Free Transcript - District Court of Arizona - Arizona

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA _________________ ) ) ) ) Plaintiff, ) ) vs. ) ) PETER THIMMESCH, et al., ) ) Defendants. ) _____________________________ ) BILTMORE ASSOCIATES, as Trustee for the Visitalk, Creditors' Trust,

No.

CV 02-2405-PHX-HRH Phoenix, Arizona March 7, 2008 1:02 p.m.

BEFORE:

THE HONORABLE H. RUSSEL HOLLAND, JUDGE

REPORTER'S TRANSCRIPT OF PROCEEDINGS BENCH TRIAL VOLUME 5 p.m. Pages 927 to 1042

Official Court Reporter: Candy L. Potter, RMR, CRR Sandra Day O'Connor U.S. Courthouse, Suite 312 401 West Washington Street, Spc 36 Phoenix, Arizona 85003-2151 (602) 322-7246 Proceedings Reported by Stenographic Court Reporter Transcript Prepared by Computer-Aided Transcription

Case 2:02-cv-02405-HRH

Document 488

Filed 03/17/2008

Page 1 of 116

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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 UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 2 of 116 For the Defendants: Mariscal Weeks McIntyre & Friedlander By: Gary L. Birnbaum, Esq. Timothy J. Thomason, Esq. Scot L. Claus, Esq. 2901 North Central Avenue, Suite 200 Phoenix, Arizona 85012 For the Plaintiff: Tiffany & Bosco By: Christopher Reed Kaup, Esq. 2525 East Camelback Road, 3rd Floor Phoenix, Arizona 85016 A P P E A R A N C E S

929

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 105 23 24 106 25 E-mail from Cindy Thimmesch re Founder's Warrants 1024 1025 Unanimous Consent of the Board of Directors in Lieu of Organizational Meeting 1007 101 EXHIBIT NO. 100 DESCRIPTION Unanimous Consent of the Board of Directors in Lieu of Organizational Meeting Spreadsheet authorized to issue 110,000,000 shares of stock of which 100,000,000 shares are common stock, no par value INDEX OF EXHIBITS IDENT RECEIVED DAVID WEISS By Mr. Kaup By Mr. Thomason By Mr. Kaup 1019 1029 1037 JOSEPH RICHARDSON By Mr. Kaup By Mr. Claus 998 1014 WITNESS: MIKE DONAHEY By Mr. Birnbaum By Mr. Klaus By Mr. Birnbaum I N D E X DIRECT CROSS 933 975 996 REDIRECT RECROSS

1002

1006

UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 3 of 116

930

1 2 3 4 5 6 7 8 9 121 10 11 122 12 13 14 15 16 17 170 18 19 205 20 21 22 23 283 24 25 Bryan Cave Statements for Visitalk.com, General Corporate, File No. 107209, from 11-20-98 through 8-31-99 222 Letter from Goldman Sachs & Co. to P. Thimmesch Letter from D. Weiss to P. Thimmesch & Michael O'Donnell re appraisal of 3,825,000 Founder's Warrants 971 971 Letter from J. Lord to S. Best re Mark Cardwell, Visitalk.com, Inc. 961 135 123 128 E-mail from M. Donahey to M. Turley re meeting minutes Letter from A. Kaplan to S. Cole Rescission Offer 2,400,000 shares of A Preferred Stock $0.125 to 0.25 per share S&W invoice matter 35854.0003 RM Securities 975 933 Minutes of Special Meeting of the Board of Directors of Visitalk.com, Inc. 975 118 EXHIBIT NO. 107 108 DESCRIPTION E-mail from Cathy Vehovic re memo Letter from M. Mahoney to P. Thimmesch re engagement of Bryan Cave 1022 1022 INDEX OF EXHIBITS IDENT RECEIVED

1000

1000

S&W Office Memo re Visitalk.com, Inc. Securities and Related Issues 955

952 1037

1028

1029

1001

1001

UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 4 of 116

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1 2 3 4 5 6 294 7 8 502 9 506 10 11 12 13 520 14 521 15 522 16 17 18 19 20 21 22 23 554 24 25 UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 5 of 116 Memorandum to Visitalk.com, Inc. dated 10-18-99 949 949 553 548 540 Visitalk.com advertising brochure 2-24-99 e-mail to Peter Thimmesch from Cindy Thimmesch Memorandum dated 7-28-99 to Visitalk.com, Inc. from Snell & Wilmer 10-18-99 Memorandum to the Members of the Board of Directors and Officers of Visitalk.com, Inc. 990 9-3-98 Press Release 989 9-17-98 Press Release 988 518 Written Consent in Lieu of Joint Special Meeting of Board of Directors and Shareholders dated 9-12-98 New Employee Information Sheet dated 9-15-98 9-13-98 Class A Stock Offering 1035 Term Sheet doc re $25,000 - 200,000 total shares of Preferred Class A Stock 983 EXHIBIT NO. 292 DESCRIPTION Settlement, Separation and Release Agreement 962 965 INDEX OF EXHIBITS IDENT RECEIVED

997 986

998

979

947

947

948

948

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1 2 3 4 5 6 7 556 8 9 564 10 11 12 13 572 14 15 16 17 18 19 20 21 22 23 24 25 UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 6 of 116 12-13-99 Updated Confidential Information Statement 945 946 570 12-2-99 Release of Claims of Susan Cole 12-13-99 letter from Visitalk to Allen and Catherine Adler and attachments 934 934 Memorandum to Visitalk.com, Inc. from Snell & Wilmer dated 10-18-99 950 951 EXHIBIT NO. 555 DESCRIPTION Memorandum to Members of the Board of Directors of Visitalk.com, Inc. dated 10-18-99 INDEX OF EXHIBITS IDENT RECEIVED

949

950

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CROSS-EXAMINATION - MIKE DONAHEY

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THE COURT:

Mr. Birnbaum, you may continue. Thank you.

MR. BIRNBAUM: MR. KAUP:

A minor housekeeping matter, Your Honor,

just for the record, Miss Heather Litton, another principal within my client Biltmore Associates is here. Mr. Schweigert has left for another meeting. MR. BIRNBAUM: Thank you, Your Honor. CROSS-EXAMINATION BY MR. BIRNBAUM: Q. A. Q. Welcome back, Mr. Donahey. Thank you. Mr. Donahey, when we left the chronology, we left the
13:02:23

And

13:02:14

story, we had -- you had just told us about the November 24, 1999 meeting, and the decision to seek Series A releases or Mr. Thimmesch and Mr. O'Donnell were going to give up their warrants. That's where I want to pick up the chronology. Did someone volunteer to spearhead the drive to get these Series A releases? A. Well, I don't -- I know the letter came from Allan Kaplan.
13:03:00 13:02:42

And he was the Series A shareholders representative on the Board of Directors. So it may have been him.

