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, BEFORE:

CIV 02-2405-PHX-HRH Phoenix, Arizona March 3, 2008 9:08 a.m.

THE HONORABLE H. RUSSEL HOLLAND, JUDGE

REPORTER'S TRANSCRIPT OF PROCEEDINGS BENCH TRIAL VOLUME I A.M. Pages 1 to 91

Official Court Reporter: Linda Schroeder, RDR, CRR Sandra Day O'Connor U.S. Courthouse, Suite 312 401 West Washington Street, Spc. 32 Phoenix, Arizona 85003-2151 (602) 322-7249 Proceedings Reported by Stenographic Court Reporter Transcript Prepared by Computer-Aided Transcription

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1 2 3 4 5 6 For the Defendants: 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 For the Plaintiff:

A P P E A R A N C E S

Tiffany & Bosco By: Christopher Reed Kaup, Esq. 2525 East Camelback Road, 3rd Floor Phoenix, AZ 85016

Mariscal Weeks McIntyre & Friedlander By: Gary L. Birnbaum, Esq. Timothy J. Thomason, Esq. Scot L. Claus, Esq. 2901 North Central Avenue, Suite 200 Phoenix, AZ 85012

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1 2 SUMMARY OF COURT PROCEEDINGS 3 4 5 6 7 8 9 SCHWEIGERT, Vernon S. 10 11 12 13 14 15 16 17 102 18 112 19 20 21 22 23 24 330 25 128 294 123 125 126 EXHIBIT NO.: 100 52 WITNESSES FOR THE PLAINTIFF: Opening Statements Plaintiff Defendants

INDEX PAGE: 4 24

INDEX OF WITNESSES Direct Cross Redirect

INDEX OF EXHIBITS

DESCRIPTION:

ID'D RECEIVED:

Unanimous Consent of the Board of Directors in Lieu of Organizational Meeting Audited Financial Statements Period Ended 1/2/99 Letter from M. Donahey re Founders Warrants Letter from A. Kaplan to S. Cole Letter from C. Thimmesch to A. Adler Updated Confidential Information Statement re 4,241,240 Shares of Series C Preferred Stock Rescission Offer 2,400,000 Shares of Series A Preferred Stock Term Sheet Doc Re $25,000-200,000 Total Shares of Preferred Class A Stock Second Joint Plan of Reorganization in re Visitalk Case No. 00-13035 UNITED STATES DISTRICT COURT

70 79 84 82 87 87 86 77 59 77 59 80 84 87

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THE CLERK:

This is case number CV 02-2405, Biltmore

Associates, LLC, as trustee for the Visitalk Creditors' Trust, versus Peter Thimmesch, et al., on for bench trial. Counsel, please announce for the record. MR. KAUP: Good morning, Your Honor. Christopher R.

Kaup, counsel for Biltmore Associates, the trustee of the Creditors' Trust. And Vernon Schweigert, the manager of my

client, Biltmore Associates, is also present in the courtroom to my immediate left. THE COURT: MR. KAUP: Good morning. Thank you, Your Honor. Good morning, Your Honor. Gary

MR. BIRNBAUM:

Birnbaum on behalf of Snell & Wilmer.

And, Your Honor, if I

may introduce the group, my partner, Scot Claus, and Tim Thomason will be here through the trial. David Baker is a

paralegal assistant who is in charge of the technology. We also have with us Mike Donahey, who is a partner at Snell & Wilmer and will be serving as our client representative throughout the trial. THE COURT: Thank you. I think we had agreed that

we'd have short opening statements, 30 minutes perhaps, was talked about? MR. KAUP: THE COURT: MR. KAUP: Yes, Your Honor. Let's go. Good morning, Your Honor. For the record,

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again, Christopher Kaup, counsel for Biltmore Associates, the plaintiff in this proceeding. First, Your Honor, let me say thank you for making the time to come down here and spend three weeks in our beautiful state during this difficult time of weather in this state, Your Honor. We do appreciate your helping us through this

proceeding. THE COURT: year. MR. KAUP: Your Honor, the facts are stubborn things, Your Honor, Your weather is not difficult this time of

said John Adams during the Boston Massacre trial.

this case is a case for -- first, prove up for damages against Peter Thimmesch, for aiding and abetting breaches of fiduciary duty against Snell & Wilmer, for malpractice against Snell & Wilmer, and for recovery of voidable preferences under the bankruptcy code against Snell & Wilmer. And for Snell & Wilmer, Your Honor, the facts in this case are stubborn things. Your Honor, the evidence will

demonstrate that Snell & Wilmer failed to perform the most fundamental duty of a lawyer. They failed to tell the truth.

And, Your Honor, the documents -- based on documents they prepared, Snell & Wilmer prepared, it is clear that Snell & Wilmer acted like Orwell's Big Brother. Your Honor,

Snell & Wilmer assisted the founders, the founders of Visitalk, Peter Thimmesch and Michael O'Donnell, with covering up the UNITED STATES DISTRICT COURT

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backdating of stock options, Founders Warrants.

In addition,

Your Honor, that cover-up of those -- of the backdating of those Founders Warrants provided the potential huge benefit, millions of dollars of potential benefit, to their other clients, Peter Thimmesch and Michael O'Donnell. Your Honor, Snell & Wilmer failed to tell the truth to the Board of Directors about that matter. Snell & Wilmer Visitalk had

failed to tell the truth to Visitalk's investors.

hundreds of individual investors who put millions of dollars of their hard-earned capital into this company. And They

Snell & Wilmer failed to tell the truth to the Board. failed to tell the truth to the investors in this case.

And, Your Honor, according to Snell & Wilmer's lead partner on the engagement, senior partner on the engagement, Mr. Mallery, Snell & Wilmer restated Visitalk's corporate history. Snell & Wilmer revised corporate history to fit their

new -- a new story of the company's prior corporate existence, which would have a tremendous benefit for Peter Thimmesch and Michael O'Donnell. And the consequence of that, Your Honor,

was Visitalk's corporate life was artificially prolonged, and it was allowed to incur additional indebtedness. And as a

result, Your Honor, its insolvency was deepened, and the company was damaged. The stubborn facts first, Your Honor, regarding Visitalk: UNITED STATES DISTRICT COURT

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Visitalk was going to be the new AT&T.

