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] UNITED STATES DISTRICT COURT WESTERN DISTRICT OF MISSOURI WESTERN DIVISION UNITED STATES OF AMERICA, Plaintiff, VS. SONNY CHRIS VLEISIDES, Defendant. ) ) ) ) ) ) ) ) ) Case No. 4:11-CR-00125-DKG-1
***************************************** TRANSCRIPT OF SHOW CAUSE HEARING BEFORE GREG KAYS UNITED STATES DISTRICT JUDGE ***************************************** APPEARANCES: For United States: Kathleen D. Mahoney U.S. Attorney's Office 400 East 9th Street Suite 5510 Kansas City, Missouri 64106 Jeffrey D. Morris Shazzie Naseem Berkowitz, Oliver, Williams, Shaw & Eisenbrandt, LLP 2600 Grand Boulevard Suite 1200 Kansas City, Missouri 64108
Regina A. McBride, RDR, CRR Official Court Reporter 400 East 9th Street, Room 8652 Kansas City, MO 64106 816.512.5623 Proceedings recorded by mechanical stenography, transcript produced by computer.
2 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 I N D E X Reporter Certificate - Page 22 WITNESSES: COURTNEY PIERCE Direct Examination by Ms. Mahoney - Page 5 Cross-Examination by Mr. Morris - Page 18
3 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 (Begin proceedings in open court at 2:03 p.m.) THE COURT: Calling Case 11-125-01, United States of
America versus Sonny Chris, is it Vleisides? THE DEFENDANT: THE COURT: Vleisides. Mr. Vleisides appears here
Vleisides.
today with his attorneys, Mr. Shazzie Naseem. Nice to see you again, Mr. Naseem. MR. NASEEM: THE COURT: MR. MORRIS: THE COURT: Good morning, Your Honor. And also attorney Mr. Jeff Morris. Good afternoon, Your Honor. Good afternoon, sir.
Also appearing today is Assistant United States Attorney, Kathleen Mahoney, and United States probation officer, Ms. Courtney Pierce. Welcome to all of you.
This cased is called today for a hearing related to a violation report filed September 3rd, 2013. And so this
Court is going to conduct a hearing to determine whether or not Mr. Vleisides is in violation of his supervised release. Mr. -- who will -- who's leading the charge here for Mr. Vleisides? Mr. Naseem or Mr. Morris? Your Honor, I will. Yes, sir. Jeff Morris. Mr. Morris, would you like us to
4 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 Pierce. THE COURT: Ms. Pierce, would you please come evidence? MS. MAHONEY: Yes, Your Honor. Call Courtney violation report, sir? MR. MORRIS: the formal allegations. Your Honor, we'll waive a reading of We've been through that report a
number of times with Mr. Vleisides and the Court is aware that we filed an opposition as well as a supplemental pleading today. THE COURT: Yes, sir. I have reviewed all the
filings in this case, including the filing today, which is document 23. I've reviewed all that. Ms. Mahoney, do you wish to present
forward, face our clerk, and raise your right hand and be sworn? COURTNEY PIERCE, GOVERNMENT WITNESS, SWORN THE COURT: And Ms. Pierce, if you'll come forward Good
and sit over here in the witness chair, please. afternoon, Ms. Pierce. THE WITNESS: THE COURT: Hello. Good afternoon.
full name and spelling your last name for us? THE WITNESS: P-I-E-R-C-E. Yes. It's Courtney Pierce.
5 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 BY MS. MAHONEY: Q. Ms. Pierce, how long have you been supervising THE COURT: Thank you, Ms. Pierce.
Mr. Vleisides? A. I have been supervising him throughout the duration of the
supervision of September 2010 is when it began. Q. And it was transferred here from the Central District of
California? A. Q. Yes, ma'am. All right. And so that was in 2010 that it was
transferred here? A. He actually immediately came here, because this is where It was eventually transferred here --
-- to our jurisdiction. And you have been the officer on the case for that
duration then? A. Q. Yes. All right. Let me ask you about a -- Mr. Vleisides has a
company called Butterfly Labs of which he is a partial owner; is that right? A. Q. Yes. And is that his primary source of income that you are
6 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 A. aware of? A. Q. Yes, ma'am. All right. And have you talked to somebody at PayPal
about complaints involving that company? A. Yes, ma'am. Chad Williams, who is -- he's in global asset
protection there. Q. And could you tell Judge Kays something about that
discussion and what PayPal has said and what their reaction to it is? A. PayPal is basically a third party vendor, is the best I
can explain it, where customers can make transactions without giving up their credit card number to different merchants. spoke to Chad Williams this morning. THE COURT: He re -I
THE WITNESS:
the past year that PayPal has had a number of complaints regarding materials purchased by Butterfly -- from Butterfly Labs to the point where PayPal froze the account that is used by Butterfly Labs. Reported that they're a huge risk to the
company because the way that they're doing business with preorders gets outside of PayPal's protection. PayPal
are coming in months later from people who had purchased equipment from Butterfly Labs. account in September 2013. They originally froze the
approximately $11 million in -- in the account. THE COURT: There's 11 -- they have $11 million
frozen in that account? THE WITNESS: At that time they did. Now he said
that they can only freeze it for so long, and slowly they are releasing money to -- so that Butterfly Labs can access it. As of today there's approximately 7 million, because as PayPal releases the money Butterfly Labs comes and is able to take it out of their account. THE COURT: Okay. I have a couple questions about
that account? THE WITNESS: THE COURT: access that account? Yes, sir.
