This case has a lot going on, so it's difficult to separate the spin from the truth. None of it really makes any sense.
According to an amicus brief field by his lawyers,
The ATF tried this and, according to them, were somehow able to get it to go through 20 rounds without stopping. No one else could get past 3 or 4. The ATF also said there was not an automatic sear or bolt carrier installed. This doesn't make any sense though - what is the third position connected to? No one has yet explained how a conventional AR-15 can malfunction with a flip of the Safe/Fire switch to magically do 3-round bursts.Kiernicki noticed the selector switch on the rifle could be rotated to a third position, other than "safe" and "fire". Olofson told Kiernicki not to use the "third position" for then it would malfunction by firing a "three-round burst" and then jam up.
Don't get me wrong, I support repealing the NFA - it's stupid and should be overturned. But rather than risking jail, maybe Olofson should have gotten that rifle fixed once he realized it was capable of short automatic bursts - regardless of the mechanism involved.