Original Transcript:
http://www.scribd.com/doc/217190031/2014-01-28-USA-v-Vleisides-TranscriptI'm a BFL customer who has been denied a refund after they've had my money for 11 months, and they've banned me from BFL forums.
I read this entire court transcript (it took me 3 hours) and I copied the important parts below to save you some time. Best parts highlighted in
blue.
I think it's funny how the Judge says that BFL has a smell and "smells really bad" and "It's a strong smell".
BFL complaints from customersQ. 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....
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.
Sonny Vleisides (BFL owner) using company money to buy a personal residenceQ. 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.
Complaints against BFL and mis-use of company funds to buy propertyQ. Mr. Morris had you look at a Better Business Bureau 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 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.Sonny Vleisides violating his parole and using customer money for loansA. Can I-- 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 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.
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...
A. No.
BFL company gross profits, staff size & locationQ. 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?
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 inthe 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.PayPalQ. 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 havea 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 what ever 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 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 takeany 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 befair 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.
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... We have an account manager [at PayPal]. 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 under-reserved. What they said was, "Well, look. Either you got toship 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 [2013]. 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 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.
65nm product refunds and upgrades to Monarchs from previous 65nm tecnhologyQ. 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 [2014] (it's presently July 2014 and still no delivery). 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 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. 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.
Pre-orders & no phone customer serviceQ. 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 sometime, 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 chi por 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 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 withrespect 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 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.Using customer funds for personal thingsQ. 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 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.
...
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 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.
BFL has multiple lawsuitsQ. 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.
Monarch & ShippingQ. The Monarch BPU was said to begin shipping at the end of 2013. Has that happened?
A. No.
A. ...In general, the largest liability that the company has remains for preorders now, not of that version [65nm] of the product, but the next version [28nm Monarch] of the product. So we've received moneys from customers, preorders for the next iteration 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. 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'rebuilding 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 28nanometer chip. Everything's shrinking. It's Moore's Law. So you have to design the chip, and then you have to geta 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. Where we are in it today [January 2013] 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 re-prototype and then you go into production assuming the re-prototype 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.
The Court's ruling that Mr. Vleisides is guilty of violating his probation terms by taking loans on company money without being open about thisTHE 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 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 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. 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. Now, my job first is to calculate the guidelines.
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.
THE COURT: Twenty-four months of continued supervision....
Mr. Vleisides failed to give all the information that was required of him. That's the basis of this violation.
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 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 violation.
THE COURT: 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 ina 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 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. 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.The TL/DR of the TL/DR is: Don't do business with BFL because their company and owners are loaded with corruption and shady business practices at the customers' losses.You can do something about it. Class Action Lawsuit against BFL:
If you are a BFL customer, yes, you can do something about it.
There is a Class Action Lawsuit against BFL. If you are a BFL customer or have been in the past, you can submit your information to Wood Law Firm's Class Action Lawsuit on Butterfly Labs below. They sent an email out today to those of us who have already joined and they asked for evidence from all those with complaints. There are about 50+ people complaining and providing information so far. We need to make that number even bigger.
http://www.woodlaw.com/cases/butterfly-labs-and-bf-labs-inc-bitcoin-miners
(There is a form at the bottom of the page to submit your information)
I filled it out and all Monarch customers should do the same. Provide factual information including correspondence and information on refused refunds with screenshots of order pages.
If you've not done so already then also raise a complaint with the FTC.
http://www.ftccomplaintassistant.gov
As BFL are violating the rules set out by the FTC.
www.business.ftc.gov/documents/bus02-business-guide-mail-and-telephone-order-merchandise-rule
If enough people do this then they might take action against BFL themselves.
If you want a refund you should request one by opening a support ticket, BFL will refuse, reply to their email insisting that you no longer have any need for the item and they have no legal basis to deny a refund. If you keep replying in different ways then they will eventually give up responding. Pass on all the details to woodlaw. The class action is still in discovery and the class hasn't been decided yet, so you might not be able to get in on it anyway. Bringing action yourself might be better, as if you find you're excluded from the class then at least your case is further on. If you wait until the class is decided then BFL might disappear before your case is heard.
Update July 14, 2014: BFL Buys out a website just to change the bad things stated about BFL into good things and to promote itself: http://techcrunch.com/2014/07/14/bitcoin-mining-company-buys-critical-site-to-improve-google-results/ 
