended to run it by the attorneys to get approval on the
form of note. But it doesn't look like that ever got
finalized. So there was an effort in March, but it doesn't
look like it ever resulted in a signed note.
Q. What efforts are being taken now by the company to make
sure that that is fully accounted for and documented?
A. I've asked our corporate external counsel at Polsinelli to
draft a form of note that we can use and put in place to
document the existing loans and anything that -- that exists
going forward.
Q. Okay. What do you understand the market rate to be on
those loans as you go forward?
A. So under tax rules, there's a concept called the AFR,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
80
applicable federal rate. It's a rate that the IRS either
prescribes or approves as the minimum interest that must be
charged in order for this not to be a bargain loan. And that
AFR over the last few years, because interest rates generally
have been so low, that interest rate for 2012, the -- it
changes during the year. The blended rate for 2012 was 22
basis points or 0.22 percent.
Q. Okay.
THE COURT: And that's not considered a bargain
rate?
THE WITNESS: Not in today's economy.
THE COURT: Okay. Very interesting.
Q. Now, we've talked a lot about some of the changes that
have -- have been instituted since you have arrived. And it
sounds like some of the things that you have put in place are
designed to help the company run better; is that -- is that
fair to say?
A. Yes.
Q. Have you encountered any resistance from either Sonny or
any of the ownership about the things that you're putting in
place?
A. None whatsoever. In fact, it's -- it's -- it's kind of
good from a bean counter's point of view that people are
actually hungry for how should we be doing this? What will
help us operate in a better way? So I've -- I've -- they
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
81
engaged me to help them. They've been very open to all of the
suggestions that I've made as recommendations.
Q. And -- and they have done more, they have adopted those
and tried to help those be a part of what the company is
trying to do?
A. We -- I mean, we have a ways to go, but yes, they have
done that with -- I can't think of an exception. Anything
that I recommended we do has been done.
Q. Okay. I want to touch briefly on the -- the purchase of
the car and the house by the company. Are you aware of that?
A. I am.
Q. Okay. Let's -- let's talk about that. What is your
understanding about those two assets?
A. So the -- the Audi was purchased, I believe in May of
2012. The house, as was discussed earlier, was bought in
December of 2012.
Q. And how does the company, that perhaps is showing loss on
its tax return, buy a house or a car?
A. So we talked about the prepaid sales model earlier where
you get cash in advance of delivering on whatever the promised
product is. So the actual cash available comes from those
presales.
It would -- it would certainly be unwise to spend
all of that money that you collected, because you have to pay
payroll and you have to buy parts and you have to pay your
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
82
taxes, et cetera. But to the extent you can estimate the
profitable portion that will be retained out of that, you can
use that for any sort of company expenditure. So the
financing of it is through the presale order.
The -- the reasons behind buying it typically a
small privately held company will buy assets that they think
are going to reduce costs in other areas. For example, you
know, if I have to fly all the time, I'm spending a lot of
money on commercial airline tickets, the company may end up
buying an airplane so that they don't have to put executives
on commercial airlines. Similarly with cars versus renting a
car or housing versus putting people into hotels.
Q. And is that your understanding about what the company has
done with those particular assets?
A. To some extent. The car itself, you know, my
understanding is that this is not the first car that the
company has owned, and that the original car that the company
owned when customers came from out of town to visit the
facilities, the company loaned them the vehicle to use instead
of them having to rent a car. 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 -- the -- the
corporate residence.
Q. How does the company account for the assets on its tax
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
83
returns?
A. On its tax returns. So any owned asset under corporate
tax laws you have to -- you can expense what you paid, but
only over a long period of time. So an example, the car, over
a five-year period the company would be recording depreciation
on the car. Any maintenance, insurance, taxes, licenses is
also taken as an expense on the corporate tax return.
For the house, similarly, you depreciate it, but
it's over a much longer period. I think it's 27 and a half to
40 years. It's a long period of time for a building like
that.
Maintenance, taxes, that sort of thing, that would
be deducted on the corporate tax return.
Q. How is an individual to characterize the use and benefit
of those assets?
A. The -- the correct way to handle it is to attribute the
value of the use of that asset to the individual to the extent
that it was personal use. So if I have a company car and I
drive it 70 percent of the time for business and 30 percent of
the time for personal, 30 percent of the fair value of leasing
that car would be added to my compensation on my W-2 as a
taxable item.
Q. And are those numbers that we're talking about for the
company, are those numbers related to those as assets, are
those turned over to MarksNelson for their review and then
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
84
ultimate addition to the company's tax return?
A. Well, in this case we're talking about the individual's
tax return.
Q. Yeah. So -- I'm sorry. To go back to -- to go back to
MarksNelson and the company, and not the individual, but you
would expect that the company would turn over any information
related to -- to those assets to MarksNelson for inclusion on
the company tax return and the financials?