But in terms of doing all the leg work and contacting and following up, I don't know who did that. Q. Okay. Well, that was what I was after. Take a look at Exhibit 123 in evidence. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 7 of 116 And you
13:03:15

CROSS-EXAMINATION - MIKE DONAHEY

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referred to the letter came from Allan Kaplan.

Is this the

cover letter or one of the cover letters that went to the Series A investors advising them about -- or requesting the release? A. Q. A. Yes. And now let me ask you to take a look at Exhibit 564. And I might add, I mean, this is the letter that advised Up until they received this letter, I
13:03:42

them of the problem.

don't believe they had any idea about the problem. Q. Thank you for that addition. You may want to pull the microphone a little closer to you. Thank you. Okay. Now, Exhibit 564, is that the form of release
13:04:00

by the Series A shareholders that was sent to them with Mr. Kaplan's letter? A. Q. A. Yes. And what was your role in preparing this, sir? Well, I was one of the people who helped draft this
13:04:19

document. MR. BIRNBAUM: evidence. Your Honor, my notes say 564 is not in
13:04:33

So we offer it at this time. THE COURT: MR. KAUP: Is there an objection? One minute.

No, Your Honor. THE COURT: 564 is admitted.
13:04:48

UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 8 of 116

CROSS-EXAMINATION - MIKE DONAHEY

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BY MR. BIRNBAUM: Q. Now, you mentioned in your testimony earlier, Mr. Donahey,

a Dan McAuliffe. A. Q. Yes. Did Mr. McAuliffe also have a role in drafting this Release
13:04:56

of Claims? A. Q. A. Yes. Tell us who Mr. McAuliffe is? Well, at the time and he still is one of our most senior
13:05:08

litigation partners. Q. Is -- does Mr. McAuliffe at least as part of his practice

at Snell & Wilmer specialize in ethics? A. Yes, when the firm established an ethics committee many

years ago he chaired it, and he still chairs our ethics committee. Q. I think I've got this right, but is Mr. McAuliffe also the
13:05:31

current president of the State Bar of Arizona? A. Q. Yes. And did Mr. McAuliffe have any particular role in drafting
13:05:42

this, or did he just work with you in putting together the document? A. Well, I thought it was important to have a litigator And I don't know whether he prepared the first draft But I felt like we ought to just make sure it

involved.

of it or I did.

would stand up, we get the input of a litigator in preparing UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 9 of 116

13:05:57

CROSS-EXAMINATION - MIKE DONAHEY

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the release. Q. All right. I'd like you to take a look at the first page And there's just a few things I want to go

of the release. through.

First, in paragraph C of the recitals, is this the disclosure you were talking about about the error in the Series A Term Sheet? A. Q. Yes. Well, that and D.

13:06:11

I'm sorry, C and D. Paragraph C, is it a fair summary, if the Court can
13:06:34

read it, just to state that you advised -- or the series A shareholders were being advised that there were, in fact, Founder's Warrants that had not been disclosed to them in the Term Sheet they had previously received? A. Yes. And that similar disclosure was probably contained in
13:06:55

Allan Kaplan's cover letter. Q. Right. Now, in paragraph D of the recitals, what's the significance of that paragraph? A. Well, in my mind this was the most significant point or the
13:07:10

most significant fact the Series A shareholders ought to have, and that is that their fully diluted ownership of the company was going down -- they would have thought it was 28.3 percent, but it's really 14.9 percent. Q. Okay. And moving on then to paragraph E of the recitals. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 10 of 116
13:07:26

CROSS-EXAMINATION - MIKE DONAHEY

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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 basis.

THE COURT:

Excuse me, before you gone on, that really

presupposes the issuances of shares pursuant to the warrants, does it? THE WITNESS: No, because this is on a fully diluted
13:07:42

THE COURT: understand then. THE WITNESS:

Perhaps that means something that I don't

Okay.

Well, fully diluted takes

all -- all the outstanding stock, and all of the stock that could come into existence upon exercise of options or warrants or other convertible securities. THE COURT: BY MR. BIRNBAUM: Q. Well, let me follow up on that, Mr. Donahey, I'm not sure
13:08:05 13:07:52

That's the part I was missing.

Thank you.

you caught what I think the Judge's question was. THE COURT: Actually he answered. Okay. I won't go to it.

MR. BIRNBAUM: BY MR. BIRNBAUM: Q.

The dilution from 28.3 to 14.9 percent, that's reflected in
13:08:18

D, that's what would occur if all the Founder's Warrants were exercised; is that right? A. Q. A. Correct. Okay. Well, no, let me back up. I mean, this percentage is, if

you take at the time of the Series A Offering, and just based UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 11 of 116

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CROSS-EXAMINATION - MIKE DONAHEY

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on the Series A Term Sheet, with the omission of the Founder's Warrants, if they did the -- I mean, this 28.3 number wouldn't have appeared on the Term Sheet. But if they'd have done the

math they would have thought they had 28.3 percent of a fully diluted basis. With the Founder's Warrants included, and if they had been disclosed as outstanding, if they'd have done the math they would have thought they had 14.9 on a fully diluted basis. Q. I think the only question I need to ask to wrap up that
13:09:03 13:08:48

whole issue is, the Founder's Warrants were never exercised by anyone at all, were they? A. Q. Correct. Okay. In paragraph E of the recitals -- go ahead and

describe in your own words, Mr. Donahey, what's being disclosed to the shareholders there. A. Well, the lack of disclosure to the Series A shareholders
13:09:16

could give the shareholders claims for breach of fiduciary duty or violations of federal and state securities laws. For

example, Rule 10(b)(5), that could be considered a material omission. Q. This was a rather dramatic disclosure you were making here
13:09:36

to the shareholders, wasn't it? A. Well, yes. Well, to be honest, I think D is the most

dramatic.

But yeah, I mean, we're not trying to hide anything.
13:09:52

We're trying to, you know, give it to them straight. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 12 of 116

CROSS-EXAMINATION - MIKE DONAHEY

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Q.

Did you believe that this release, at the time you helped

prepare it, did you believe that this release was a legally sufficient and effective release? A. Absolutely. MR. KAUP: THE COURT: BY MR. BIRNBAUM: Q. A. Q. Your answer was? Absolutely. And in fact, did you receive a report as to how many or who
13:10:20

Objection, calls for a legal conclusion. Overruled.

13:10:11

of the Series A investors actually signed the release? MR. KAUP: Objection, calls for hearsay from a person

that's not even been named. THE COURT: BY MR. BIRNBAUM: Q. Did you receive information regarding the number of people The question again was?
13:10:41

who signed the release? THE COURT: THE WITNESS: BY MR. BIRNBAUM: Q. And what is your understanding, Mr. Donahey, of how many of You may answer. Yes.
13:10:50

the Series A investors signed the release? A. All 40 -MR. KAUP: THE COURT: Objection, that calls for hearsay as well. You may answer.
13:11:01

UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 13 of 116

CROSS-EXAMINATION - MIKE DONAHEY

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THE WITNESS: BY MR. BIRNBAUM: Q.

