2013-12-17 transcript of vleisides show cause hearing

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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 COURT WESTERN DISTRICT OF MISSOURI WESTERN DIVISION UNITED STATES OF AMERICA, ) Case No. 4:11-CR-00125-DKG-1 ) Plaintiff, ) ) VS. ) ) SONNY CHRIS VLEISIDES, ) ) December 17, 2013 Defendant. ) Kansas City, Missouri ***************************************** 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 For Defendant: Jeffrey D. Morris [Defendant present.] 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. Case 4:11-cr-00125-DGK Document 26 Filed 12/20/13 Page 1 of 22

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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, )) December 17, 2013

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.

Case 4:11-cr-00125-DGK Document 26 Filed 12/20/13 Page 1 of 22

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I N D E X

Reporter Certificate - Page 22

WITNESSES:

COURTNEY PIERCEDirect Examination by Ms. Mahoney - Page 5Cross-Examination by Mr. Morris - Page 18

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(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: Vleisides.

THE COURT: Vleisides. Mr. Vleisides appears here

today with his attorneys, Mr. Shazzie Naseem.

Nice to see you again, Mr. Naseem.

MR. NASEEM: Good morning, Your Honor.

THE COURT: And also attorney Mr. Jeff Morris.

MR. MORRIS: Good afternoon, Your Honor.

THE COURT: 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?

MR. MORRIS: Your Honor, I will.

THE COURT: Yes, sir.

MR. MORRIS: Jeff Morris.

THE COURT: Mr. Morris, would you like us to

formally advise him of the allegations in the September 3rd

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violation report, sir?

MR. MORRIS: Your Honor, we'll waive a reading of

the formal allegations. 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.

Very well then. Ms. Mahoney, do you wish to present

evidence?

MS. MAHONEY: Yes, Your Honor. Call Courtney

Pierce.

THE COURT: Ms. Pierce, would you please come

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

and sit over here in the witness chair, please. Good

afternoon, Ms. Pierce.

THE WITNESS: Hello. Good afternoon.

THE COURT: Would you please begin by speaking your

full name and spelling your last name for us?

THE WITNESS: Yes. It's Courtney Pierce.

P-I-E-R-C-E.

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THE COURT: Thank you, Ms. Pierce.

Ms. Mahoney?

DIRECT EXAMINATION

BY MS. MAHONEY:

Q. Ms. Pierce, how long have you been supervising

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. Yes, ma'am.

Q. All right. And so that was in 2010 that it was

transferred here?

A. He actually immediately came here, because this is where

his ties were. It was eventually transferred here --

Q. Okay.

A. -- to our jurisdiction.

Q. And you have been the officer on the case for that

duration then?

A. Yes.

Q. 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. Yes.

Q. And is that his primary source of income that you are

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aware of?

A. Yes, ma'am.

Q. 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. I

spoke to Chad Williams this morning. He re --

THE COURT: Who's Chad Williams again?

THE WITNESS: He is an employee there at PayPal. He

is a global asset protection officer.

THE COURT: Thank you.

A. This morning he reported that over the course of at least

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

protects the customer's money for 45 days and allows them to

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be able to receive a refund. But he said that the complaints

are coming in months later from people who had purchased

equipment from Butterfly Labs. They originally froze the

account in September 2013. At that time there was

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. So if there was 11 million, now there's $7 million in

that account?

THE WITNESS: Yes, sir.

THE COURT: And so Butterfly Labs -- how do they

access that account? 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? Or how does that work?

THE WITNESS: Yes. I asked that specific question.

Now the 45 days that is not relevant to the releasing of the

money.

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THE COURT: Okay.

THE WITNESS: The 45 days is the customer window to

-- for eBay -- or PayPal to protect their money.

THE COURT: To complain?

THE WITNESS: Yes. But these complaints were coming

in later. He said that they can't hold the money forever and

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: Did they suggest to you how they make

the customers whole? Is it a refund of money? What is it?