A. Yes. The car existed during 2012. I know that
MarksNelson received that information regarding the car. The
house was purchased in December of 2012. There was no --
there was no tax activity attributed to the house for the
three weeks it was owned in 2012. For 2013 I am personally
doing the value of the car and the value of renting the home,
both of those will be added to Mr. Vleisides's W-2.
Q. Okay. The final thing I want to touch -- well, actually,
one more thing beyond that. But the -- so Butterfly Labs has
grown tremendously in terms of its -- its gross revenue from
2013 -- I'm sorry, from 2012 to 2013; correct?
A. Yes.
Q. And we talked about the applicability of this particular
computer hardware beyond just mining applications. What are
some other uses of this hardware beyond just -- just Bitcoin?
A. So we -- the company was approached several months ago by
a major significant credit card company about the possibility
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
85
of using that hardware in validating credit card transactions
as either authentic or fraudulent. That company is currently
conducting testing using 12 of the company's suitcase-sized
machines, much large -- about eight times more powerful than
this one. So they're running a test on that, and if that
turns out, what my understanding, as of last week, is their
testing is going well. That would -- if they decide to adopt
this technology for validating all of their credit card
transactions, which I would say given the size of this company
would be 10s of millions if not hundreds of millions of
transactions a year, we would be looking at a multimillion
dollar order from them and the opportunity to then take that
product to other credit card companies as a whole new -- a
whole new market for this technology.
Q. For authenticating credit card transactions?
A. Correct.
Q. And on the preorder for testing purposes, how many
machines did they order?
A. They ordered 12 machines.
Q. And at a cost of how much per machine?
A. Twenty -- about 20,000 per machine.
Q. So that's a fairly substantial order for testing purposes?
A. It is. Now, I -- to be clear, because this is such a
potentially large new market for us, we have loaned them those
machines. They are to test with them and return those
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
86
machines. So this was not recorded as a sale.
Q. Okay. But they were built and processed here in Kansas
City with the idea that there could be some potential future
business with that credit card company?
A. Yes. That's right.
Q. Okay. Let's talk about any online retailers that -- that
are interested at all in -- in this product. We've talked
about Butterfly Labs' own website. Are you aware of any other
commercial -- larger commercial interest or consumer interest
in this product beyond just the website for Butterfly Labs?
A. Yes. There -- the first week of January there's an
annual -- there's an annual trade show in Las Vegas, the
Consumer Electronics Show, CES. It's -- it's the consumer
electronics trade show for the year.
Butterfly had a booth at CES this year. I was not
there, but, you know, appropriate company people were. And
apparently there was a lot of buzz around Bitcoin, and
Butterfly attracted a fair amount of attention. We had
inquiries after -- or during and after CES from at least three
well-known retail chains, Micro Center, TigerDirect and Fry's
Electronics. We have since engaged TigerDirect as a customer.
So we are supplying them with our hardware to advertise on
their website and sell to their customers. And we have a
meeting with Micro Center, I believe this week, and the Fry's
Electronics will come behind that. So there is a new retail
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
87
reseller channel.
Q. So the market is expanding beyond just the -- the
consumers that -- that wanted product, now you are able to
compete and supply larger commercial retailers with the
product as well?
A. That's the direction we're headed in, yes.
Q. Okay. The final thing I want to talk about is the -- the
issue of the lawsuits that were raised. I believe there were
-- there were two that was raised. One was in Johnson County
and one was filed in the District Court of Kansas. And I want
to ask you, to your knowledge, is the company handling these
lawsuits? I mean, were they aware of them before they just
came up today in -- in testimony?
A. The company is responding to those lawsuits.
Q. Okay. And who do they have engaged as a firm that is
working on those lawsuits?
A. Polsinelli, who serves as external counsel for the
company.
Q. Okay. So Polsinelli is actively engaged with handling
those lawsuits?
A. Actively engaged.
Q. Okay. And you also have played an active role in, I
guess, handling those lawsuits too?
A. I have.
Q. Okay. And to highlight a point that was made earlier, but
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
88
neither of those lawsuits personally names any company
individuals as -- as the basis for it is the company itself
that is being sued?
A. BF Labs, Inc. is the only named defendant in the suit.
Q. Okay. In both suits; correct?
A. In each suit. Correct.
Q. Okay.
MR. NASEEM: I have no further questions, Your
Honor.
THE COURT: Thank you, Mr. Naseem.
Ms. Mahoney?
CROSS-EXAMINATION
BY MS. MAHONEY:
Q. So just on this lawsuit thing, there was a default
judgment; right?
A. There was.
Q. So that's -- that's not an active involvement; is it?
A. That Pols -- so there is default judgment. And Polsinelli
has filed a -- let me think about this for a minute. Because
not being an attorney I have to think about the difference
between the two. One has a default judgment in place, the
other has filed for a default judgment. Polsinelli is filing
an opposition to the request for default judgment in the
Meissner case. On the Lolli case, Polsinelli is actively
involved in settlement negotiations.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
89
Q. Okay. Now, you talked about how somebody should
characterize personal use of company assets. And this car was
bought in, you know, May or thereabouts of 2012. Was that
characterized as personal income to Mr. Vleisides on his 2012
tax return?