And so Butterfly Labs -- how do they Do they -- is it because the 45 days has
ran, or does Butterfly Labs say, hey, listen, we made customer John Doe -- we've satisfied him, and so we want to release that money that John Doe paid in? THE WITNESS: Yes. Or how does that work?
Now the 45 days that is not relevant to the releasing of the money.
8 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 Q. Today? Q. Okay. in later. THE COURT: Okay. The 45 days is the customer window to
THE WITNESS:
-- for eBay -- or PayPal to protect their money. THE COURT: To complain? Yes. But these complaints were coming
THE WITNESS:
that they've been in contact with someone at Butterfly Labs, and as they make the customers whole PayPal is releasing the money. THE COURT: the customers whole? Did they suggest to you how they make Is it a refund of money? He was not aware. I'm sorry. What is it?
Okay.
recommended revocation or extension of supervision in September, and you spoke with Mr. Williams today. Have the
complaints continued or have they been resolved since September? A. He said that the complaints have continued to come in. He
specifically noted that, at the time we talked, which was 10:30 this morning, three complaints had come in regarding Butterfly. THE COURT: Three additional complaints? Yes.
THE WITNESS:
been a total of over 6,000 complaints, and between November 11th and today, it was more than 200. come in. Q. And what is PayPal's course of action that they are going You talked about the freezing of So they continue to
Labs in the future? A. No. Butterfly Labs is permanently barred from accepting
PayPal as payment for their products. Q. A. Why is that? He said that it's too risky. It poses a risk to them,
PayPal, and they're just not willing to -- to take it. Q. Is that because of this model of this preorder without
shipping date and -A. Q. That coupled with the volume of complaints. Okay. Now, when this hearing was set over the last time,
and the parties had agreed that we would set it over in an attempt to resolve it. And you had requested some documents
from Mr. Vleisides and had asked some questions through his attorney; is that right? A. Q. Yes, ma'am. All right. And I believe that list of questions and the
documents sought were attached to the suggestions filed today by Mr. Vleisides' attorneys. Did you receive a -- what had
10 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 been a recently filed tax return from 2012 of Mr. Vleisides? A. Q. Yes, I did. Okay. And did those tax returns, both the personal and
business, reflect that Mr. Vleisides had made approximately $26,000 a year or something like that? A. Q. Yes, ma'am. And yet he had lived in what you described as a very nice
house and drove a nice car; was that correct? A. Q. Yes. All right. So how -- how was the car and the house and
the furnishings of the house provided? A. They were all company provided. The -- the residence, I
believe, is valued at approximately $380,000, along with the furnishings and the car. Q. Okay. So the company bought Mr. Vleisides's house, car
and furnishings? A. Q. A. Q. A. That is my understanding. And they own it? Yes. Are you aware of anybody else using these except him? My belief is that Mr. Vleisides is the sole occupant. He
has reported to me in the past that if business partners come into town that they may stay there -Q. A. Okay. -- on overnights.