The evidence

that will be presented before you will make clear that Visitalk raised tens of millions of dollars from individual investors, not venture funds, not -- primarily -- not institutions, but, Your Honor, mostly from individuals, moms and pops, and through a Series A, Series B, Series C, and Series F, and a debenture offering of securities. Visitalk spent over $54 million in just two and a quarter years, and they earned less than a $100,000 of revenue. Indeed, Your Honor, the evidence that will be presented to you based upon prior depositions, I believe, will make clear that Visitalk was nothing more than the emperor with his new clothes. Visitalk never had a commercially viable product prior to the date they filed for bankruptcy based upon the testimony of three Visitalk former officers: Its controller, Greg

Gaston; its former VP of marketing, Deb Kuhns; and its former chief engineer, James Fallon. Ms. Kuhns is expected to testify that it was clear to all, to everyone at Visitalk that Visitalk's technology simply did not work. Mr. Fallon, Your Honor, is expected to testify The new servers to make the

that the product did not work.

product work were extremely expensive, and at no time did Visitalk have an economically scalable product. It simply,

according to its chief engineer, couldn't do what it said it UNITED STATES DISTRICT COURT

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was going to do.

And if it couldn't do what it said it was It was They

going to do, it never could be commercially viable. certain to fail.

It was the Titanic of the Internet age.

had charted a course, Your Honor, for economic disaster. But Visitalk had a great story. Peter Thimmesch and

Michael O'Donnell had a great pitch about the things that Visitalk would do. Many people bought it. They invested their

hard-earned dollars into the company. wasn't there, Your Honor. clothes.

However, in reality, it

It was just the emperor with no

Now, Your Honor, the stubborn facts regarding Snell & Wilmer's representative of Visitalk: Despite knowing about serious securities law problems, including the backdating of the Founders Warrants, despite having received Visitalk's financial information, which showed no revenue and millions of dollars of expenditures on unneeded items such as lavish TI's in a new building, millions of dollars for software it didn't need to bill customers it didn't have and to account for revenue it never got, and despite Snell & Wilmer having pumped -- promoted the stock to Visitalk's investors -- Mr. Mallery even told a group of Visitalk shareholders in December of 1999 that they were soon going to be millionaires, so they didn't need to worry about any of the prior problems with the company. There were two -- There were two former Visitalk UNITED STATES DISTRICT COURT

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officers have testified and expect to testify in this proceeding that Mr. Mallery gave business advice to Visitalk and that Mr. Mallery was a father figure to Peter Thimmesch and Michael O'Donnell. This is far from the ordinary They were promoting the stock to

attorney-client relationship. investors.

They were telling them everything was fine despite And they never told the

having knowledge to the contrary.

truth regarding these matters to the Visitalk directors and to the Visitalk investors. Now, Your Honor, Snell & Wilmer had inside information regarding Visitalk's business and financial condition. And

that's because Snell & Wilmer was preparing Visitalk securities offerings after they started representing the company in -beginning in the -- beginning very early in July of 1999. So all of the securities offerings after that date, including a revised offering document to Series C investors -there were over 20 million of them -- were prepared by Snell & Wilmer. There's no dispute about those facts.

And in connection with receiving, in connection with preparing those offering documents, they received, the evidence will demonstrate, they were receiving the financial information of the company. In addition, Your Honor, it knew the truth. Visitalk -- Snell & Wilmer knew the truth regarding securities -- the securities problems at the company. UNITED STATES DISTRICT COURT

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Snell & Wilmer, based upon its own documents, knew the truth regarding problems with the Founders Warrants. Visitalk could not have continued to operate, the evidence will be clear, it could not have continued to operate unless Snell & Wilmer continued to provide securities law representation to them, unless it continued to prepare offering documents. But, Your Honor, those offering documents, the

other documents given to investors, including a purported release document to the first investors, the Series A investors, didn't tell the truth. And because it didn't tell

the truth, Your Honor, all these people -- people have had claims and have claims. But Snell & Wilmer knew the truth.

They simply didn't put it in the documents that they knew were going out to investors. Now, Snell & Wilmer, Your Honor, drafted a document in the form of a letter to Stephen Best, Visitalk's then general counsel. That document is a document no one disputes they

prepared, but, Your Honor, it's not on letterhead of Snell & Wilmer, and it's not signed by Mr. Donahey. He admits having prepared it, but there is no evidence, Your Honor, that that document was ever actually transmitted, sent, mailed to Mr. Best, general counsel, the person to whom it was addressed. And, Your Honor, it -- I

believe it will be clear in the testimony here that there is no record of that document having been received by Visitalk, and UNITED STATES DISTRICT COURT

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that document is important. 1999.

It's a document dated July 28,

And in that document, Snell & Wilmer outlines and

details the problems with these initials options claimed to have been issued to the founders. Warrants. The document recites, Your Honor, that the Founders Warrants were authorized in November of 1998, and they were issued in November of 1998. Critically, Your Honor, that's We call them the Founders

after the date on which the first investors, the Series A investors, bought their stock. So in Snell & Wilmer's own

words in this document, the Founders Warrants were authorized and issued in early November of 1998. They later, Your Honor,

then went back and attempted to change that story. However, in the July, 1998 -- 1999 letter, the July 28, 1999, letter, Snell & Wilmer and Mr. Donahey also wrote that the actions of Peter Thimmesch and Michael O'Donnell regarding the Founders Warrants breached the agreements with the Series A investors. He also wrote that these -- that the

actions of Thimmesch and O'Donnell were a breach of fiduciary duty by Thimmesch and O'Donnell and could subject the company to significant liabilities. So in that document, Your Honor, in Snell & Wilmer's own words, the actions of Thimmesch and O'Donnell breached the contract, constituted a breach of fiduciary duty, and gave rise to claims against the company. That's their own words.

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Subsequent to that, Your Honor, in October of 1999, other lawyers at Snell & Wilmer, a Mr. Charles Pulaski, drafted two internal memoranda. Those memoranda identify further Again, Your Honor,

problems regarding Founders Warrants.