A. On -- so the -- the proper way, yes, it was. Although it
was not handled the preferred way from a tax reporting
standpoint. It should have been reported as part of his W-2
income as additional wages. The way that the former
controller handled it is that she used a 1099 miscellaneous
form, which is a self-employment form.
So they reported the value of what Mr. Vleisides
received and he reported it on his return. It was reported as
self employment income, not as wages from the company.
Q. And has the company as assets that it has bought to
improve its profitability bought houses for other employees?
A. It has not bought houses for any other employee.
Q. Okay. You said that you had asked Polsinelli to draft
notes to document the shareholder loans. When did you ask
them to do that?
A. About a week ago, probably.
Q. Okay. And you understand that Ms. Pierce asked for that
information in September of 2013 when you came in?
A. I'm not aware of that.
Q. Okay. And so in both circumstances, of the house and the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
90
loan, it was customers' money that went to Mr. Vleisides
buying his house that he lives in, and to loan him and other
shareholders money; right? Because of this prepaid model?
A. It was certainly money that customers deposited, you know,
with the company to purchase their products. I'm not entirely
sure at which point legal entitlement to the money passes from
the customer to the -- to the company. But the -- the money
that any company uses, if it's not borrowed or put in by
investors comes from its customers. In this case it all came
from the customers.
Q. And you called it also advance pay?
A. I -- advances of salary, draws, payroll draws early on.
By the end of 2012 what they had done is in the beginning as
each draw was made it was added to the amount of the loan. At
the end of the year it was deducted from the loan and moved
over into salaries and wages. So by the end of 2012 no part
of the loan reflected the wages part of what had been advanced
to Mr. Vleisides.
Q. Well, it kind of sounds like what happened, from your
description, was that these shareholders were using company
credit cards and making personal purchases and then they just
turned into loans? They were turned into loans at some point?
A. To some extent I would say that's correct. The company --
the company credit cards were used for both personal and
business purposes, and the personal portion was shown as an
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
91
advance that would be -- need to be repaid by the shareholder.
Q. Now, should people who have company credit cards use them
for personal expenses?
A. They should not.
Q. All right. And so does that continue on, do you know,
by -- by Mr. Vleisides?
A. I -- I will say that it probably has continued.
Q. All right. Are there other employees, in particular
Mr. Vleisides' mother, who has a company credit card that
makes personal purchases on?
A. There are other company emp -- there are other company
employees who -- you know, the only one I've looked at closely
is Mr. Vleisides because of this issue. There are other
company employees who have company credit cards. I do not
know whether Mr. Vleisides' mother has a company credit card.
Q. Did you prepare the 2012 financial statements or tax
returns?
A. I reviewed the 2012 tax returns that were prepared by
MarksNelson. And I did not produce or review, other than for
informational purposes, the 2012 financial statements.
Q. So having worked for this company for only approximately
four months, you have not prepared any financial statements or
tax returns for -- for anybody involved here?
A. So I've prepared -- prepared. MarksNelson is contracted
to do the external accounting. Because the company lost its
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
92
controller they turned to an outside firm to do the -- the
reporting.
MarksNelson produced reports for the first quarter
of 2013. I reviewed those in detail. 2012 they, I believe,
were prepared by the company, and then MarksNelson reviewed
those. I also reviewed them, but I did not have a hand in
preparing them. And as far as Mr. Vleisides' personal tax
return, I did not have a hand in preparing that.
Q. Are you familiar with bank accounts of the company?
A. Generally, yes.
Q. How many bank accounts do they have at BMO?
A. Two that I'm completely aware of. I'm not -- I don't
think there are others after -- beyond that.
Q. How many employees have use of the company credit card?
A. There were formerly American Express cards, now we use
Diners Club cards. There are either five or six outstanding
cards.
Q. And who checks on whether the -- those people use them for
personal expenses?
A. We have a staff accountant who processes the charges and
makes the first cut at determining whether something looks
like business or personal, and then I review it after that.
Q. The Monarch BPU was said to begin shipping at the end of
2013. Has that happened?
A. No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
93
Q. And finally, the shareholder loans were represented to be
based on future profitability. How is that accounted for?
Isn't future profitability pretty speculative?
A. So in the -- nothing that I have seen in the company's
records says it's future profitability. The notes from the
prior controller didn't refer to what they were anticipating.
In a pre-sales type of model, if you know that you're selling
something for a thousand dollars and it's going to cost you
$300 to create it and a hundred dollars to advertise it and
another $100 for the people to put it together, you can expect
that you have about $500 of profitability built in there.
However, the way you account for it is all of that
is deferred into the future from a -- from a generally
accepted accounting principles' point of view you look at a
completed transaction. So the fact that I'd received your
order and your money, but I haven't delivered to you, I don't
have any sales revenue in that period. I don't have any sales
revenue until I deliver your product. And at that point I do
have sales revenue, I record the cost, and the profitability
of the actual realization of the profit.