All 47.

And in fact, you then relied upon that information in

subsequent advice you provided to Visitalk, did you not? A. Q. Yes. Let's then go on -- I don't want to overstate this,
13:11:13

Mr. Donahey, but had you now addressed at this point in our story both the September 12 approval of the warrants and the issue of disclosure to the Series A shareholders? A. Q. Yes. All right. Let me move on to the next topic then, which is
13:11:36

Series C. Now you previously identified a Series C Offering, an information statement that had been utilized before you ever arrived as counsel for Visitalk. A. Q. Yes. When you did arrive in approximately June of '99, had the Is that correct, sir?
13:11:55

Series C Offering been closed? A. No. I understand that they -- that Visitalk had received But the
13:12:11

all the money from subscribers by the time we arrived. Offering hadn't closed. Q. Did you -THE COURT: Excuse me.

I'm not understanding how the

company could have all the money and it wasn't closed. THE WITNESS: Well, the subscription documents -- or
13:12:28

UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 14 of 116

CROSS-EXAMINATION - MIKE DONAHEY

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the subscription documents that went out in March -- let me take that back. When money would come in with the subscription -- with the subscription paperwork filled out, then I believe Visitalk would send out a letter saying, we've received your subscription and your subscription documents, and they would look it over to see if it was acceptable. And they said, when
13:12:44

we close the Offering we will send you your stock certificate. So does that answer your question, Your Honor? THE COURT: Not exactly. What is involved in closing
13:13:02

if it doesn't involve the transfer of money or the release of money from escrow or whatever? THE WITNESS: the Series C Offering. THE COURT: THE WITNESS: I'm beginning to understand that. So I believe that the closing
13:13:14

Well, there was no close of escrow on

would -- when Visitalk said it was closed, then it was closed and they would send stock certificates out. THE COURT: THE WITNESS: Okay. Okay. Now, in between -13:13:28

Would you like some more explanation. THE COURT: THE WITNESS: Go ahead. In between, for example, the terms of

the Series C Preferred Stock that -- each series had its own certificate of designations which contained the terms, which UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 15 of 116
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CROSS-EXAMINATION - MIKE DONAHEY

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are fairly detailed and long. the A.

And the C was based on the B and

But the problem was, when we got in there and looked at

it, there were several things in the C Certificate of Designations that would be problematic to Visitalk going forward. BY MR. BIRNBAUM: Q. A. Q. You're jumping ahead a little bit. All right. So let me try to close up this closing issue. Money was received from investors, but it was being held by Visitalk; is that correct? A. Q. Correct. It was not susceptible to being used by Visitalk until the
13:14:05 13:13:59

closing? A. No, it was -- it was -- some of it was being used, I
13:14:16

believe. Q. All right. Now, at the closing, all that money becomes

property of Visitalk, and Visitalk then delivers shares to the Series C investors? A. Q. Correct. Okay. And the shares had not yet been delivered to anyone;
13:14:30

is that correct? A. Q. Correct. All right. Now, during that time period, you come on
13:14:41

board, the money has been received, but the shares haven't been UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 16 of 116

CROSS-EXAMINATION - MIKE DONAHEY

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issued.

Did you at that time discover any issues or problems

with the Series C Offering? A. Q. Yes. Now, did those -- let's get this out of the way, Did those issues or problems have anything to do
13:14:56

Mr. Donahey.

with the Founder's Warrants? A. Well, no, except that depending upon how the Founder's

Warrants issue was resolved, that could impact the disclosure in the updated Series C Offering Circular. Q. Sure. All right. That's a good point. So let me ask it a
13:15:15

different way. The Founder's Warrants, both approval and disclosure issue, those matters got resolved in the way that you've already described; is that correct? A. Q. Correct. What was the new problems or new issues that you now
13:15:27

discovered with respect to the Series C Offering that the company had already started? A. Okay, well, we -- we felt that the original Series C
13:15:42

Offering Circular Disclosure was inadequate for a variety of reasons. Also, by this time it was out of date and needed to And -- I mean, this was a long time in internet

be updated.

time, and a lot had happened that needed to be disclosed. There was -- I mentioned the Certificate of Designations for the Series C Preferred Stock that had a right UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 17 of 116
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CROSS-EXAMINATION - MIKE DONAHEY

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of participation, which was basically a right to participate in future equity offerings. And I know that, for example, they

were considering issuing stock to china.com, and before issuing stock to china.com it would be impracticable to go survey the few hundred Visitalk shareholders and ask if hey want to get the same stock that china.com wanted, china.com wouldn't want that. I know I'm just scratching the surface, but that kind of gives you the flavor hopefully of the problems that we thought would either -- the original Series C Offering certainly didn't include good enough disclosure, and some of the things in the original Series C Offering would have handicapped Visitalk going forward. Q. A. Q. China.com eventually becomes the Series -D. -- D Offering. So the concern was, under the existing
13:17:02 13:16:41 13:16:26

booklet, the existing disclosure information, and existing rights of Series C shareholders, if you proceeded based on the documents that were out there, you might have found the company in a position where it couldn't do the Series D, at least without the consent of everybody? A. Correct. MR. KAUP: THE COURT: Objection, calls for speculation. I don't think so.
13:17:28 13:17:17

You may answer. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 18 of 116

CROSS-EXAMINATION - MIKE DONAHEY

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THE WITNESS: BY MR. BIRNBAUM: Q. A. Okay.

Correct.

Now, what solution did you propose to the company?

Well, the solution was to circulate the updated Series C
13:17:41

Offering Circular with the improved disclosure -- updated disclosure, it included the revised terms of the Series C Preferred Stock, so that Visitalk wouldn't be handicapped in the future. There was also a cover letter which tried to

address some of the securities issues that we had identified in July. For example, the general solicitation and other issues.
13:18:03

And for example, we had the investors confirm that they didn't hear about Visitalk through the Business Journal article or some form of general solicitation. And so this was the document, this cover letter that accompanied the Updated Series C Offering Circular was sent to the 360 Series C investors. 352 of them sent it back saying Seven of them sent it back And one of
13:18:23

they want to stay in the Offering.

electing to get their money back with interest.

them disagreed and said he wanted the original Series C terms. So the company sent his money back too. Q. Mr. Donahey, take a look if you would at Exhibit 572 which It was stipulated in evidence.
13:18:51

I believe is in evidence.

I believe it's in, Your Honor. THE COURT: It's 572? Yes, sir.
13:19:08

MR. BIRNBAUM:

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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 admitted.

If it's not, we move its admission. MR. KAUP: THE COURT: No objection. It's one of the stipulated exhibits, it's

MR. BIRNBAUM: BY MR. BIRNBAUM: Q. A. Q.