Snell & Wilmer's own words establishing that the -- and the quotes are on your screen, Your Honor -- establishing that the -- that the attempt to issue the Founders Warrants was voidable and in fact that there is some evidence to say that it in fact never happened when Thimmesch and O'Donnell said it was going to happen. And Mr. Pulaski went on to write that the

only document that existed at that time regarding the Founders Warrants, which was the unanimous consent of the Directors, is dated September 12, 1998, was ineffective even today. Today,

that day that he drafted that, or the day that is on that document is October 22, 1999. So in Snell & Wilmer's own

words, the Founders Warrants were not effective as of October 22, 1999. Honor. In early March of 2000, Mr. Donahey again confirmed in a memo dated March 6, 2000, that the Founders Warrants were not issued until November of 1998, after the sale of stock to the Series A investors. And he also wrote that the Founders In -- And that document is on your screen now, Your

Warrants were not duly authorized by the company. So you have a document by Mr. Donahey in July of 1999, two memos by Mr. Pulaski in October of 1999, and a memo by UNITED STATES DISTRICT COURT

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Mr. Donahey in March of 2000, all saying that -- all setting forth one chronology of the Founders Warrants, and that the -and that the Founders Warrants were not duly authorized by the company. So -- But then, Your Honor, we come to the crux of

the problem, because the -- they have taken the exact opposite position in this litigation. They have taken the position that

the Founders Warrants existed, that they were authorized and issued in September of 1998, on September 12 of 1998. They have to take this position, Your Honor, because they didn't tell the truth to the Visitalk Board of Directors, and they didn't tell the truth to the Visitalk investors regarding this matter. So despite their own words in their own

documents, they come before you, Your Honor, and they want to tell you a different chronology, the same chronology they told the Directors, the same false chronology they told the investors. Visitalk did not tell the truth regarding the Founders Warrants first to the Visitalk Directors, and the evidence will be clear that there was a critical board meeting of Visitalk on November 24, 1999. Immediately prior to that Board meeting on

November 2, 1999, Snell & Wilmer sent a memo, a memorandum, to the Visitalk Directors, to them directly. signature, a cover memo from Mr. Donahey. cover memo from Mr. Pulaski. And what is critical about that memo, Your Honor, is UNITED STATES DISTRICT COURT It was under the Behind that was a

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what is not in it.

And what is not in that memo is anything in

Mr. Donahey's July 28, 1999, document, which we have no evidence was actually mailed to Visitalk, nothing in Mr. Pulaski's first memo in October, nothing from Mr. Pulaski's second memo from October of 1999. And it did not contain the

chronology regard -- the true chronology regarding the Founders Warrants contained in Mr. Donahey's March 6, 2000, memo. And in fact, Your Honor, Mr. Kaplan has testified, and Alan Kaplan is one -- was one of the former members of the Board of Directors. member. He was an outside, independent board And, coincidentally,

He was a Series A investor.

Mr. Donahey -- I'm sorry -- Mr. Kaplan had also been represented by Snell & Wilmer. Snell & Wilmer. But Mr. Kaplan testified that he was never told these critical facts regarding the true chronology of the Founders Warrants and that he relied on what Snell & Wilmer did tell him, which is the false story, the false story concocted by Thimmesch and O'Donnell and Snell & Wilmer in order to preserve the Founders Warrants and cover up the truth. Snell & Wilmer also didn't tell the Board about the critical legal problems and consequences regarding the problems of the Founders Warrants they knew to be true. In the memo So by no means is he adverse to

dated November 2, 1999, they state that Mr. Thimmesch would resign and leave the company and sue the company if in fact -UNITED STATES DISTRICT COURT

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if in fact the company tried to void the Founders Warrants or took the position the Founders Warrants didn't exist. However, Mr. Thimmesch laughed at that during his deposition. And I expect Mr. Thimmesch to testify truthfully

here if he testifies that in fact what he did -- similar to what he did in his deposition that he never would have left the company, he never would have sued the company if the company took the position that the Founders Warrants were not valid. But yet Mr. Pulaski and Mr. Donahey told the Board he would. That was false. There is no dispute, Your Honor, that Snell & Wilmer did substantial work on the securities offerings and other documents regarding securities law matters. Snell & Wilmer did not tell the truth to the investors in these securities documents. They didn't tell the truth

regarding the Founders Warrants and the securities law problems in several critical documents. First, Your Honor, there was a letter and release document sent to the Visitalk Series A investors regarding these Founders Warrants matters, and that was sent out to them in -- very early in December of 1999. And it was sent to them

to solicit releases of the claims that Snell & Wilmer admitted they helped. However, Your Honor, that cover letter from Mr. Kaplan -- First, Your Honor, the cover letter from UNITED STATES DISTRICT COURT

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Mr. Kaplan and the release agreement was prepared by Snell & Wilmer. There's no dispute about that. When

Mr. Kaplan signed that document, he said relied on Snell & Wilmer to prepare it. deposition. That's what he said in his

He's expected to testify to that here today again

or during this trial. Your Honor, however, nothing -- there is nothing in that letter to the Series A investors and nothing in the release document about the true chronology of the Founders Warrants contained in Mr. Donahey's July 28, 1999, letter and his March 6, 2000, memo. Instead, Your Honor, they told the investors that the Founders Warrants existed. They told the -- They told the

Series A investors that the Founders Warrants had been issued prior to them buying the stock. They knew that was false.

They knew it was false, Your Honor. In addition, Your Honor, Snell & Wilmer failed to tell the truth to investors in an updated Series C confidential information statement, a document sent out to investors who bought $20 million worth of stock. And it was sent to solicit

their continued participation in that offering, Your Honor. And there is nothing in that document -- contained in those four documents prepared by Snell & Wilmer, the two documents by Mr. Donahey and the two documents by Mr. Pulaski. In addition,

Your Honor, there is nothing in there about the claims held by UNITED STATES DISTRICT COURT

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the Series A investors which Snell & Wilmer said in their July 28 letter existed. Snell & Wilmer prepared several other securities offering documents, including a Series F offering document and a debenture offering -- convertible debenture offering during the last months of Visitalk's existence. None of those

documents contained those -- the statements in Snell & Wilmer's own documents. So, Your Honor, we have this ongoing pattern of failing to tell the truth to the investors, the truth they knew existed. And the purpose? The purpose was to keep Visitalk

alive, to keep soliciting money from investors, because Visitalk could not live, Visitalk could not survive, Visitalk would be forced to shut down if in fact it didn't bring in new money from investors because it had no revenue from operations. Your Honor, another point that is important in this case is that Snell & Wilmer began representing Peter Thimmesch and Michael O'Donnell and their spouses personally for their estate planning. Now, the date on which they first began

representing them personally is in dispute whether it was January of 2000, slightly before or slightly after. But there

is no dispute that they were representing Thimmesch and O'Donnell for their estate planning. And, Your Honor, there is

an e-mail from October of 1999 through which Marcia O'Donnell was referred to Dick Mallery, Mr. Mallery, at Snell & Wilmer UNITED STATES DISTRICT COURT