So if I collect all of this money in 2012 and I
don't deliver until 2013, 2012 reflects nothing other than the
cash and a liability to deliver the product. 2013 will show
all of the revenue and all of the cost and all of the
profitability, but no cash in flow.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
94
Q. And these were made in 2012; is that right?
A. The loans were in 2012 and in 2013.
Q. All right. And 2012 was when there were a lot of shipping
problems and basically all liabilities for this company?
A. For this product, yes. They had an earlier version -- an
earlier generation of product that did ship in 2012.
Q. And, in fact, the company reported losses on both the
financial statement and tax return?
A. That's correct.
MS. MAHONEY: No further.
THE COURT: I have a couple questions that will give
you a chance to -- to follow-up, if you need to. One moment,
please.
EXAMINATION
BY THE COURT:
Q. You testified earlier -- I want to make sure I understand
this, Mr. Bourne. I thought you said they have manufactured
and shipped all the products in the backlog and they now have
60 employees. It was in the context of your discussion of
they went to 110 employees to 60 and you made the statement, I
thought, that they have now manufactured and shipped all the
products within the backlog. Is that -- is that -- did I get
that right?
A. You did with the exception of three to five orders, which
haven't. I mean, they total $2500 in those orders have not
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
95
been done.
Q. Oh, okay. So -- and that's part of your -- your work with
PayPal is they shouldn't have any -- there shouldn't be
millions of dollars with PayPal; right?
A. That's right.
Q. But there is; right?
A. There still is $3 million in PayPal.
Q. Okay. One moment, please. Now, you also described -- you
testified that there's two ways is PayPal works. One way is
going to the company website, and -- and when you decide to
pay for a product you press the PayPal button, I guess. You
said the other way is that PayPal escrows this amount. Do you
remember talking about that?
A. I -- I do, although that's not a separate method of
payment. That's what happens to the funds after you elect to
push that button.
Q. That's my -- that's my question. So it's not like
Butterfly Labs went to PayPal and says, hey, we would like to
select this alternative way where you escrow the money and
it's a pre -- it's a prearranged agreement. This escrow is --
I understand maybe that's how PayPal makes money off the
interest of this to some degree, but it's usually not an
escrow -- it's an involuntary escrow of sorts it looks like in
this case because I'm sure Butterfly Labs wanted their money,
but there was a lot of problems related to that; right?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
96
A. Yes, sir. If I go back to --
Q. Sure.
A. -- what I had said earlier. We've ended up refunding
about eight percent of the actual purchases.
Q. Sure. But I guess my question is, this isn't some
prearranged agreement between Butterfly Labs and PayPal that
they'd escrow this money, this was a default procedure that
PayPal had in place to protect themselves and the consumer; is
that fair?
A. Yes, sir.
Q. So basically there's really one way. I don't want to
argue with you because I fuss at lawyers for argument. But
isn't there really one way how PayPal's intended to work and
it's where you press the button and you pay them and you get
your stuff; right? The default is if you don't get your stuff
and you complain, PayPal freezes it and that becomes an escrow
if it doesn't -- everything else doesn't work out correctly;
is that a fair way to characterize that?
A. Out of -- out of a hundred percent of the orders that
PayPal receives in, they're going to -- they're going to hold
back 10 to 15 percent of the money as a reserve against
expected refund requests.
Q. Okay.
A. That's typical. That would be the normal way to do it.
As the volume of complaints rises, and the financial exposure
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
97
grows, more and more moneys flowing through, PayPal, in its
own defense and protecting consumer, I'm not sure whether I
would say arbitrarily but certainly unilaterally decided 10 to
15 percent holdback is not enough. We're going to hold a
hundred percent. So --
Q. And given the backlog, that's not unreasonable; right?
A. I --
Q. I mean, I don't want to put words in your mouth. Don't --
you don't have -- if that --
A. Well, Your Honor, as -- from an auditor's point of view,
you look at historical claims and you say, typically five to
twenty percent goes bad. Up to that number is reasonable, and
beyond that, from an auditor's point of view, you're
overreserved. Well, my position as a CFO is to say to PayPal,
you guys have been and remain overreserved.
Q. So when you report liabilities, you do -- you do -- I know
that there are a number of, like we talked about, there's the
methods we've used to report income tax, corporate income tax,
there's also different methodologies we use to calculate
assets and liabilities to get some sense of the financial
well-being of the company. But when you look at liabilities,
under the generally accepted accounting practices or
principles, this -- this money that you have, this is reported
as liabilities; is it not? Or this money that PayPal has,
because you owe -- you owe something here; right?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
98
A. Yes. That's right. Every dollar that comes in as cash is
initially posted to an account called prepaid sales. That
prepaid sales account shows up under the heading liabilities
for the company.
Q. What do you call lawsuits that are pending, pending
lawsuits, how do you report that?