Thank you.

13:19:18

Mr. Donahey, you have 572 in front of you? Yes. Is that the Updated Series C Confidential Memorandum that
13:19:26

you just described to the Court? A. Q. Yes. And I neglected to give you one exhibit, sir. May I approach again, Your Honor? THE COURT: BY MR. BIRNBAUM: Q. Let me hand you Exhibit 570. Take a look at that. And is that the cover letter Yes.

13:19:38

that you referred to to the Series C Offering? A. Yes. MR. BIRNBAUM: evidence as well. THE COURT: BY MR. BIRNBAUM: Q. So now, Mr. Donahey, through the Updated Series C Offering
13:20:09

And Your Honor, I believe 570 is in

13:19:57

It is.

and the letter that you've described, had all of the Series C UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 20 of 116

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issues that confronted the company now been resolved to your satisfaction? A. Q. Yes. The Founder's Warrants and related issues that we've now
13:20:28

discussed, those were not the only matters on which you and your firm provided securities advice to the Board of Directors through Mr. Best; is that right, sir? A. Q. Correct. Let's just very briefly, and we won't review the contents,

let's look at a few of the other things. Take a look, for example, at Exhibit 548. This is a

13:20:45

memorandum from Snell & Wilmer to Visitalk.com regarding -July 14, 1999, regarding restrictions on disclosure before a Public Offering. Is this a memorandum that you either sent or caused to be sent to Mr. Best at Visitalk? A. I believe so. MR. BIRNBAUM: evidence. MR. KAUP: THE COURT: BY MR. BIRNBAUM: Q. And tell us very briefly if you could, sir, what kind of No objection. 548 is admitted.
13:21:30 13:21:14

Your Honor, we'd offer Exhibit 548 in

advice were you trying to provide to Visitalk in this letter? A. Well, we wanted to advise Visitalk about the limitations on UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 21 of 116
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what they can say publically about any potential IPO. to limit any gun jumping concerns.

I wanted

Obviously they were being

asked, I believe, about NykeO, and there's some limits on what you're allowed to say. And so we didn't want the SEC to raise
13:22:08

any issues about any public releases by Visitalk prior to their filing of a registration statement. Q. Thank you. Take a look at Exhibit 553. This is a memorandum to

the members of the Board of Directors and Officers of Visitalk from Snell & Wilmer dated October 18, '99, regarding federal securities laws. Did you send or cause this memorandum to be sent to Visitalk as well? A. Yes. MR. BIRNBAUM: MR. KAUP: THE COURT: BY MR. BIRNBAUM: Q. Tell us, Mr. Donahey, what you were trying to do here in
13:22:52 13:22:27

Your Honor, we offer 553 in evidence.

13:22:43

No objection. 553 is admitted.

terms of advising your client. A. Well, two things. The first is just to familiarize the

Board with their obligations once they become -- you know, if Visitalk became a public company. But I think, you know, some

of the advice in here is applicable and may also be applicable to private companies. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 22 of 116
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So it's just general advice to the Board of Directors about the federal securities laws. Q. Okay. Take a look at Exhibit 554. This exhibit appears to be a memorandum to Visitalk from Snell & Wilmer dated October 18, 1999 -- excuse me, October 18, 1999, regarding publicity in connection with public offering. Is this also a memorandum that you either sent or
13:23:29

caused to be sent to Mr. Best for Visitalk? A. Yes. MR. BIRNBAUM: admission of 554. MR. KAUP: THE COURT: BY MR. BIRNBAUM: Q. And think the title was pretty self-explanatory, but give
13:23:56

And Your Honor, we move for the

13:23:49

No objection, Your Honor. 554 is admitted.

us a brief statement of what you were trying to do here. A. Well, this is similar to the gun jumping memo, that

describes the do's and don'ts in connection -- you know, in advance of going public. Q. Okay. Turn to Exhibit 555. Mr. Donahey, this is a memorandum to the members of the Board of Visitalk from Snell & Wilmer, also dated October 18, 1999, regarding corporate responsibilities as directors of a public company. Did you send or cause this memorandum to be sent to UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 23 of 116
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Visitalk? A. Yes. MR. BIRNBAUM: 555. MR. KAUP: THE COURT: BY MR. BIRNBAUM: Q. A. Now, what was this about, Mr. Donahey? Well, it's -- the re line says corporate responsibilities But again, one -- this is,
13:24:59

Your Honor, we move the admission of

No objection. 555 admitted.

13:24:47

as directors of a public company.

you know, to prepare the Board for being a public company, and that some of this applies only to public companies. But, of

course, the duty of loyalty and corporate opportunity and confidentiality and duty of care, those are all things that would apply to both a public and private company. Q. Did you in this memorandum describe and advise the Board
13:25:18

about their fiduciary responsibility? A. Q. Yes. Did you, in fact, describe the business judgment rule
13:25:34

applicable to Visitalk? A. Q. Yes. Let me ask you to go on to Exhibit 556. This is a memorandum to Visitalk from Snell & Wilmer dated October 18, 1999. This one is regarding SEC reporting Did you also cause -- either send

and compliance requirements.

13:25:56

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or cause this memorandum to be sent to Mr. Best as well? A. Yes. MR. KAUP: Objection, Your Honor, relevance. There's

no dispute Visitalk was not a public company, and this document relates only to responsibilities of a public company. MR. BIRNBAUM: Your Honor? Your Honor, the expert witness that they have proffered in this case apparently is of the opinion that Snell & Wilmer did not provide adequate advice to the Board of Directors of Visitalk regarding their responsibilities as directors. Each and every one of these memoranda goes to
13:26:25 13:26:11

Would you like me to respond,

establish what they, in fact, did provide to the Board. THE COURT: We'll receive 556. It's admitted.
13:26:48

MR. BIRNBAUM: BY MR. BIRNBAUM: Q. A. All right.

Thank you, Your Honor.

Mr. Donahey, what's 556 about?

Well, it discusses a public company's reporting and other

obligations. Q. Okay. Let me -- you can put those all aside, Mr. Donahey. And I want to return to the
13:26:58

Let's go on to the next subject.

subject we touched on before, which is integration. There was a transaction Series E involving MP3; is that correct, sir? A. Correct. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 25 of 116
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Q.

Okay.

You described on your testimony, or upon questioning

by Mr. Kaup, that a rescission offering was at least undertaken or discussed. A. yes. Q. A draft of at least one of the potential rescission Is that correct, sir?

I wouldn't say it was undertaken, but it was discussed,
13:27:39

documents was prepared; is that right? A. Well, I'm not aware of any other rescission offer that was

contemplated, other than this one. Q. I may not have been clear. Just take a look at Exhibit 128
13:27:57

in evidence. A. Q. Okay. This document is entitled Rescission Offer. So that we're

clear, Mr. Donahey, Exhibit 128 was never sent to anyone, was it? A. Q. It was never sent to any stockholder. Right. That's what I meant. Thank you. I mean, there's
13:28:15

And it was never even completed. blank lines on it; is that correct? A. Q. A. Correct. Okay.