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for estate planning by an employee of Goldman Sachs. So before they went through all the gymnastics with the Series A investors and told them the false story regarding the Founders Warrants, before they had the Board meeting on November 24, 1999, at which time they never told the Board the truth, before they sent the November 2 memo to the Board in which they didn't tell the Board the truth regarding the Founders Warrants, the O'Donnells and the Thimmesches were referred to Mr. Mallery at Snell & Wilmer for estate planning work. And there's no dispute, Your Honor, that there was no written conflict waiver by Visitalk for that representation of Peter Thimmesch and Michael O'Donnell for their most valuable -- the only valuable asset they have, the evidence will show, is these claimed rights to these Founders Warrants, which were worth tens of millions of dollars. Mr. Mallery went way beyond the proper role for a lawyer for a corporation. In his own words, he restated or And that was in December

rewrote Visitalk's corporate history.

of 1999, at the time all these documents were going out to the Series A investors to solicit their releases, all of which contained a false story. He also -- And the only purpose of

those documents, Your Honor, the only purpose of restating and rewriting corporate history was to cover up the truth regarding the backdating of the Founders Warrants. UNITED STATES DISTRICT COURT

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Mr. Mallery also gave business advice to the company. Mr. Mallery also promoted the company's stock. He pumped it to

investors despite his knowledge of contrary facts regarding the condition of the company. True to or well in form, Your Honor, Mr. Mallery testified in his deposition -- he's certainly expected to testify here the same way -- that he doesn't recall the work he did restating Visitalk's corporate history. The evidence will demonstrate, Your Honor, that Snell & Wilmer assisted Peter Thimmesch and Michael O'Donnell with the cover-up of the truth, the backdating of the Founders Warrants. They did not tell the truth to the investors. did not tell the truth to the Board of Directors. They

And these

actions certainly fall below the standard of care for lawyers in Arizona. That is the most fundamental obligation of a

lawyer, is to tell the truth. Those actions, Your Honor, also provided substantial assistance to Visitalk and to Peter Thimmesch and Michael O'Donnell in covering up the truth and in keeping -artificially prolonging Visitalk's life. And the consequence

was the deepened insolvency of the company. They -- Those actions also allowed the company to raise more money from investors. returned. That money should have been

The money from the investors should have been UNITED STATES DISTRICT COURT

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returned to the investors through a rescission offering. didn't do that.

They

The evidence, Your Honor, will also establish that the investors held claims against Visitalk under the bankruptcy code definition, properly included in any calculation of insolvency in this case. First, Your Honor, we know they held claims because Snell & Wilmer itself wrote in their own documents that these investors held claims against the company. Second, Your Honor, Visitalk -- in Visitalk's plan, Visitalk was in Chapter 11, Your Honor will recall. 11 plan was confirmed in that case. A Chapter

And the data in that case,

Visitalk provided in that Chapter 11 plan that the -- its investors held claims and classified them in a separate class and treated them as having claims. The bankruptcy court confirmed that. So we have a

bankruptcy court order confirming the plan, which is res judicata and is binding, adjudicating these persons -necessarily adjudicating the investors as holding claims because they were separately classified. And in that

classification they were treated as holding claims. And they were to receive and did receive a distribution on account of their claims, not a distribution on account of their equity interests. Third, Your Honor, we know that the -- that these UNITED STATES DISTRICT COURT

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investors held claims because subsequent to the confirmation of the Visitalk Chapter 11 plan, the bankruptcy court, Judge Baum, entered another order clarifying Article 12 of the plan, which made clear that Biltmore Associates, as a trustee of the Visitalk Creditors' Trust, was entitled to make distributions of funds to the Visitalk investors on account of their claims. There was an ambiguity in the plan between the article dealing with the plan treatment and the article in the plan setting up the Creditors' Trust, so the trust -- the trustee and the reorganized debtor got an order clarifying those -- the term of the plan regarding the creation of the trust to make clear to the world that Biltmore had the authority to distribute funds to these persons. Now, Your Honor, that motion was filed with the bankruptcy court. bankruptcy court. Snell & Wilmer was a creditor in the Snell & Wilmer received notice of the plan.

Snell & Wilmer necessarily also received notice of the motion to clarify Article 12 of the plan. So we have two bankruptcy court orders determining that the investors held claims. And, Your Honor, last, we know the investors held claims because the investors agreed they held claims. Your

Honor, the Court may determine deepening insolvency damages through two measures. There are two measures that are used to

determine an amount of deepening insolvency damages under the UNITED STATES DISTRICT COURT

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cases. The first deals with the amount of additional indebtedness incurred by a company, in this case, Visitalk, after a particular date, the date on which the tortious act occurred. And, in addition, there's a second method, Your Honor, which deals with, quote, dissipation of assets. refer to it as dissipation of assets. The cases

And fairly read, Your

Honor, that means the diminution in the value of assets between the point at which the tort occurs and the date of bankruptcy. So you're measuring two different events or events over a course of time and two different data points. The first

two data points are the amount of debt on day one and the amount of debt on -- day one being the date the tort occurred and the date of bankruptcy or in the bankruptcy case. And the

second method of calculating it is the value of the assets when the tort occurred and the value of the assets during the bankruptcy. And, Your Honor, here it is clear that based upon the actual documents, including audited financial statements prepared by Ernst & Young during Visitalk's life, that the amount of damages in this case as caused by Snell & Wilmer and by Mr. Thimmesch measured from the point in time in November or December of 1999 is between $17.8 million and $25 million. So, Your Honor, we're not guessing at asset values. UNITED STATES DISTRICT COURT

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We're taking Visitalk's own numbers. were audited by Ernst & Young.

We're taking amounts that

And then we're looking at

actually what the value of the assets were in the bankruptcy case. assets. During the bankruptcy case Visitalk sold all of its It only realized $197,000. So the best measure of the

value of assets in the bankruptcy case is what they sold the assets for, $197,000 and change. In conclusion, Your Honor, the facts here are stubborn things. Somehow, some way Snell & Wilmer lost sight of who Snell & Wilmer forgot what their duties

their client was. were.