A. You don't report that until there's a reasonably
quantifiable and -- it has to be a likely loss and the loss
has to be quantifiable. And at that point --
Q. Okay.
A. -- you would put it on as an expense and a liability.
Q. And but you didn't really prepare these financial
documents because you just came late to the game, so to speak;
is that fair?
A. Yes, sir.
Q. So you didn't really have to quantify or calculate
pursuant to these generally accepted accounting principles the
liabilities related to this PayPal issue; is that fair?
A. No. The PayPal issue is very straightforward. It -- the
way it was accounted for was the proper way to account for it.
Q. But you didn't do any of the financial reporting in that
regard?
A. I did not.
Q. Now, it would seem to me that this idea of undocumented
loans or advances is probably the worse way -- it gives
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
99
accountants nightmares is what keeps you guys up at night; is
that fair to say?
A. Yes, sir.
Q. Okay. And that's why you when you got there, you said,
hey, we've got to fix this. We've got to document this.
We've got to put this in writing because this -- it's scrutiny
from courts and the IRS and everybody else and investors,
everybody else involved; right?
A. I probably didn't say that as soon as I got there, but
once I became aware that this is an issue, then yes. I -- I
will say this is not atypical. It is typical that this
situation, because it's a privately held company.
Q. There are many inherent problems with this practice,
though?
A. Yes, there are.
Q. All right. One moment, please. So what accounts -- what
liabilities does Butterfly Labs have at present would you say?
A. We have -- in terms of dollar amount or type?
Q. Types. Types. Any -- any rough -- and, you know, rough
estimates related, if you could, please.
A. Sure. Again, we have not been able to accumulate all the
numbers for the 2013 reports yet. But, in general, the
largest liability that the company has remains for preorders
now, not of that version of the product, but the next version
of the product. So we've received moneys from customers,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
100
preorders for the next iterration of these products. That's
the largest liabilities on the books if we had our financial
statements current. And we probably, at this point, I'd say
that liability would be north of $10 million.
Q. Okay. And -- and, basically, what I got from your
testimony, you may have said this, this applicable federal
rate that -- that where corporations loan money to
shareholders or to principals in the corporation, this is not
uncommon in the corporate world; is that -- is that right or
is it uncommon?
A. In the private held small company world, shareholder loans
are very common. The same rate would be used if there was a
loan between two family members. It has to be an interest
bearing loan and the AFR is what's used. Loans between
related parties typically would use AFR. Small company loans
to shareholders are extremely common.
THE COURT: Very good. That's all the questions I
have. Mr. Naseem?
MR. NASEEM: Thank you, Judge.
REDIRECT EXAMINATION
BY MR. NASEEM:
Q. Mr. Bourne, I want to follow-up again on the PayPal issue.
Even though there were problems that had arisen with -- with
this money that was in escrow, did Butterfly Labs seek to
terminate the relationship with -- with PayPal?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
101
A. No. Not at all.
Q. And, in fact, would it be fair to say that they worked
extra hard to make sure that PayPal and the customers were --
were satisfied according to the terms that -- that PayPal had
set?
A. We did.
Q. Okay. And as a result of those efforts, you were able to
clear out the backlog and reduce the amount of reserve that
PayPal ultimately held; correct?
A. So far we've gotten $8 million out of the 11 back.
Q. Okay. And would it be fair to say that -- that Butterfly
Labs would like to continue to do business with PayPal?
A. Yes. We would.
Q. Okay. So even though you didn't have a chance to
negotiate the terms on the front side as to what the escrow
would look like, the terms were at least acceptable enough to
you that you would continue to do business with them?
A. Yes.
Q. I mean, the fact that they keep a larger reserve, I
understand, we've talked about that.
A. I have asked them what -- what under the terms of service
that they have with us gives them the right to retain the --
the level of reserve that they have. I have not gotten an
answer to that question.
Q. But those negotiations are typical in the type of business
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
102
arrangement with someone that is --
A. It's a fairly one sided relationship. They're huge and
we're not.
Q. Fair enough.
A. So we take the terms that they dictate.
Q. Okay. We talked about this Monarch BPU that has not yet
shipped. What is the Monarch BPU?
A. It's the next generation of this product. It's more in
the form of a card, about the size of your hand, that would --
it's kind of a plug and play type of component if you're
building computer hardware. So it's a more powerful version
of -- of this that will be coming out soon.
Q. Okay. And, you know, as far as where things are on the
process of getting that out the door, what -- where do things
stand, if you know?
A. The -- all of these products are based on this chip that I
was describing before. The -- the chip that's in this is
called a 65 nanometer chip. The chip in the new one is a 28
nanometer chip. Everything's shrinking. It's the more is
law. So you have to design the chip, and then you have to get
a firm that builds chips to actually build some prototypes
that you can test and see if they function the way that you
want them to. This process is multiple. I mean, it's many
months from design to initial manufacturing to testing to full
production.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
103
Where we are in it today is that the prototype chips
have been delivered to the lab that will do the testing on
those chips. So the testing process should take until, well,
the end of this week or maybe into next week. At that point
we'll know if the chip's functional as they designed, if they
live up to the engineering specifications. At that point
modifications will be made, if necessary. You have to
reprototype and then you go into production assuming the
reprototype works correctly.