It was a long way from being completed.

13:28:26

You participated in its drafting, did you not? I don't know -- I don't

I don't know -- I believe I did.

remember doing so. I'm not sure. Q.

It wouldn't have surprised me if I did, but

Now, I think there may have been some confusion about this, UNITED STATES DISTRICT COURT

13:28:42

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so let's go right to the point.

This Rescission Offer, whether

it ever was used or not, this had nothing to do with Founder's Warrants, did it? A. Q. A. Correct. This was -- tell us what this was about. Well, MP3, before they invested $15 million in Visitalk's
13:28:57

Series E Preferred Stock conducted due diligence investigation of Visitalk. And they had the same -- you know, identified the

same issue that we had, this possible integration issue with respect to the Series A, B and C Offerings, given their proximity in time. And so they included in the purchase agreement for the Series E Preferred Stock a covenant that Visitalk would commence a Rescission Offer in a certain period of time to the As and the Bs and the Cs. It was, to the best of my They
13:29:43 13:29:25

recollection, limited solely to the integration concern. conducted a very thorough review of Visitalk. They had

absolutely no concern about the Founder's Warrants, to my knowledge, or the release or anything -- or the Cardwell December release. It was, to the best of my recollection,
13:30:03

purely limited to the integration issue. Q. Let me ask you to take a look at -- I think it's page 5. At the top it says, Background is the

It's numbered page 5. section heading. A. Yes.

13:30:27

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Q. A. Q.

Do you see that, sir? Yes.

It's page 5 of the document.

It has the number 5 on it. In the third paragraph of the Background section, it

says, because of the timing of the Series A, B and C Offerings, these Offerings may be integrated and we could lose our exemption from the registration requirements of the '33 Act. We are conducting this rescission Offering to remedy any potential integration problems we may encounter, and to provide the holders of the Rescission Stock with all necessary information to make an informed investment decision about Visitalk.com. This Rescission Offer is not an admission that

13:30:41

13:31:06

we did not comply with the registration provisions of applicable federal or state law, nor is it a waiver of any applicable statute of limitations. Was that the purpose of this contemplated Rescission Offer? A. Q. Yes. It was to remedy any potential integration issue.
13:31:26

So Mr. Kaup had asked you a question a couple of days ago I
13:31:47

think it was, about how you recognized in this document certain claims or potential claims. To the extent that any potential

claims are recognized or addressed in this draft document, they are integration issues; is that correct, sir? A. Q. Correct. Okay. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 28 of 116
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A.

But when you say "claims" or "potential claims," I mean, And I think it was more I mean, the SEC

there were no claims to my knowledge.

aimed at not having something hold up an IPO. hold something up later. Q.

Now with respect to that point, Mr. Donahey, to the best of

13:32:25

your knowledge did the SEC or any other state or federal regulatory agency ever assert that Visitalk's various series of offerings should be integrated? A. No. And of course, even if they had, even if
13:32:46

they -- somebody had concluded they were integrated, that doesn't mean that you don't -- you don't nonetheless fit within an exemption. Q. Okay. The next subject -- this is the first time I'm going

to go a little out of chronological order just so we can wrap up these warrants. In 2000, March of 2000, Mr. Best asked you to summarize the securities issues that you had previously addressed. A. Q. Yes. Take a look at Exhibit 118 in evidence. Is this the
13:33:15 13:33:01

Is that correct, sir?

memorandum you prepared in response to Mr. Best's request? A. Q. Yes. Now, I want to be -- I don't want to go through the

memorandum again, Mr. Donahey, but I do want to make sure we have your explanation. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 29 of 116
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In the first few pages there -- there seems to be a recitation of facts that you believed back in 1999, but you subsequently had corrected or determined the true sequence of events. A. Q. A. Q. A. Q. Is that correct, sir? Well, specifically under number 1. Were you still confused in March of 2000 -13:33:57

Yeah. Yeah. No.

-- about the sequence of events? No. All right. Explain again briefly the structure of this
13:34:05

letter. A. Well, it addresses a variety of securities issues. I think

there are nine sections.

And what I did was -- because this

was a memo to Steve Best, and he knew what he told me to do, and I know what he told me to do, I laid out with respect to the Founder's Warrants our original understanding consistent with the September -- July 28, 1999 Founder's Warrants memo. And then after on page 3 where it says, the company resolved the Founder's Warrants problem as follows, I set forth what we did. Q. So, for example, in paragraph B, 1B, you state in the
13:34:52 13:34:29

middle of that paragraph, in addition, pursuant to the above referenced agreement, Mr. Cardwell agreed that his stock certificate should be dated September 15, 1998, and that the action taken by the Board of Directors on September 12, 1998, UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 30 of 116
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should be properly memorialized in the form of meeting minutes dated that date, rather than an action by unanimous consent, which have now been included in the company's minute book. That's the minutes and the Cardwell stock certificate that we -- you identified for us and were admitted in evidence before lunch; is that right? A. Q. Correct. So this is your explanation of how you addressed those
13:35:34

understandings or misunderstandings that you had that were reflected earlier in the letter where you were telling Mr. Best, here is what we started out to address, and here is the solution we ended up with? A. Q. Correct. Okay. Let's move on then, Mr. Donahey -- well, let's
13:36:06 13:35:53

conclude on the Founder's Warrants. You've told us, I believe, that to the best of your knowledge nobody ever exercised any Founder's Warrants? A. Q. I'm confident nobody exercised any Founder's Warrants. To the best of your knowledge, did anyone ever threaten to

bring a claim relating to the existence or disclosure or nondisclosure of the Founder's Warrants? MR. KAUP: THE COURT: THE WITNESS: BY MR. BIRNBAUM: UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 31 of 116 Objection, foundation. Overruled. None other than this litigation.

13:36:23

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Q.

Okay.

Did anybody -- I just asked you about threatened.

To the best of your knowledge, setting aside this case, did anybody, any series investor, ever file a lawsuit or otherwise initiate a legal proceeding that you're aware of relating to the existence, disclosure or nondisclosure of the Founder's Warrants? A. Q. No. Okay. Our next subject, sir, is estate planning. Are you aware that Snell & Wilmer did some estate planning work for Mr. and Mrs. Thimmesch, Mr. and Mrs. O'Donnell? A. Q. A. Q. Yes. Do you recall when that work was undertaken? In 2000. Do you recall who, singular or plural, at Snell & Wilmer
13:37:20 13:37:09 13:36:53

was involved in doing that work? A. I don't believe I was involved in it. I believe

David Weiss was the primary person. others. Q.

