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The Company reported in its report for the quarter ended June 30, 2000, that it was not involved in any form of litigation, nor had it been served by anyone, however, it was being threatened of being sued by parties believed to be short in the Company's stock. Some of these parties were attempting to extort a certain amount of shares from the Company by making accusations, known to be blatant lies, against the Company and the Company's CEO, Mr. Luis Alvarez.
Management felt compelled to disclose the Company's dealings with these parties at that time in the unlikely event that either the Company or the CEO would be served with a frivolous lawsuit. The Company CEO and the Company attorneys met with these parties' attorneys to discuss the nature of their complaints. Neither the Company nor Mr. Alvarez was ever served, either personally or through any of the attorneys, as Mr. Alvarez suggested they could do. The Company's disclosure, therefore, was done in an abundance of caution. The Company was prepared to be served by such parties and possesses numerous articles of evidence defending the Company and CEO against their accusations. Management believed that these parties were merely attempting to apply pressure, by filing frivolous complaints and motions, in order to receive a specified amount of common shares, but without having to expose themselves to any sort of testimony. Thus, the following has been their course of action:
(1) On February 22, 2000, CVI Group ("CVI"), a Canadian joint venture, and others associated with CVI (collectively, "Plaintiffs"), filled in Palm Beach County, Florida, Circuit Court, but did not serve, an action styled CVI Group, et al. V. Whitehall Enterprises, Inc. and Luis Alvarez, Case No. CL 00-1807 AB (the "Lawsuit"). The Lawsuit was a desperate attempt to unwind certain arms-length transactions in the shares of Whitehall Enterprises, Inc. ("Whitehall") to which a Plaintiff or various Plaintiffs were a party, including a July 30, 1999 written agreement affording Whitehall's CEO, Luis Alvarez ("Alvarez"), the option to purchase from plaintiff, 1274328 Ontario, Inc., four million (4,000,000) shares of Whitehall preferred stock (collectively, the "Transactions"). Plaintiffs falsely depicted themselves as victims of a scheme by defendants to increase demand for Whitehall shares. They complained also of damage resulting from threats of physical harm allegedly made by Mr. Alvarez.
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As acknowledged in writing by Plaintiffs' counsel, there was no merit whatever to the Lawsuit. Mr. Alvarez did not threaten Plaintiffs as alleged in the Lawsuit, nor were Plaintiffs otherwise entitled to relief from the transactions. Whitehall and Mr. Alvarez would have aggressively defended the Lawsuit, attacking among other things, the sufficiency of Plaintiffs attempts at service of process and will file when appropriate, a counter-complaint. Whitehall and Mr. Alvarez moved to dismiss the complaint as failing to state a cause of action, for improper service of process and improper venue. That motion was scheduled to be heard on October 18, 2001. However, on October 15, 2001, while the Plaintiffs were testifying under oath in another related matter in another jurisdiction, Plaintiffs' counsel contacted Whitehall's counsel to voluntarily dismiss the lawsuit without prejudice. On October 19th, the Palm Beach County Circuit Court entered an Agreed Order of Dismissal without prejudice.
(2) On March 27, 2000, 127 Ontario and 129 Ontario ("Ontario") filed a Motion with the United States Bankruptcy Court, Southern District of Florida to require the Company to fulfill certain terms of the Court's Confirmation Order of September 8, 1998, specifically payment of $75,000 in cash, issuance of 4,000,000 shares of Preferred Stock and the appointment of three of the five directors of the Company. Coincidentally, the attorneys for Ontario, which also represent CVI, did not notify the Company attorneys and the U.S. Bankruptcy Court granted and Order on October 16, 2000 to this effect.
On October 25, 2000, the Company moved to vacate the Order on the basis that each of the matters ordered by the Court had been previously satisfied and fulfilled by the Company. Based on these circumstances, the Company believed that it was in a position to demonstrate essential compliance with the Court's Order and, consequently, there should be no impact on the Company's operations since it has satisfied previously the specific terms of the Order.
The parties stipulated and agreed that the motion to vacate the Bankruptcy Court's October 16, 2001 Order would be granted in the event that the Plaintiffs failed to secure a default judgment on the Lawsuit filed in Palm Beach County, but not served on the Company or Mr. Alvarez, either personally or through any of the attorneys. On or about February 2, 2001, the Plaintiffs in the Lawsuit withdrew their motion for entry of a default judgment upon the filing by defendants of a motion to dismiss the Lawsuit. Thus, on March 13th, the United States Bankruptcy Court, Southern District of Florida entered an Order granting the Company's motion to vacate the order issued on October 16, 2000 by the Court.
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While, both of the filings referred to above were frivolous in nature and have been resolved, the Company is legally bound to disclose them. Management believes that the disclosure itself was what the parties were trying to use as leverage against the Company and the CEO. However, the Company and the CEO vigorously defended themselves and the parties were not successful.