THE WITNESS: He was not aware.

THE COURT: Okay. I'm sorry.

Q. Okay. And you had initially brought this report and

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?

THE WITNESS: Yes.

Q. Today?

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A. Yes. He wasn't able to look at everything, but there's

been a total of over 6,000 complaints, and between November

11th and today, it was more than 200. So they continue to

come in.

Q. And what is PayPal's course of action that they are going

to take with Butterfly Labs? You talked about the freezing of

the account. Are they going to do business with Butterfly

Labs in the future?

A. No. Butterfly Labs is permanently barred from accepting

PayPal as payment for their products.

Q. Why is that?

A. 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. That coupled with the volume of complaints.

Q. 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. Yes, ma'am.

Q. 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

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been a recently filed tax return from 2012 of Mr. Vleisides?

A. Yes, I did.

Q. 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. Yes, ma'am.

Q. And yet he had lived in what you described as a very nice

house and drove a nice car; was that correct?

A. Yes.

Q. 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. That is my understanding.

Q. And they own it?

A. Yes.

Q. Are you aware of anybody else using these except him?

A. 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. Okay.

A. -- on overnights.

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Q. Okay. But he -- in any case, he did not declare any of

that as his personal income?

A. I do not believe so, no.

Q. And the business sustained a loss, was that right, in

2012?

A. Yes.

Q. According to their own tax return and financial statement?

A. 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. And what did the loss amount reflect for the tax return?

A. $863,000.

Q. And are -- do you understand why there's that large

discrepancy --

A. I do not.

Q. -- over $600,000?

A. I do not.

Q. Okay. Were you also made aware that the company, although

losing money, had loaned money to shareholders?

A. I was.

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Q. And -- and Mr. Vleisides is one of those shareholders?

A. Yes, ma'am.

Q. And did you ask for documentation on that?

A. On the loan?

Q. Right.

A. I do not believe there was any documentation available.

Q. So -- and the loans were -- when were those made, if you

know?

A. I don't know.

Q. Okay. But they were undocumented loans?

A. Yes, ma'am.

Q. All right. And what was the reason given of loaning money

to shareholders?

A. I believe it was based on future profitability.

Q. Okay. So the company was losing money and yet loaning

money to its shareholder at future profitability?

A. That is my understanding.

Q. Okay. And this was during the time where they had these

thousands and thousands of complaints?

A. Yes.

Q. Through just one vendor?

A. Uh-huh.

Q. Or one payment acceptance. What is your understanding on

the rate of interest? Was it a market rate or below market?

A. My understanding is that it was below.

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Q. Was it less than one percent?

A. Yes.

Q. 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. Yes. Yes.

Q. Okay. 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: So we're clear, there's a condition of

supervised release. What condition is that where he has to

provide some transparency as to his financial dealings?

THE WITNESS: Well, especially as related to

business. He has to make the probation office aware. 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

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provide you information without you requesting it?

THE WITNESS: Not -- not without me requesting.

However, I did request from him.

THE COURT: Okay.

Q. Okay. Is there also -- did you request information about

business ownership interest he had?

A. Yes, ma'am.

Q. And then did you see in the recently filed tax return that

he had ownership interest in a Bahamas corporation?

A. That is what I believe I saw, yes.

Q. Okay. And could you just tell Judge Kays a little bit

about that, please?

A. The -- one of the documents requested from Mr. Vleisides

was a copy of his 2012 tax returns. He filed those and then

provided me a copy. On one page I noticed a report, or at

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. It's Form 5471.

Q. Okay. Go ahead. And you said it's listed as the name of

the company?

A. Yes. It says the date of incorporation is 11-2 of 2012,

and the country under whose laws incorporated, it says

Bahamas, which is not something I was aware of.

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Q. Okay. So when you had asked for business interests, this

was not disclosed to you?