There may have been

Did you believe that any conflict of interest existed as a

13:37:37

result of your doing securities work for Visitalk and David Weiss or possibly others doing estate planning work? A. No. MR. KAUP: Objection, relevance. I'd be happy to drop the claim from the
13:37:56

MR. BIRNBAUM:

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case. MR. KAUP: THE COURT: going to happen. The objection again, because I lost it in the exchange, Mr. Kaup? MR. KAUP: Relevance, Your Honor. His opinion about
13:38:06

Your Honor -I don't think -- I don't think that's

whether there was a conflict is not material to this -- to the resolution of this case. THE COURT: BY MR. BIRNBAUM: Q. sir? A. Q. No. By the way, did Mr. Best specifically approve of Snell &
13:38:27

I'll take his testimony.

13:38:20

Did you believe that there was some conflict of interest,

Wilmer doing the securities work and the estate planning work? MR. KAUP: Objection, hearsay. It can't be hearsay, Mr. Best is the

MR. BIRNBAUM: company. THE COURT:

I don't know whether he's the company or So I'll take the answer.

13:38:49

not, but he's the general counsel. THE WITNESS: BY MR. BIRNBAUM: Q. Okay.

That's my understanding.

You've testified about Mr. Cardwell's release that Do you recall that,
13:39:08

was executed back in December of 1999.

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sir? A. Q. Yes. Okay. And that related to the Founder's Warrants, any

claim Mr. Cardwell might have, when he became a director, when he became a stockholder, when the Founder's Warrants were approved. A. Q. Right. Now, did -- did you learn, subsequent to December of 1999, Is that right?
13:39:20

that Mr. Cardwell's employment by Visitalk had been terminated? A. Q. A. Q. Yes. Do you recall how you learned that? I don't. Did you learn at some point in time that Mr. Cardwell had
13:39:38

hired legal counsel? A. Q. A. Q. A. Q. A. Q. Yes. And who was that? Primarily Jan Lord. And that's which law firm? Fennemore Craig. And Fennemore Craig is a large Phoenix-based law firm? Yes. And did you learn that Mr. Cardwell had threatened legal
13:40:02 13:39:52

action against Visitalk? A. Q. Yes, through his lawyers. Okay. And I'm not going to go back, but you were shown UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 34 of 116
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Exhibit 170.

Do you recall that was the letter on the

Fennemore Craig letterhead from Miss Lord -A. Q. Yes. -- about this issue? You're aware, are you not, sir, that negotiations ultimately ensued between Visitalk and its representatives and Mr. Cardwell and his representatives? A. Q. Yes. You told us about one meeting where the parties, I think Did
13:40:55 13:40:38

you used the word "postured" or laid out their position.

you otherwise engage in the negotiations of the settlement that was ultimately achieved? A. Not the business points or the dollar amounts or the But the documenting the deal. I mean,
13:41:20

substantive issues.

there might have been draft -- there were probably drafts going back and forth on the nonbusiness points. Q. Well, I want to be clear about this then, Mr. Donahey. You

were not part of the formulation of the settlement that was ultimately agreed upon; is that right? in creating that settlement? A. Q. Correct. Okay. And you did not participate, other than one meeting You did not participate
13:41:38

you told us you attended, in negotiating the business terms of the settlement? A. Yeah, I mean, what I would consider the big points, the UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 35 of 116
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business points, I didn't participate in that part. Q. Okay. Now, at some point in time you were asked though to

participate in documenting the settlement; is that correct? A. Q. That's my recollection. Do you recall who asked you to participate in the
13:42:09

documentation? A. Q. I don't recall. But I got to believe it would be Mr. Best. Is that, sir, the documentation

Exhibit 292 in evidence.

that you helped prepare of the settlement based on the business terms that were provided to you? A. Q. Yes. And can you describe, without excruciating detail,
13:42:35

Mr. Donahey, what happened, what was the settlement? A. Well, primarily Cardwell released the company from any There were some other
13:42:58

liability related to his termination.

provisions about how the parties would conduct themselves going forward. For example, Cardwell agreed to maintain the I believe there was a noncompete

company's confidentiality. included in here.

I believe the company agreed to maintain D&O
13:43:21

insurance for Mr. Cardwell's benefit. And there was also the stock -- Cardwell owned a million shares at this point, and he agreed to sell 500,000 of them to investors procured by Visitalk, sell those shares for $2.42 a share. Q. Did the Board of Directors of the company Visitalk approve UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 36 of 116

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the transaction? A. Q. Yes. Did Mr. Best approve your documentation of the business

terms? A. Yeah -- well, I hesitate to call it my -- he approved the
13:43:59

documentation, but I see on the bottom of the document it was prepared by Jan Lord, the document footer. was all over this document too. So he -- I'm confident he approved this document, I just don't think it would be quite right to say it's my document. Q. Okay. Mr. Stodghill again was the employment lawyer for
13:44:18

And Steve Stodghill

Visitalk? A. Q. From Texas. And did you view this settlement as an exercise of business
13:44:26

judgment by the Board of Directors of Visitalk? MR. KAUP: Objection, Your Honor, relevance as to what

his view is as to the company's business judgment. THE COURT: THE WITNESS: BY MR. BIRNBAUM: Q. What -- what were the perceived advantages, at least from I'll take his view of it. Absolutely.
13:44:42

your perspective, of this transaction for Visitalk? A. Well, they got a full release from Mr. Cardwell. They had
13:45:00

him agree to maintain the company's confidential information, UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 37 of 116

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and not compete with the company.

There was a -- and also the

company made money on the sale of Cardwell's stock. Q. Was that approximately a million dollars that the company

treasury received? A. I don't know the precise amount, but that sounds about
13:45:22

right. Q. Was Mr. Cardwell's stock holdings, his influence of the

company, also reduced because of the structure of the transaction? A. Q. Cut in half. And was the transaction designed in such a way that
13:45:33

Visitalk did not issue any new stock? A. Correct. Which would have exacerbated the integration

problem. Q. Well, I want to go back -- last time I think we'll hear the But I do want
13:45:48

word "integration," I hope it's the last time. to talk about that for a second.

If the company had considered an alternative structure where the company just sold new stock, took the money and settled with Mr. Cardwell, why would that have been a problem? MR. KAUP: hypothetical. THE COURT: We'll see. Objection, Your Honor, it's an improper
13:46:10

You may answer. THE WITNESS: Well, it would have made the integration
13:46:28

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issue worse, for one.