Q. And similar to what we talked about before, is Butterfly
Labs keeping its customers apprised of its progress in that
regard?
A. Yes. I think, you know, we had a newsletter that was just
recently released to anyone who's ordered from us before
advising them of the status of the current product.
Q. Okay. So, in other words, they're not hiding from the
product, that they are trying to address it actively?
A. Yes.
Q. Okay. Let's go back and talk about the credit card
statements that are reviewed by the company. Is it fair to
say that there is a process by which credit cards, either by
the owners or by employees, is -- is reviewed?
A. There -- there's more of a process now than there was
before. And there's not enough of a process now to give me a
hundred percent comfort that we are where we should be.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
104
We're -- we're migrating from a very immature, loosely managed
company to a more mature professionally managed company.
Q. And I guess the larger point there is have you encountered
any resistance of any kind from either the employees or the
ownership about moving to a tighter more structured company?
A. No.
Q. Okay. And as it relates to loans, when we use that term,
and if there is something that is determined to be a personal
expense and gets put into this other bucket, personal expense
bucket, is the expectation that that would have to be paid
back at some point to the company?
A. Yes. Absolutely.
Q. Okay. So it's not like the company is just giving away
all its money to the extent that you can determine whether
something is a legitimate business expense or a personal
expense. The personal expense is accounted for as well and
then must ultimately be paid back to the company?
A. It's neither all of its money nor is it being given away
at all. It's being accumulated in an account that is -- it
says loans receivable. I have another client who does exactly
the same thing and it's called shareholder advance. It is
being accumulated in a bucket. The intent, given my review of
the former controller's emails, was that this would be paid
back out of eventual dividends.
Now the dividends are dependent on profitability.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
105
But the idea was in the future we'll have profits. It's to be
paid out of dividends. So the implication is that they were
expecting to be profitable in the future. In March of 2013
could they know that they have been profitable? By that time
they had received enough orders to where I think there would
be a pretty good indication that that's what they believed.
Q. And to some extent, I mean, when you engage in -- in
business, and especially something as advanced as this, I
mean, some of the calculations that are done by the company,
some of it is -- I mean, there is some speculation about what
future profitability may be, what the future demand may be,
all those types of things go into the business decisions that
get made?
A. Yes. And the longer you're in business the more history
you have to base those projections off of so the more reliable
they become. So at an early stage it's -- to some extent,
it's seat of the pants.
Q. But like you say, it's not uncommon?
A. No.
MR. NASEEM: Okay. Thank you. No further
questions, Your Honor.
THE COURT: Ms. Mahoney?
MS. MAHONEY: Just one.
RECROSS EXAMINATION
BY MS. MAHONEY:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
106
Q. Judge Kays asked you about the liabilities that they had
and you said the largest was the preorders?
A. Yes.
Q. And those are nonrefundable payments by customers?
A. That's right.
Q. And so when customers complain that they have not gotten
their product, and they say, I was told all sales are final or
that this was nonrefundable, those customers are right; aren't
they?
A. Yes. Those are the terms that are on the website.
MS. MAHONEY: Okay. That's all I have.
THE COURT: Thank you.
Mr. Naseem, any other evidence you'd like to
present, sir?
MR. NASEEM: No, Your Honor.
THE COURT: All right. Thank you, sir.
MR. NASEEM: I'll retrieve that.
THE COURT: Yes. So does the government have any
other evidence?
MS. MAHONEY: No, Your Honor.
THE COURT: Okay. That concludes the evidence.
Let me tell you what I think. Let's see. Get my
notes here. Mr. Vleisides, here's your problem. You are on
supervised release for fraud. So any time we get concerns
that, A, you're not completely forthcoming with all the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
107
information that we think you should be; and B, we've got $11
million in escrow that's being held based upon customer
complaints, you have a huge problem.
As far as the evidence, I -- I -- based on the
evidence I've heard at this point in time, I am going to find
that you are in violation of your probation in this way -- or
your supervised release, in that you did fail pursuant to the
special conditions of probation and supervised release, you
did fail to advise or seek permission from your probation
officer to apply for any loan or open any line of credit
without prior approval. That's clear. I don't think there's
any question about that. Whether or not we call it an advance
or a loan, you took money out. It lacked the transparency
that we expect based upon your conditions of supervis --
supervised release. So on that particular issue, the Court
will make a finding.
The other stuff is pretty close. It smells really
bad. And but I am not going to make a particular finding on
that. Yes, sir.
MR. NASEEM: Judge, can I be heard? Maybe I can --
THE COURT: No. No. I'm sorry.
MR. NASEEM: No.
THE COURT: I'm sorry. We're done with evidence and
I'm -- I'm going to rule here on this. So that's the
particular issue that you're stuck with today.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
108
Now, my job first is to calculate the guidelines.