And, Your Honor, Snell & Wilmer failed to perform the The

most fundamental duty of a lawyer, to tell the truth.

evidence will clearly demonstrate that Snell & Wilmer did not tell the truth to the Board of its client Visitalk. They

didn't tell the truth in documents, securities documents, sent to investors. And worse, Your Honor, worse, they helped cover up the truth to aid and abet Mr. Thimmesch and Mr. O'Donnell in preserving their Founders Warrants. Those actions, Your Honor, helped artificially prolong Visitalk's corporate life. Those actions resulted in Visitalk

incurring substantial additional indebtedness it had no ability to repay because it only generated $100,000 worth of revenue during its entire short two-and-a-quarter-year life. Because of that, Your Honor, the Visitalk Creditors' UNITED STATES DISTRICT COURT

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Trust created by the bankruptcy court as a result of Visitalk's Chapter -- confirmed Chapter 11 plan created for the benefit of the creditors of Visitalk is clearly entitled to a judgment for damages of not less than $17.8 million and up to $25 million. Thank you, Your Honor. THE COURT: Thank you, sir.

Mr. Birnbaum. MR. BIRNBAUM: Your Honor. Good morning, and thank you very much,

Gary Birnbaum for the defendant Snell & Wilmer.

Your Honor, Snell & Wilmer's work for Visitalk was done properly. honestly. It was done professionally. It was done

And it was done without any criticism whatsoever. Snell & Wilmer reported to and was directed to report

to Visitalk's in-house general counsel, a gentleman named Stephen Best. Mr. Best is a former Assistant United States He is today a partner at the

Attorney, former prosecutor.

Dewey and LaBeouf law firm, one of the largest in the world, where he specializes in corporate governance and internal investigations. At the time of Snell & Wilmer's representation from the beginning to the end, Mr. Best was the in-house general counsel for Visitalk to whom Snell & Wilmer was directed to report. As he will testify and has already testified -- if you'll give us the first slide, Mr. Baker -- Mr. Best was the UNITED STATES DISTRICT COURT

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person best situated to evaluate Snell & Wilmer's work.

And

Mr. Best will say that they acted professionally, attentively, satisfactorily, always with his authorization and always in the best interests of Visitalk. Mr. Best will also testify that Snell & Wilmer's work, in his own words, the second slide, surpassed all of his demanding expectations. Snell & Wilmer's work. Now, Mr. Best will also confirm that the various hodgepodge of securities issues that Mr. Kaup has just presented all, all, predated Snell & Wilmer's arrival as counsel to Visitalk. The Series A, the Series B, the Series C stock offerings were all undertaken by Visitalk at a time that they were either unrepresented or represented by Bryan Cave, another law firm, a gentleman named Joe Richardson, who was the counsel before Snell & Wilmer ever arrived. Not only had those issuances already been undertaken, but, as Mr. Best will also confirm, third slide, the documentation -- all of the corporate and securities documentation was a disaster when Snell & Wilmer arrived on the scene. Now, as you would expect, Mr. Best was more than a little concerned about this disastrous documentation situation. Mr. Best wanted to clear up the situation, identify any UNITED STATES DISTRICT COURT That's the person best able to assess

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problems, and report to the Visitalk Board of Directors, a Board of Directors, by the way, which at that point in time consisted of people like Jeffrey Hirschberg, the former vice chairman of the Ernst & Young international accounting firm, and Alan Kaplan, who was an Internet expert who had recently sold his own company, privately held company, for $284 million, anything but an unsophisticated group of individuals. Now, the principal issue that existed at this time -and Mr. Kaup spent a few minutes talking about it -- related to the so-called Founders Warrants. Now, the Founders Warrants And that's an

also preceded Snell & Wilmer's arrival. important fact.

What were the issues relating to the Founders Warrants? Well, there are two. of them as two. Conceptually it's easy to think

The first one is were they properly approved,

and the second one is were they properly disclosed? Snell & Wilmer was asked by Mr. Best -- and here's his -- the confirmation letter of Snell & Wilmer's engagement, Slide 4 -- they were initially asked by Mr. Best to review these issues on a discreet and confidential basis based only on the information provided to Mr. Best -- by Mr. Best. me. So initially that's what they did. Excuse

They reported to

Mr. Best.

But ultimately they undertook a full investigation,

everything that was necessary to determine this issue of when UNITED STATES DISTRICT COURT

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were the Founders Warrants agreed to?

When did the Board of Because plaintiff's

Directors agree that they could be issued?

entire case, setting aside its other flaws, all falls or rises on this issue of, well, were the Founders Warrants approved back on September 12 of 1998 as Snell & Wilmer and Visitalk and the officers and directors all claimed they were? So Snell & Wilmer undertook an investigation, and they concluded that the Founders Warrants were approved on September 12, 1998, by Mr. Thimmesch and Mr. O'Donnell, the only two directors of the company existing at that time, eliminating all of the arguments about, well, there were other directors whose approval was needed, et cetera. Well, what did Snell & Wilmer base its conclusion on? Why is it the conclusion of the Board of Directors that September 12, 1998, was the key date? Well, because the meeting that occurred on September 12, 1998, had four people present. Peter Thimmesch says the

meeting occurred, and we approved the Founders Warrants. Cynthia Thimmesch says the meeting was held, and we approved the Founders Warrants. Mike O'Donnell, the co-founder, says

the meeting was held, and we approved the Founders Warrants. Marcia O'Donnell says the meeting was held, and Peter and Michael approved the Founders Warrants. The only issue that ever existed was whether Mark Cardwell was already a director and shareholder of the company. UNITED STATES DISTRICT COURT

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But Mark Cardwell confirms that he was neither on September 12, 1998. And the documentary evidence -- well, it fills a ledger, but let me give you a very quick overview, Your Honor. For example, slide number five here is a unanimous consent that was prepared by Joe Richardson, not by Snell & Wilmer, before Snell & Wilmer ever comes to the scene. Joe Richardson of

Bryan Cave prepares a unanimous consent document which he dates on the second page as of September 12, 1998. And this document

is signed by Peter Thimmesch and by Michael O'Donnell as the sole directors of Visitalk. The company itself has a series of press releases, if you go to the next slide. For example, here's the press

release on September 3rd when the company is founded by Peter Thimmesch and Michael O'Donnell, nobody else. Next slide. Here is the press release on the 17th Mark

announcing the arrival of Mark Cardwell on the scene.