It would have diluted the existing

stockholders, I mean, their percentage interest would have been reduced for any other stock that's issued. There are probably other issues too, I just can't think of it. Q. But those are the two main ones.
13:46:49

This Settlement Agreement with Mr. Cardwell regarding his

employment issues, would you just take a look at Exhibit 292 and see if you can tell us when it was executed? A. Q. It looks like it was executed on May 10th, 2000. And this Settlement Agreement, we'll call it the settlement
13:47:09

of the employment issues in May 10, is this a transaction that is completely separate from the release Mr. Cardwell had signed back on December 13th regarding when he became a shareholder and the Founder's Warrants issues? A. Yes. The December release related to the Founder's This
13:47:36

Warrants issues and he was still employed at that point.

release related to his termination, and had nothing to do with the Founder's Warrants. Other than it might recite in here,

you know, that he reaffirms the December Founder's Warrants release. Q. So just so we're crystal clear, we have a December Cardwell
13:47:53

release, and then we have a May Cardwell Settlement agreement? A. Q. Correct. All right. Thank you, sir. Are you
13:48:06

Mr. Mallery we referred to briefly earlier. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008

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familiar with Mr. Mallery's reputation in the community? MR. KAUP: Objection, relevance. And not -- and

not -- outside the scope of direct examination. THE COURT: BY MR. BIRNBAUM: Q. Mr. Donahey, let me go to a specific meeting. Do you Sustained.
13:48:31

recall in December of 1999 there was a shareholder's meeting? MR. KAUP: Objection, Your Honor, again beyond the I asked him nothing about that
13:48:51

scope of direct examination. meeting. MR. BIRNBAUM: THE COURT: frankly, sir. MR. BIRNBAUM:

Your Honor, if I --

I don't know whether you did or not

Your Honor, whether he did or not, if
13:48:59

you would like to call this our direct examination of Mr. Donahey, that's fine. THE COURT: BY MR. BIRNBAUM: Q. A. Q. A. Q. A. Q. Do you recall a December 1999 shareholders' meeting? Yes. And did you attend that meeting? Yes. Did Mr. Mallery attend that meeting? I believe so. Did -- at the time of your representation of Visitalk, to UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 40 of 116 I'll take it.

13:49:10

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the best of your knowledge, sir, did Mr. Mallery exercise any control over any aspect of Visitalk's business? A. Q. A. Q. No. Did he dominate Visitalk in any way? No. Did you -- was it your perception that he was held in high
13:49:40

regard by the officers of Visitalk? A. Q. A. Q. A. Q. Some of them, yes. Are you familiar with Mr. Mallery's background? Yes. Are you familiar with his reputation in the community? Yes. Describe for us what you perceive Mr. Mallery's position to
13:49:59

be in the Phoenix business or legal community. MR. KAUP: Again, Your Honor, objection to relevance
13:50:12

and beyond the scope of direct. THE COURT: This was coming in as perhaps defendants' But I am not clear on what

direct testimony from this witness. the relevance is, too. MR. BIRNBAUM: Your Honor? THE COURT: Yes.

Would you like me to address that,

13:50:35

MR. BIRNBAUM:

Your Honor, it appears that it's part

of the plaintiff's case that Mr. Mallery is an insider, Snell & Wilmer is an insider for preference purposes, because they UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 41 of 116
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exercised some control over this company. addressing the area at all.

That's why I'm

Mr. Mallery, who the Court may well know, is a very distinguished member of the Phoenix community, was regarded as such by Mr. Best and Mr. Thimmesch, both of whom will, in fact, testify to that fact. That's the context in which we're going to describe Mr. Mallery's relationship to the company. And if they're
13:51:10

going to continue to assert that he's an insider for preference purposes, then we need to be able to explain who he is and what his role really was, and how the folks at Visitalk really viewed him. THE COURT: If you need to recall this witness to
13:51:30

shore that up in some respect later, you may, and we'll consider it then. But as far as part of your either direct
13:51:49

case or cross-examination right now -MR. BIRNBAUM: THE COURT: I --

-- let's move on to something else. Your Honor, I'm perfectly happy to Thank you.
13:51:59

MR. BIRNBAUM:

reserve that, with the Court's permission. BY MR. BIRNBAUM: Q.

The December 1999 shareholders' meeting, Mr. Donahey, you

attended? A. Q. Yes. Do you recall speaking at that meeting? UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 42 of 116
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A.

I don't believe I had a formal -- you know, I didn't appear I believe I responded to some questions.

on the agenda. Q.

Do you recall whether Mr. Mallery spoke at all at that

meeting? A. Q. I don't remember -- I don't remember Mr. Mallery speaking. Do you recall ever in your career working with Mr. Mallery
13:52:26

that he ever suggested to anyone, whether seriously or even in jest, that they were going to become millionaires as a result of some transaction? MR. KAUP: THE COURT: Objection, Your Honor, relevance. I'm under the impression that there has
13:52:46

been such an allegation in the case, so I'll take the answer. THE WITNESS: like that. I have never heard Dick say anything

And the thought of Dick saying something like that
13:53:05

is unimaginable. MR. BIRNBAUM: Your Honor, may I offer the stipulation

that any such alleged statement is, in fact, irrelevant to the issues in this case? Perhaps we can simply eliminate it, based

on what Mr. Kaup just said. MR. KAUP: No, Your Honor. His question was, at any
13:53:23

time, anywhere did he make that statement, not at the December 27, 1999 Board meeting. And when he asked Mr. Donahey about

whether he remembers Mr. Mallery saying anything at that meeting, he said he didn't remember him doing it. So my
13:53:44

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December 27, 1999. THE COURT: All right. Both of you all have been

expanding the scope of things here hugely beyond what I at least perceived we needed to talk about. And largely I've let
13:54:02

you go, and I'm going to continue to do that, subject to time limits. Go ahead, Mr. Birnbaum. BY MR. BIRNBAUM: Q. I wasn't sure whether we got your answer, sir. Have you

ever heard Mr. Mallery, seriously or in jest, ever suggest to anyone in any context that they were going to become a millionaire as a result of any transaction? A. Q. No. Were you personally familiar with the billing and payment

13:54:13

history of Visitalk as a client of Snell & Wilmer? A. Q. A. Q. Somewhat. Were they -- was Visitalk generally a slow pay? Yes. Did you personally from time to time urge them to make

13:54:32

payments? A. Q. Yes. Up until a few weeks preceding bankruptcy, is it fair to

13:54:49

say, Mr. Donahey, that whatever the practice had been by Visitalk in terms of paying its bills, that it was no different during the time period approaching bankruptcy until just a few UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 44 of 116
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weeks before the bankruptcy was filed? A. Q. That's correct. Did Snell & Wilmer ever terminate its relationship with

Visitalk as a result of nonpayment or slow payment? A. Q. A. Q. A. Q. No. Did you ever limit your services in any way? Not to my knowledge. Did you ever suspend your services in any way? Not that I know of. All right. My last topic, sir, Goldman Sachs. I think
13:55:38 13:55:26

we've already heard this, but tell us who Goldman Sachs is, as you understand it. A. Q. A. Goldman Sachs is a very prominent investment banking firm. And had they been formally engaged by Visitalk? I believe -- I believe they -- there was an engagement
13:55:54

letter with Goldman Sachs. Q. Take a look, sir, if you would at Exhibit 205. There's no objection to it, Your Honor. it's been offered, but we offer it now. THE COURT: MR. KAUP: THE COURT: BY MR. BIRNBAUM: Q. Is 205 the engagement of Visitalk -- by Visitalk of
13:56:29

I don't think

Is there an objection to 205? No objection, Your Honor. 205 is admitted.