that as his personal income? A. Q. I do not believe so, no. And the business sustained a loss, was that right, in
2012? A. Q. A. Yes. According to their own tax return and financial statement? Yes. I believe the tax return company loss was around
$800,000. Q. Okay. And is that another concern that you had was the
financial statement versus the tax return? A. Yes. Mr. Vleisides provides periodic financial statements
to me, and the one he provided -- the last one he provided regarding the company loss I believe he reported it at approximately $140,000. Q. A. Q. And what did the loss amount reflect for the tax return? $863,000. And are -- do you understand why there's that large
discrepancy -A. Q. A. Q. I do not. -- over $600,000? I do not. Okay. Were you also made aware that the company, although
12 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 Q. A. Q. A. Q. A. Q. And -- and Mr. Vleisides is one of those shareholders? Yes, ma'am. And did you ask for documentation on that? On the loan? Right. I do not believe there was any documentation available. So -- and the loans were -- when were those made, if you
Yes, ma'am. All right. And what was the reason given of loaning money
to shareholders? A. Q. I believe it was based on future profitability. Okay. So the company was losing money and yet loaning
money to its shareholder at future profitability? A. Q. That is my understanding. Okay. And this was during the time where they had these
thousands and thousands of complaints? A. Q. A. Q. Yes. Through just one vendor? Uh-huh. Or one payment acceptance. What is your understanding on
13 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 business. Q. A. Q. Was it less than one percent? Yes. Okay. And, again, was this declared as income on
Mr. Vleisides' tax returns? A. No. And on his financial statements he provided to me, I
do not recall ever seeing where he received $65,000. Q. Okay. So he's supposed to report to you because he's on
supervision for financial crimes; is that right? A. Q. Yes. Okay. Yes. So he was supposed to report to you whether he
received loans? A. Well, I periodically ask for documents where it would have
been included. Q. And you -THE COURT: supervised release. So we're clear, there's a condition of What condition is that where he has to
provide some transparency as to his financial dealings? THE WITNESS: Well, especially as related to I'll
get the exact for you. THE COURT: And the reason I'm asking this, it says
on the one that we're on, September 3rd, 2013, we're proceeding on a violation of a condition. The last part of
that condition relates to giving you access upon your request, it sounds like. Is there a special condition where he has to
14 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 Q. Okay. provide you information without you requesting it? THE WITNESS: Not -- not without me requesting.
business ownership interest he had? A. Q. Yes, ma'am. And then did you see in the recently filed tax return that
he had ownership interest in a Bahamas corporation? A. Q. That is what I believe I saw, yes. Okay. And could you just tell Judge Kays a little bit
about that, please? A. The -- one of the documents requested from Mr. Vleisides He filed those and then
least a reference to a business named Future Engineering, and then it has international in parentheses. Q. And what -- what part of the tax return is that,
Ms. Pierce? A. Q. It's Form 5471. Okay. Go ahead. And you said it's listed as the name of
and the country under whose laws incorporated, it says Bahamas, which is not something I was aware of.
was not disclosed to you? A. Q. A. Q. A. No, ma'am. What is it that you're requesting from the Court? I'm requesting 24 months of additional supervision. Could you explain why that is? Just with the -- the red flags that have been presented
here, coupled with Mr. Vleisides' history, his -- his criminal history are cause for concern. We didn't get to go into --
the PayPal is not the only place we have received complaints from. There is Consumer Sentinel is a law enforcement website
where people can get online and submit complaints about different companies. As of October 18th of this year there
had been 173 complaints submitted online to Consumer Sentinel, with a total of over $600,000 complained to being losses from Butterfly Labs. So when you look at what's going on with PayPal, and what's going on with Consumer Sentinel, I've taken the customer list provided to me by Mr. Vleisides and cross referenced with some of the names that are complaining, and those people are coming up as customers. It's matching up.
And so when you have these huge losses and so many unknowns, this business who's loaning cash without documents and putting him up in a relatively expensive home on a low salary and still reporting losses, to me those are all red flags that
16 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 show that he needs a little bit more supervision so that the probation office can determine that Butterfly Labs and Mr. Vleisides are on par and that everything is -- is legal. Q. And just to follow-up a little bit, when a customer
complains, what -- part of what Butterfly Labs sells involves bitcoin mining, something of that nature? A. Q. Yes. Okay. And when somebody preorders, is that an item that
costs $50 or thousands of dollars? A. My -- my understanding from looking online is that there
is a smaller bitcoin miner that maybe a few hundred dollars, like in the 200s. But the loss can be -- I mean, some of the I --
That's the top one, but don't quote me. THE COURT: And I note in the affidavit filed by
Ms. Drake, which is document 20-5, she claims that the prices for the products range anywhere from $274 to $22,484. Are you
aware of any of the -- are any of these complaints related to the high end units of $22,000, or do you know? THE WITNESS: THE COURT: I don't know.
Okay. What I remember is a range. Please proceed. I don't have any further
Okay.
MS. MAHONEY:
Okay.