This is a -- you are still a criminal history category I. The
guideline range is 3 to 9 months. The supervised release
range is custody and supervised release may not total more
than three years.
At this time, what is your recommendation?
MS. MAHONEY: Twenty-four months, Your Honor, of
continued supervision?
THE COURT: Twenty-four months of continued
supervision.
MS. MAHONEY: Right.
THE COURT: Now, Mr. Naseem, you may be heard as to
disposition, sir?
MR. NASEEM: Can I make final argument as to whether
it's appropriate to even place him on supervised -- or
continued supervised release?
THE COURT: Sure. Sure.
MR. NASEEM: Okay. Thank you, Judge. I think it
would be helpful to kind of break this down into two different
categories. One is, did a violation actually occur? Did
Mr. Vleisides --
THE COURT: And I've already said it did.
MR. NASEEM: Okay.
THE COURT: In your appellate brief you may argue
that. But I'm really done hearing argument about that part
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
109
right now.
MR. NASEEM: Okay. Well, then, let me turn then to
the time that's been imposed and whether it's actually then
appropriate.
THE COURT: Yes, sir.
MR. NASEEM: Okay. I think what you see here, Your
Honor, is -- is Mr. Vleisides being actually very transparent
with Ms. Pierce about what was going on with him and his
company. We have email exchanges that occur between the two.
There are numerous phone calls. The FBI gets to come out to
Butterfly Labs and talk to him and tour his facility.
Ms. Pierce testified that she went out there
multiple times. He has in person discussions with her. She
was allowed to any form that she requested he -- he was giving
her. So he was compliant, I think, in every way that would be
possible with the terms that were put before him. And to the
extent that Ms. Pierce did not understand what was happening,
I don't know that Mr. Vleisides would have been a mind reader
to know given the open lines of communication that she did not
understand something. If there was a question that she had
about something, he would expect that she would ask him, like
she had on so many other occasions.
Now, all these factors I think are proof positive
that he was doing what was necessary on supervised release.
And given where --
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
110
THE COURT: So you are going to argue for.
MR. NASEEM: No, no, no.
THE COURT: It sounds like you're arguing with --
MR. NASEEM: I'm going to transition, Your Honor.
THE COURT: You can do, but it's not going to help
you, I guess. You can --
MR. NASEEM: I'm going to transition to whether that
-- that term is appropriate.
But clearly then Butterfly Labs is developing and
growing. Mr. Vleisides has -- has been an active part of that
growth, and we heard the term mouthpiece I think may be used
negatively. But I think he is more of a champion in that
regard for building this business, trying to rebuild his life.
And if we put him on 24 months of supervised release, the
opportunities that were available to -- to Butterfly Labs to
move this -- this venture forward, this venture that rivals
some of the top tech companies in San Francisco. We are doing
business here in the midwest that San Francisco and the east
coast is doing.
If we put him on supervised release for 24 months,
we prohibit some of those opportunities. He is prevented from
-- from traveling as freely as he could, maybe some other
investment opportunities that would arise he may not be
allowed to participate in. Maybe other companies have certain
requirements about who they will do business with, and if he
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
111
is listed as an owner and has 24 months of supervised release,
those kinds of conditions may prohibit the growth, the future
growth of Butterfly Labs, which we've heard has been
tremendous.
In a time when there was economic downturn this
company was putting about 110 people to work. That's a lot of
people. That's a lot of families that are being fed. I don't
think we should limit the potential of Butterfly Labs by
imposing this additional condition of release of 24 months.
THE COURT: I have 110 -- 110 employees the company
peaked at is what I was thinking.
MR. NASEEM: Yes.
THE COURT: Did you just say 2500?
MR. NASEEM: No, no. 110 at its peak.
THE COURT: Okay.
MR. NASEEM: And 60 after getting the production out
the door.
THE COURT: Yes, sir.
MR. NASEEM: Yes, sir. But that's 110 families that
are -- that are relying upon Butterfly Labs to -- to remain
viable, to go forward. I think it's a good company, as you've
heard. And as you have seen they have put the right
leadership in place in the form of Mr. Bourne. Mr. Bourne has
come in and made significant changes. He has not been
resistant to that. Mr. Vleisides has not been resistant to
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
112
that at all. And I think if we impose 24 months of
supervision on him, we are -- we are making him take a step
back.
He has done all that he has done, having been -- I'm
not telling the Court anything the Court doesn't know. But
the odds of success after you have been convicted of a white
collar fraud and building up a company that now does revenue
in the millions again, it really defies a lot of the odds.
And so what he has done, along with the other ownership group,
has been really tremendous, Your Honor. And his -- it's a
benefit to all of Kansas City to have a company like that in
its midst.
If we prevent him from being able to travel and
to -- to do the things that are necessary to move the company
forward, we -- we take a chance that we cripple Butterfly Labs
in some way.
I would suggest, Your Honor, that six months of
additional supervision could be necessary, to the extent that
we have questions that have been raised here about what has
the company been doing, I think we've answered those today.