13:56:11

Goldman Sachs & Company on March 10, 2000? UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 45 of 116

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A. Q.

I believe so. Based upon your discussions with officers and directors of

Visitalk, Mr. Donahey, did the Visitalk -- did Visitalk recognize the need for capital to develop its products and its markets? A. Q. Yes. Did you ever participate in any discussions, with Mr. Best
13:56:53

or any other officer of Visitalk, regarding the capital acquisition methods that were available to Visitalk? A. Q. I believe so. Did you ever talk about the possibility of seeking venture
13:57:09

capital? A. Q. I believe so. Did you ever speak about the availability of traditional
13:57:24

financial institution borrowings, loans? A. Q. We may have, I don't recall that. Did you ever participate in discussions involving future

private placements? A. Q. Yes. Did you participate in discussions involving possible
13:57:39

strategic partnerships? A. Q. Yes. And I assume, sir, you participated in discussions

involving a potential initial public offering as well? A. Yes. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 46 of 116
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Q.

Was there, in fact, a Series F stock offering that was

contemplated at one time? A. Q. A. Q. I believe so. That didn't occur pre-bankruptcy; is that right? That's my understanding. And was there also a pre-IPO private placement that was Was that the Series F stock offering?
13:58:10

being considered? A. Q.

Could I have you rephrase that? Yeah, I'm sorry. I didn't do that well.
13:58:30

The Series F stock offering that was never completed, was that planned for institutional investors, do you recall? A. Q. A. Q. A. I don't remember. Okay. Yes. How did -I believe so. And it's possible that there was a multiple So, I mean, it might have Was that to be a private placement?

13:58:44

potential Series F offerings. evolved over time. ever consummated. Q.

But in any event, I don't believe it was

So at least in the contemplation of the company there

13:59:03

was -- as you understood it, there was both an additional private placement and then hopefully an initial public offering. A. That's what was planned? And it's just the F, you know, it's just
13:59:21

I believe so.

letters of different versions of series -- different series of UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 47 of 116

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Preferred Stock.

So whatever transaction at issue preferred

stock next, however it was consummated, would be called F. Q. A. Q. Well, setting aside the letters. Okay. The point is, there was additional private placements
13:59:37

planned to raise capital, and then hopefully a public offering as well to raise capital; is that correct? A. Q. A. I think that's fair. Okay. So what happened? What happened to Visitalk?
13:59:50

Well, in March -- March of 2000 was the peak of the And after March 2000,

internet, Nasdaq and dot-com market.

then money for dot-coms and technology startups dried up and it got worse and worse and worse. were getting at. I don't know if that's what you

But, you know, it was bad in April, and May
14:00:23

just got worse and worse and worse, and I think it continued even going down after when Visitalk filed for bankruptcy. Q. So ultimately neither the planned private placement nor the

anticipated public offering could be successfully completed? A. Correct. MR. BIRNBAUM: Thank you very much, Your Honor.
14:00:37

That's all I have for this witness. THE WITNESS: Would it be okay if I took these back

just so I don't get them mixed up? MR. KAUP: No, I think I'm going to use some of the
14:01:28

same ones they had been using, Mr. Donahey. UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 48 of 116

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THE WITNESS:

Okay. REDIRECT EXAMINATION

BY MR. KAUP: Q. Mr. Donahey, Mr. Birnbaum had you look at Exhibit 121.
14:01:38

That's the meet -- the minutes for the Board of Directors meeting dated February 24, 1999. A. Let me pull it up here. Yes. Do you recall you gave -- he asked you questions and you Do you recall that?

gave testimony about the executive session which related to the Founder's Warrants? A. Q. Yes. And you recall you testified that you were excluded, I

14:01:55

believe was your word, during the period of the -- during the period of the executive session? A. Q. That's my recollection. Could you look at Exhibit 122? And that would be in
14:02:15

the -- our exhibits. you. A. Q. Yes.

It may be what Mr. Lofredo just gave to

14:02:41

Do you recall Exhibit 122 had the redline draft of the

November 24, 1999 Board minutes to which you made revisions; correct? A. Q. Correct. Look at the page with SWDS0406 at the bottom right-hand UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 49 of 116
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side. A. Q.

Are you there?

Yes. Do you see the sentence right in the middle of the page,

the Board went into executive session where the -- and you deleted "options" and inserted "alternatives" were reviewed? A. Q. Yes. And then below that you see text containing words that are
14:03:16

stricken and then words that have been added to the paragraph relating to the executive session; correct? A. Well, when you say "relating to the executive session,"
14:03:38

I'm -- I don't know whether the next part was in executive session or not. I remember the conclusion or the decision that

the releases would be obtained or Thimmesch and O'Donnell would give up their Founder's Warrants. relayed to me at the meeting. So it's possible that Miss Turley -- this was also discussed in the executive session, I don't know. remember this discussion that day. Q. Well, I guess that's my exact question, Mr. Donahey, and
14:04:31

I remember that being
14:04:14

But I

that is, how is it that -- or is the text from -- it begins, it was decided that the Board would ask, through the additional language you added at the top of the next page, SWDS0407, from a time period in which the Board was in executive session or out of executive session and you were present? A. Well, I know this was discussed at a time when I was UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 Page 50 of 116

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present.

And that could have been in the context of the

nonexecutive session of the Board, or it could have been that was relayed to me as having been decided in the executive session of the Board. I don't know.
14:05:22

So -- I know at that meeting being advised that this was the path they were going to take. Whether they reached

that conclusion in the executive session that I didn't attend, I don't know. Q. Well, let's look back over at Exhibit 121 then. If you
14:05:45

look on page 4, the bottom of the page, and you looked at this with Mr. Birnbaum, you have the sentence which says that the Board went into executive session where the alternatives were reviewed. And then over on the next page at the -- you have a

paragraph which begins, it was decided, and then it goes down to -- that paragraph ends with the words, pursuant to their employment agreements. A. Q. Yes. Now, you see that's the same language that we looked at Do you see that?
14:06:09

just a minute ago in Exhibit 122, that had -- that included your revisions and deletions? A. Q. Yes. Do you recall having been present in this meeting during
14:06:31

the period of time the discussions in the paragraph I just referenced in Exhibit 121 occurred? A. Well, I guess I don't know how to say it any different than UNITED STATES DISTRICT COURT Case 2:02-cv-02405-HRH Document 488 Filed 03/17/2008 P