A. No, ma'am.

Q. What is it that you're requesting from the Court?

A. I'm requesting 24 months of additional supervision.

Q. Could you explain why that is?

A. 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

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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. Yes.

Q. 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

machines might be $5,000. I --

Q. Okay.

A. 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: I don't know.

THE COURT: Okay.

THE WITNESS: What I remember is a range.

THE COURT: Okay. Please proceed.

MS. MAHONEY: Okay. I don't have any further

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questions, Judge.

THE COURT: I have just a couple questions then I'll

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 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.

THE COURT: So you -- you're saying that you gave

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? Or what are you

saying?

THE WITNESS: Yeah. He -- he gets his -- in a

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. That puts it into a more gray area.

THE COURT: And this other business, this Bahamas

corporation, Future Engineering, did you -- did he request

from you permission to engage in that business?

THE WITNESS: No, I've never heard of that.

THE COURT: Okay. That's all the questions I have.

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Mr. Morris?

MR. MORRIS: Thanks, Judge.

THE COURT: Yes, sir.

CROSS-EXAMINATION

BY MR. MORRIS:

Q. Ms. Pierce, we met before the hearing, but you and I

haven't met before nor have we talked?

A. No.

Q. Okay. I'm going to try to break this into three kind of

general categories: Some general information, the violation

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. Right.

Q. Fair enough?

A. Yeah.

Q. Okay. I believe you said in your direct exam that you

have been supervising, I call him Sonny --

THE COURT: Mr. Morris, let me -- let me stop you

real quick. I'm sorry to interrupt you.

MR. MORRIS: Of course. Absolutely.

THE COURT: But, you know, in fairness to your

client, I didn't know about this PayPal conversation today.

It sounds like it was a follow-up conversation. But if you

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wanted some more time to investigate this, I would continue

this case, at your convenience, so you can follow-up on this

PayPal issue. Because, in fairness, this is a concerning

thing; right?

MR. MORRIS: Sure.

THE COURT: And so -- but I didn't know about this

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: Yeah.

MR. MORRIS: 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: Sure.

MR. MORRIS: Because there's a -- there's -- there's

a lot to be said about that --

THE COURT: Sure.

MR. MORRIS: -- that I think is very favorable for

my client. With regards to the PayPal issue that was just

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.

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MR. MORRIS: -- more additional information. So if

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

client about that, I'll give you some time. But I'm going to

accommodate your request in that regard. Because it is --

well, and let me go back through here. So -- yeah. That --

that's important information. But there's also other

important information. So do you want some time to talk to

your client about that or?

MR. MORRIS: Just briefly, Judge.

THE COURT: Okay. Sure. Sure. Yes, sir.

MR. MORRIS: My client is very interested in, of

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: Sure. Yes, sir.

MR. MORRIS: So we -- we are asking for that

opportunity, Judge. And I'm willing to -- to do this one of

two ways. One, if you're -- if you're willing to give us a

continuance, we're happy to come back --

THE COURT: Yeah.

MR. MORRIS: -- and do whatever you want. If you'd

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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: Okay. That's fine.

THE COURT: But sometimes he forgets.

MR. MORRIS: Then we will wait. And Judge, I will

tell, you we do not need much time to put together responsive

information.

THE COURT: Okay.

MR. MORRIS: And certainly your -- your schedule

will dictate. But I don't think that we need much time.

THE COURT: Okay. Well, Ms. Francis is the keeper

of the --

MR. MORRIS: Okay.

THE COURT: -- docket for me, and I would get in

deep trouble if I tried to set anything now. But we will

accommodate your schedule, of course, the best we can. So at

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

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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

very interested to learn more about this. Okay?

MR. MORRIS: Very good.

THE COURT: This case is continued. 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.

/s/Regina A. McBride, RDR, CRR December 20, 2013REGINA A. MCBRIDE, RDR, CRR DATEOfficial Court Reporter

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