And if Ms. Pierce does not understand what is going on, or if
the government doesn't, then we can answer those questions as
easily as we did before in a six-month period. An additional
two years of supervision is not necessary to figure out what
the answer to these questions are.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
113
You've got a CFO who is well versed now in just his
four months about what the company's up to and can help
address any questions that -- that Ms. Pierce may have. If
the concern is truly that she did not understand what the
company was doing, I think we have that figured out, even in
the show cause hearing. But to the extent she needs some more
answers, he can provide those. And it doesn't have to be in a
two-year time period. Because sometimes, Your Honor, what
happens is that the amount of time that you have stretches to
fit the time given. So if we say we have two years to try to
figure out, that's what it will take. But if we say six
months then we can try to figure it out in six months. And
this company has been actively working to try to put all this
stuff together.
And so I think we could reasonably expect that with
six months of additional supervised release we can get all the
answers to the questions that the probation office needs.
THE COURT: Thank you.
MR. NASEEM: Thank you.
THE COURT: Would your client like to be heard? He
doesn't have to, but if he'd like to speak he may stand where
he's at.
MR. NASEEM: I don't know that there's anything more
that he wants to say.
THE COURT: Okay. You did a good job, Mr. Naseem.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
114
I don't think he needs to add anything to it, but he has a
right and I want to make sure he understands that right.
MR. NASEEM: Thank you, Your Honor.
THE COURT: All right. I like what your attorneys
did. I think they did a good job for you. But let me make
sure my findings are clear here. I don't think Ms. Pierce
misunderstood a thing. I think Ms. Pierce was crystal clear.
I think Mr. Vleisides was crystal clear. I think
Mr. Vleisides failed to give all the information that was
required of him. That's the basis of this violation.
In fact, Ms. Pierce, I'm going to direct you to add
any additional or suggest any additional conditions you think
that will help better monitor this unique business enterprise,
which Mr. Vleisides is involved in. I'll expect you, and I'll
impose those most likely if I find them to be appropriate.
And I'll expect Mr. Vleisides to respect those and demean
himself to the supervision of Ms. Pierce of this court.
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 quite honest with you, if it was, we'd
be talking about 24 months in prison. It's not -- I think
it's too close. I think 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 in this part,
you know, Mr. Vleisides, as we say here at the courthouse, you
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
115
need to get your toothbrush and get your things in order,
because fraud will not be tolerated, you understand that? So
I would work very hard to make these consumers happy consumers
who you've dealt with.
Now, I do believe that a continued term of
supervised release is important. So we're not going to lock
you up today based on this al -- violation.
Today it is pursuant to the Sentencing Reform Act of
1984, it is the judgment and sentence of this Court, based
upon his violation of supervised release, that Sonny C.
Vleisides is hereby placed on supervised release for an
additional term of two years. While on supervised release the
defendant shall comply with all the conditions previously
imposed in the original judgment dated September 15th, 2010.
Further, the defendant shall abide by the following
addition -- additional conditions. The defendant shall submit
his person, his property, house, residence, office, vehicle,
papers, computer, other electronic communication or data,
storage devices or media and effects to a search at any time
conducted by a U.S. probation officer at a reasonable time in
a reasonable manner, based upon reasonable suspicion of
contraband or evidence of a violation of a condition of
release.
Failure to submit to a search may be grounds for
revocation. The defendant shall warn any other residents that
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
116
his premises may be subject to searches pursuant to this
condition.
The defendant shall file a personal and business tax
returns as required by law and provide the probation officer
with copies of all tax documents as directed by the probation
officer.
As I said earlier, Ms. Pierce is going to make some
proposed suggestions to the Court related to how we can better
supervise you, Mr. Vleisides, and make sure that we have
transparence in that supervision. Your job is to make sure
that she understands everything, and this -- this business
about her not understanding, I don't buy it. Your job is 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 -- I know you're calling
it -- we're calling it an advance today, but I find it's a
loan, so we're clear on that part as well.
You have 14 days to appeal this decision.
I hope this is successful for you, Mr. Vleisides.
I'm -- I'm pulling for you. I hope Butterfly Labs is a
legitimate company that enjoys success. But there's a smell,
and that's what I'm addressing today.
Ms. Mahoney, what did I leave out?
MS. MAHONEY: Nothing, Your Honor. Thank you.
THE COURT: All right. Mr. Naseem, anything else?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
117
MR. NASEEM: No, Your Honor. Thank you.
THE COURT: All right. Good luck to you,
Mr. Vleisides. That will conclude this case.
(Proceedings concluded at 12:09 p.m.)
C E R T I F I C A T E
I CERTIFY THAT THE FOREGOING IS A CORRECT TRANSCRIPT FROM
THE RECORD OF PROCEEDINGS IN THE ABOVE-ENTITLED MATTER.
/s/Regina A. McBride, RDR, CRR March 5, 2014REGINA A. MCBRIDE, RDR, CRR DATEOfficial Court Reporter