Cardwell is actually employed on September 15th and becomes a Directer of the company on September 18th, all of which dates, as you well know, are after September 12th. The next exhibit is the payroll records. Visitalk

employed its employees through a subcontracting employment service. Here is Mark Cardwell's application for employment.

And if you look at the absolute bottom of the page, you will see that Mr. Cardwell lists his own date of hire as September UNITED STATES DISTRICT COURT

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15.

He's just not there on September 12. Next there is a Series C -- Oh, I'm sorry. I missed It's a

this one.

The next exhibit is Visitalk Milestones.

marketing brochure prepared by the company and used by the company pointing out that the first Board of Directors meeting occurred on September 12, 1998, attended by Mr. Thimmesch and Mr. O'Donnell and no one else, because they are in fact the only Directors. Let's go on to the next exhibit. The Series C

Offering you'll hear a lot about, Your Honor, but don't be confused. There are two confidential information statements.

First the company did one that was prepared principally by Ray Gaston, their chief financial officer. Then you'll hear that

there's an updated one that Snell & Wilmer participates in. This is the first one. information statement. This is the company's confidential And there it is, Mark Cardwell, date of

employment, has been the Chief Technology Officer since September 17, 1998. Let's go back in time even a step further. The In

Series A Offering was basically prepared by Mr. Thimmesch. fact, you'll hear Mr. Thimmesch, a very skilled man in many respects, got a lot of his forms from Kinko's. were ultimately reviewed by Joe Richardson. prepared by Mr. Thimmesch. Snell & Wilmer. UNITED STATES DISTRICT COURT Some of them

Some were just

But none of them are prepared by

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Well, here is the term sheet prepared by Mr. Thimmesch for the Series A Offering. What is the significance of it?

Look at the shares outstanding prior to the offering. 5,100,000 shares; 2.6 million of Mr. Thimmesch, 2.5 million of Mr. O'Donnell. point in time. And then I believe the most important exhibit on this issue, Your Honor, is Exhibit 566. Mr. -- As Snell & Wilmer and the Board were trying to clarify this issue -- and they had the testimony of Mr. Thimmesch, Mrs. Thimmesch, Mr. O'Donnell, Mrs. O'Donnell -there's still Mark Cardwell. September 12? Was Mark Cardwell there on There is no Mark Cardwell on the scene at this

The only hole is what does Mark Cardwell say?

So they went to Mark Cardwell, and they said, "Mr. Cardwell, would you please confirm the real facts, because you yourself might even arguably have some sort of a claim --" Cardwell, when he joined the company, got a million shares of stock -- "and you didn't know the Founders Warrants were outstanding. Well, Mr. Cardwell were they outstanding or were Were you a

they not outstanding when you joined the company? Director when the Founders Warrants were approved?" And Mr. Cardwell says I was not.

Here is his

statement in writing signed by Mr. Cardwell stating that he agrees he did not become an employee or shareholder until September 15 and did not become a Director until September 18, UNITED STATES DISTRICT COURT

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1998.

And, therefore, the whole issue of the timing of the

Founders Warrants is put to rest. But if it isn't sufficiently put to rest at this point in time, it gets even better, because the Board of Visitalk determined that there was still a disclosure issue. Even if

the Founders Warrants had all been properly and timely approved, there were Series A shareholders -- By the way, Series A was $250,000. That's the total. But there were

people who had invested $250,000.

And because of that term

sheet prepared by Mr. Thimmesch which you just saw, they had not been told that the Founders Warrants were outstanding. And as a consequence of that, the Board needed to decide what to do. There were people out there who had shares

who had not received full disclosure of these warrants or options, which could quite potentially dilute their interest. So all kinds of alternatives were discussed by the Board of Directors. You'll see they got alternatives suggested

by the Board members, by Snell & Wilmer, by other law firms, by different lawyers at Snell & Wilmer. And ultimately we get to

November 24, 1999, when the Board of Directors of Visitalk meets and decides what to do. Let me give you a picture of what happens at that meeting, Judge. They go into executive session, and they So Snell & Wilmer isn't even there at

exclude Snell & Wilmer.

the time that the decision is made. UNITED STATES DISTRICT COURT

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In fact, they get on the telephone their other law firms, because Snell & Wilmer is merely securities counsel. They get some small little firms, Gibson, Dunn & Crutcher, to advise them on corporate law, and a firm called Lynn Stodghill, an employment law specialty firm from Texas, to advise them on employment law. With those two on the phone and Snell & Wilmer excluded from the room, they then decide to do something perfectly rational, wise if not just rational. They decide

that they're going to ask every Series A shareholder to sign a release after being advised of the Founders Warrants and to confirm that they want to stay in the deal. But if any, any,

shareholder says no -- and the lawyers from Gibson Dunn and Lynn Stodghill are very clear about this -- if any shareholder says no, then this release program will not be acceptable, and Mr. Thimmesch and Mr. O'Donnell will have to agree to give up their warrants. And Thimmesch and O'Donnell agree to that.

And that's the plan that's adopted in the absence of Snell & Wilmer, a perfectly good plan that we'd be happy to take authorship of, but we didn't author it. The plan is then implemented, successfully and completely implemented. Slide number 13 is the testimony about the review of this plan: "There was no absolute answer. Snell & Wilmer gave

us all the possibilities.

Then the company made an informed

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business decision as to how to proceed, and then they proceeded." This is the general counsel's testimony.

How did they proceed? They went to the Series A investors. Specifically

Alan Kaplan, who you heard about, took the laboring oar, contacted all 47 individuals. And every single one signed a

written release acknowledging the existence of the Founders Warrants and deciding that they wanted to remain in the company anyway. Mr. Best and the Directors, in Mr. Best's words, found this to be an appropriate solution, a good one, and one that was in the best interests of Visitalk. So -- Now, with respect to everyone else after Series A, the Founders Warrants were fully disclosed to everyone else. So what's the problem? complaint by anyone? Well, the plaintiff admits that the Founders Warrants were fully disclosed. On the Series B investors, they say: You Why do we even have a

Well, they were fully disclosed but not well enough.

disclosed their existence, but you didn't disclose enough about their terms. Well, that's because they're pretending that we have mom-and-pop investors. In fact, every investor in Visitalk, Some of them were

every single one, is an accredited investor. UNITED STATES DISTRICT COURT

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giant companies like China.com and MP3. individuals are all accredited investors.