17 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 questions, Judge. THE COURT: let Mr. Morris cross. So did Mr. Vleisides request permission from you to engage in this business of Butterfly Labs? THE WITNESS: Yes. He -- I was involved all along. I have just a couple questions then I'll
I can remember him talking about it and talking about getting investors. However, I was not fully informed of the nature That would have caused me
him approval then to undertake this Butterfly Labs business, but you -- you don't -- you feel like you were misled as to the type of -- how they would raise money? saying? THE WITNESS: Yeah. He -- he gets his -- in a Or what are you
normal business where you -- you buy and sell, I would have been okay with for him. I was not aware that customers would
be paying money and waiting, from what I'm told, six to eight months or even a year. THE COURT: That puts it into a more gray area. And this other business, this Bahamas
corporation, Future Engineering, did you -- did he request from you permission to engage in that business? THE WITNESS: THE COURT: No, I've never heard of that. That's all the questions I have.
Okay.
18 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 BY MR. MORRIS: Q. Ms. Pierce, we met before the hearing, but you and I Mr. Morris? MR. MORRIS: THE COURT: Thanks, Judge. Yes, sir. CROSS-EXAMINATION
haven't met before nor have we talked? A. Q. No. Okay. I'm going to try to break this into three kind of Some general information, the violation
general categories:
report, and then some of what you talked about on your direct examination with government counsel about a conversation you had today with PayPal. It was kind of hard to prepare for
that because it didn't happen until today. A. Q. A. Q. Right. Fair enough? Yeah. Okay. I believe you said in your direct exam that you
have been supervising, I call him Sonny -THE COURT: real quick. Mr. Morris, let me -- let me stop you
client, I didn't know about this PayPal conversation today. It sounds like it was a follow-up conversation. But if you
19 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 my client. wanted some more time to investigate this, I would continue this case, at your convenience, so you can follow-up on this PayPal issue. thing; right? MR. MORRIS: THE COURT: Sure. And so -- but I didn't know about this Because, in fairness, this is a concerning
either, so I'll leave that up to you and your client. MR. MORRIS: Well, I'm glad that you brought that
up, Judge, and excuse us. THE COURT: MR. MORRIS: Yeah. I had intended, based upon what was
said today, to go ahead and examine on some of the things that were in the violation report. THE COURT: MR. MORRIS: Sure. Because there's a -- there's -- there's
a lot to be said about that -THE COURT: MR. MORRIS: Sure. -- that I think is very favorable for
brought up today, I -- that is contrary to some of the information that I've learned, and not from Mr. Vleisides, from company counsel and others with the company, and I had intended to ask the judge for the opportunity to have some time to respond to that and to develop -THE COURT: Sure.
the Court would like me to do that first, and then reconvene this hearing, I'll do whatever the Court wants. THE COURT: Well, I -- since you're the one who's
kind of put in a bad place here, I'm going to be -- whatever you want to do, Mr. Morris. If you want to talk to your But I'm going to
client about that, I'll give you some time. accommodate your request in that regard. well, and let me go back through here. that's important information. important information.
your client about that or? MR. MORRIS: THE COURT: MR. MORRIS: Just briefly, Judge. Okay. Sure. Sure. Yes, sir.
course, explaining the PayPal situation to address questions of the Court, the Court that's deciding whether his supervision should end or continue or be revoked. THE COURT: MR. MORRIS: opportunity, Judge. two ways. Sure. Yes, sir.
continuance, we're happy to come back -THE COURT: MR. MORRIS: Yeah. -- and do whatever you want. If you'd
21 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 of the -MR. MORRIS: THE COURT: Okay. -- docket for me, and I would get in But we will So at like me to conduct some of this examination now, I can, or just wait. Whatever you want. THE COURT: I think it would be more beneficial to
you and your client if you would wait, just because the judge takes good notes. MR. MORRIS: THE COURT: MR. MORRIS: Okay. That's fine.
tell, you we do not need much time to put together responsive information. THE COURT: MR. MORRIS: will dictate. Okay. And certainly your -- your schedule
But I don't think that we need much time. Okay. Well, Ms. Francis is the keeper
THE COURT:
accommodate your schedule, of course, the best we can. this time I will show that this case is continued and to
address these issues related to this new information as to PayPal or any other issues you deem appropriate. And
obviously we want open communication between both sides, and -- and I will, for the record, say that this is -- given the nature of the type of case which your client is placed on
22 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 /s/Regina A. McBride, RDR, CRR REGINA A. MCBRIDE, RDR, CRR Official Court Reporter December 20, 2013 DATE supervision for, it would be very concerning to the Court if there was this type of millions of dollars of problems; right? And you -- I think you understand that. So, but yeah, I'd be Okay?
very interested to learn more about this. MR. MORRIS: THE COURT: Very good.
Thank you.
(Proceedings concluded at 2:29 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.