But even the And the disclosure

to those people was more than adequate in the circumstances. Nothing material was omitted. And how do we know that? Because the two securities experts that you'll hear from in this case, Mike Donahey, who is from Snell & Wilmer, and an independent expert, Scott Theobald, will both tell you that the Series B offering was perfectly appropriate, and adequate disclosure was made to the accredited investors, and Steve Best, the general counsel, also agrees with that. So who is going to disagree? No securities attorney. to disagree. The plaintiff's only expert in this case, Mr. Boyd Lemon, the expert for hire from California -- legalmal.com is his Web site -- the expert for hire admits he is not a securities lawyer, and he is not a securities expert. You know, Your Honor, it is fair right at the outset of this case to suggest that you as the trier of fact may wonder in a case in which alleged securities malfeasance exists by securities lawyers in connection with securities offerings, where is the securities law expert necessary to establish the standard of care and breach of standard of care? There is no securities law expert on the plaintiff's UNITED STATES DISTRICT COURT No securities lawyer is going

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side of this case. What about Series C now? Well, we've covered A and B. The Founders Warrants

were fully disclosed by Visitalk in the Series C Offering, but, nevertheless -- and here's where we get to the heart of this strange issue -- the plaintiffs say, nevertheless, the Series A and B and C investors all had claims against Visitalk. The Series A investors, even though they signed releases, they say, oh, those releases were no good, so there were potential claims. The Series B investors were told about

the warrants, but they say, well, the disclosure wasn't good enough. The Series C investors were told everything, and the They concede that. But they

disclosure was good enough.

nevertheless say to you but it doesn't matter, Judge, because you know what the Series C investors were not told? They were

not told that Series A and B might have claims, and they claim that somehow or other that is a material disclosure. And, therefore, I want to use almost all the time left that I have, Your Honor, to talk about the so-called claims, because these claims are the heart of plaintiff's case. The case is founded on the notion that the claims of these investors, claims of the investors, somehow or other constitutes debt of Visitalk. And because all of the capital

invested by the investors in Visitalk in their view really wasn't capital at all -- it was all really debt; it all needs UNITED STATES DISTRICT COURT

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to be reclassified -- therefore, Visitalk, in the words of Mr. Schweigert, Visitalk was insolvent from day one, day one, it was never solvent, because every dollar of equity it raised was all really debt, because Visitalk owed all this money back to all of these people. Now, it took their money, it used their money, it spent their money as capital, but their position is no, no, it was all debt because they all had claims, and those claims constitute debt, not equity, and therefore every time another investor invested a dollar, thinking they were investing capital in the company, ah-hah, they were really giving the company debt. repayment. They were really creating a liability for

And somehow or other, every dollar of equity that

came in deepened the insolvency of Visitalk that supposedly existed from day one. And, therefore, Snell & Wilmer, when it helped with each of the equity offerings, was somehow deepening the insolvency by creating new claims. Now, Your Honor, it's difficult to get a grasp on that theory, but let me say that there are three things wrong with it. Factually -- or legally there were no claims. Factually

there were no claims.

Definitionally there were no claims.

There's the three things wrong with this theory that there were claims which constituted debt, which meant that Visitalk was insolvent, which meant that every dollar they UNITED STATES DISTRICT COURT

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raised deepened the insolvency and that Visitalk, which they claim was worth absolutely nothing from day one -- its technology was valueless, the company was worth nothing -- but, nevertheless, it has what now appears to be a $17 million claim because its solvency deepened. Well, let me just say at the outset of this brief discussion that the logical problem with that argument is if an investor invested a dollar and lost that dollar, and there was some bad action that caused the loss, the investor may have a claim to get that dollar back. Visitalk -- And of course the

plaintiff here does not hold the claims of the investors or of creditors as a matter of law. This Court has already correctly So their position is

ruled that they represent only Visitalk.

a company that had no assets of any value, no technology of any value, was insolvent from day one, then received capital, it all should be called debt. Therefore, every time they got a

dollar, they went further in debt, and therefore all that debt is claims that needs to be repaid, and therefore we've deepened the insolvency. It is the single most illogical basis for a lawsuit that I suspect this Court has heard at least in a long time. So let's go through the claims legally. By December

13th, 1999, every single Series A investor had signed a release. Give me Slide 15, Mr. Baker. UNITED STATES DISTRICT COURT

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And the release reads, Your Honor, as every release you've seen in your long and illustrious career reads, it's every claim -- all claims, known and unknown, et cetera, et cetera, relating in any way to this Founders Warrant situation. And of course the release of the Series A claims eliminates any discussion of the Series B and the Series C, all of which they say are based on the failure to disclose the alleged Series A claims. So that's the basic legal problem.

Now, factually, factually, there were no claims. Mr. Kaup uses the colorful phrase facts are stubborn things. Here's a few facts, Your Honor: No claim -- and we're

talking Series A, Series B, Series C, relating to these Founders Warrants -- no claim was ever threatened, period. Number two, no claim was ever filed. Number three, no claim was otherwise asserted for something other than a formal filing. Further, number four, when Visitalk filed its Chapter 11 proceeding, as you would expect, Slide 16, Visitalk was required in its statement of financial affairs to list all of its contingent liabilities. claims listed. Next, as you would expect, Your Honor, when a bankruptcy proceeding is filed, parties with claims are required, prior to the bar date, to file proofs of claim. UNITED STATES DISTRICT COURT There are none. There are no

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No proofs of claim were ever filed by any investor as a result of this Founders Warrants issue. Next, once you're in the bankruptcy, Visitalk is required to file monthly business and operations reports. And

those reports -- there's a sample on the screen; this one is January, 2001 -- under penalty of perjury requires that Visitalk disclose all of its pre-petition liabilities. There

are no claims disclosed on any of these operating reports. Perhaps the most interesting line, in light of Mr. Kaup's argument, is in the Visitalk reorganization plan disclosure statement, which is Slide 18, here, if you look, Your Honor, at the page Mr. Baker has just highlighted for you, in bold and underlined type -- if it wasn't sufficient emphasis to do just one or the other, in bold and underlined type -- "No shareholder of any class of equity will receive any distribution on account of their equity interest." This

provision of the plan, this chapter of the plan is never modified or altered in any respect. When the second amended plan is confirmed by the Court -- and that's Exhibit 656, is the plan -- that acts as a bar. It is res judicata barring any subsequent claims. And in fact, Your Honor, there's even an interesting bit of subsequent history here, because, for other reasons, on December 13th, 1999, Visitalk updated its Series C confidential information statement. That's the statement that I showed you

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that Ray Gaston had prepared. Now they update it with the assistance of Snell & Wilmer, and in this updated financial statement, they grant to every Series C investor a right to cancel the subscription, because many of them had already sent in subscription documents and funds. cancel. They give them a right to

And some of them -- I think it's six or seven --

actually accept that right. So for all of those reasons, there's factually no claim either. claim. And as far as definitionally, Mr. Kaup referred to the bankruptcy code. Every witness in the case, bankruptcy code, There's legally no claim. There's factually no

financial accounting standards board, pronouncements, everybody will agree in order to have a claim that constitutes a liability and that therefore can be booked as a debt, the claim has to be not only measurable, but it has to be likely. It has

to be probable of assertion and probable that it will result in some loss. And the Ninth Circuit in the Sierra Steel case that

the Court had previously cited in its prior opinions in this case, in see Sierra Steel, the Ninth Circuit said: In

determining whether there's a claim, a debt, a liability that should have been stated, we use 20/20 hindsight. We look

backwards, and we say in light of everything I've just gone over, is there really any possibility that there was some UNITED STATES DISTRICT COURT

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material indebtedness that existed that was not disclosed? With 20/20 hindsight, we know there are no claims. know none were ever perfected. threatened. We know none were ever even We know that We

We know that none were ever filed.

none were ever adjudicated.

We know there was no proof of There is no

claim ever filed in the bankruptcy proceeding. claim.

This entire notion is an artificial construct created to try to create a lawsuit against Snell & Wilmer for monies that, if anybody lost, the investors in Visitalk lost, but they had full disclosure, and they never asserted any claim. There

was no loss to Visitalk, and there was no deepening insolvency. Now, what if there was some type of a claim? What if

everything I've said is in effect wrong and the Court goes down a different path? Well, we know that the plaintiff here, Biltmore Associates, cannot assert any shareholder claims. that. The Court's already ruled that. They admit

We know they're not The

here asserting any creditor claims. Court's already ruled that.

They admit that.

So the only claims they can assert are claims of Visitalk, this entity that they claim was valueless from day one and that failed because of a series of things that they allege from the .com failure, the inability to raise capital quickly enough, the deficiencies of the technology, alleged UNITED STATES DISTRICT COURT

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malfeasance by the officers of the company, bad business decisions by the Board of the company. All of those are part

of the story of Visitalk, at least from the plaintiff's perspective. So where is the Snell & Wilmer causing damage event? And that's a very important point, Your Honor, as I close this discussion of the securities issues. What about causation? What about damages? Isn't it

interesting that the plaintiff just made a half hour or so opening statement in a tort case founded on negligence, legal malpractice, in which the words causation and resultant damages never appear? And the reason is simple, because Snell & Wilmer, which did nothing wrong, even if you assume their actions were somehow wrongful, didn't cause any loss to Visitalk in part because Visitalk didn't lose anything other than investor capital, which it lost as a result of the failure of its technology, the failure of its business plan, the operation of the company in the ordinary course of business. This is a unique case. .Com failures have looked for Looking to the

many excuses over the years, as you well know. lawyers in this case is somewhat unique. So damages and causation are lacking.

The underlying

facts establish that the Founders Warrants were approved on the 12th of September, 1998. And there is no securities related

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claim here, and no securities expert will say there is. Now, I want to move very briefly onto something that's very important and very different. What about the damages?

Well, first, no one has tried to allocate any damage to Snell & Wilmer. Despite the burden that you have to show

that Snell & Wilmer caused some specific loss, there is no witness in this case, expert or otherwise, who is going to identify a specific loss caused by Snell & Wilmer as opposed to losses caused by 15 other contributing factors. But there's something more important here, Your Honor. The plaintiff here sued a whole variety of people, officers and directors of Visitalk, the principals of the company, the company's auditors, et cetera. They have concluded settlements

in the form of covenants not to execute with a variety of those people. The covenants not to execute involve the entry of

judgments, I think all of which have gone through Your Honor, but at least some of them have, total -- In fact, I think it's even important, Judge, that at least on one occasion you questioned whether the damage number was real, whether it really was something that they could establish was caused by that individual defendant. entered. I'm not going to belabor this opening by going through all the judgments. They total $176.8 million, $176.8 million. And ultimately the judgment was

The total damages that Visitalk allegedly suffered by the UNITED STATES DISTRICT COURT

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action of all the defendants, including Snell & Wilmer, is somewhere between $17 million and $25 million. Well, why is that important? Let me show you, Your Honor, if I may place it on the screen, Slide 23. Arizona Revised Statute 12-2504, this is a

piece of the Uniform Contribution Among Tortfeasors Act in Arizona. It says quite clearly "If a release or covenant not

to sue or not to enforce a judgment is given in good faith to one of two or more persons liable for the same injury" -that's exactly our case -- "then" you go down to subparagraph one, "it reduces the claims against the others" -- that's Snell & Wilmer -- "to the extent of any amount stipulated by the release or the covenant." In other words, Snell & Wilmer is being sued for $17 million on a claim where the plaintiffs have already statutorily recovered $176 million. There is no claim left

notwithstanding all of the other failures of the plaintiff's case. The statute controls here. In fact, Your Honor, we're

about to go through two or three weeks of evidence to establish what Mr. Kaup just told you in the opening statement. believe they have $17 million worth of claims. They

The Court can

take judicial notice of the fact -- we have the evidence as well -- but you can take judicial notice of the fact that they have $176 million of statutory recoveries. They can't recover

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anymore money against Snell & Wilmer, notwithstanding the factual issues that we've just described. Now, there's a couple of other matters that require very brief attention. There's an allegation here of conflict Snell & Wilmer provided estate

of interest by Snell & Wilmer.

planning advice to the Thimmesches and the O'Donnells while it was representing Visitalk. That's absolutely true. And in the So what?

classic demur sense, Your Honor, let me say so what? T