On December 22, 2000, the Company filed in Superior Court of the state of Arizona, County of Maricopa, a complaint styled Whitehall Enterprises, Inc., a Delaware corporation; and Alternative Lending Group, Inc., an Illinois corporation, Plaintiffs, v. R. Jeffrey Mertz and Kelly Mertz, husband and wife, Defendants, Case Number CV2000022536. The complaint charges the Defendants with Breach of Contract, Conversion, Breach of Fiduciary Duty, Fraudulent Conveyance and Unjust Enrichment.
Subsequent to the acquisition of ALG by Whitehall and pursuant to an Employment Agreement, Mr. Robert Jeffrey Mertz ("Mertz") continued to be employed as the President of ALG. In that capacity, Mertz retained significant control over ALG's corporate accounts and operations.
In or about June 2000, Mertz arranged to purchase a home in Paradise Valley for approximately $1.5 million. Mertz purchased the home for his personal use. The purchase of the home conferred no benefit on ALG. Mertz made arrangements to borrow the bulk of the purchase price from ALG and other third parties. Mertz represented on his application and attached financial statements that he was the owner of both ALG and the 8 million Whitehall shares that Whitehall had used to purchase ALG. Mertz also represented that certain corporate accounts of ALG, and that certain vehicles leased through ALG, were his personal assets. Mertz made additional false disclosures to his lenders in order to secure financing. Specifically, Mertz falsely represented that he had received income from MiB, which at the time was in acquisition negotiations with Whitehall. Mertz also falsely reported income from another company. Mertz did not have sufficient personal assets to meet his down payment obligations. Consequently, he arranged for ALG funds to be wired from ALG accounts in order to meet his down payment obligations. Mertz falsely represented the true purchase price of the home. Although he indicated in his loan documents that the sale price was approximately $1.5 million, Mertz made arrangements for approximately $200,000 to be returned to him after the loans closed. With assistance from fellow ALG employee, Jonathan Reece, Mertz packaged the loan transaction through ALG in order to hide his illegal activity. However, Mertz did not disclose to his
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lenders that he was employed by ALG. Instead, he falsely represented that he was employed by Whitehall and that he was a customer of ALG. Although Mr. Reece was not an ALG loan officer, he represented himself as one at Mertz's direction in order to mislead the lending banks. By implicating ALG in the transaction, Mertz subjected the Company to potential recourse by the lender banks. Mertz's various misrepresentations violated state and federal criminal banking laws, and constituted a fraud on all of the participants in the transaction, including ALG.
Defendants also used ALG assets for personal reasons to the detriment of ALG. Among other things, Whitehall learned that Defendants used their ALG credit cards to purchase in excess of $200,000 in goods and services intended to benefit Defendants personally, and which conferred no benefit to ALG. These items included purchases from Victoria's secret, limousine travel to Las Vegas, cash advances at casinos, and other consumer goods, including furniture and accessories for the Defendants' newly purchased Paradise Valley home.
In addition to discovering several acts of misconduct by Mertz, including the misappropriation of ALG funds, Mertz had mismanaged ALG and had failed to use his best efforts to secure revenue for ALG. Therefore, on November 10, 2000, pursuant to its authority under the Articles of Incorporation and Bylaws of ALG, Whitehall removed Mertz and Jonathan Reece as Directors of ALG. Whitehall appointed Luis Alvarez, James Mack, and Vincent Landis as replacement directors. That same day, ALG terminated Mertz's employment with ALG. Mr. Jonathan Reece and Mrs. Kelly Mertz were also terminated. The new Directors then appointed James Mack as President and Secretary.
In anticipation of his termination, Mertz arranged for a colleague to remove his office computer from the ALG office. Mertz also removed various records regarding ALG's accounts. Mertz's purpose in taking these records was to hinder the ability of Whitehall and ALG to discover his various acts of embezzlement and fraud. The computer in question contained proprietary documents and client files belonging to ALG depriving ALG of valuable business information, which cannot be replaced.
Immediately following his termination, Mertz contacted representatives of Merrill Lynch, which managed certain accounts of ALG. Mertz instructed the Merrill Lynch representatives to transfer funds from ALG accounts into his personal accounts, or into accounts he had opened in the name of ALG but which were not listed on ALG's financial reports and were, therefore, unknown to Whitehall and new ALG President James Mack. Without knowing that Mertz had been terminated, Merrill Lynch complied with Mertz's requests. These misappropriated funds from ALG's Merrill Lynch accounts were intended to be used to meet ALG's November payroll obligations. As a result of Mertz's embezzlement, ALG incurred indebtedness to its employee leasing company, which funded ALG's payroll obligations.
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In addition to his unauthorized use of the funds in ALG's Merrill Lynch accounts, Mertz contacted representatives of Northwestern Mutual Life Insurance Company to obtain one or more loans against the policies. The Northwestern representatives arranged for Mertz to receive approximately $100,000 as a loan secured by the Northwestern life insurance policies. Mertz then used the proceeds from the loan, which rightfully belong to ALG for his personal benefit, therefore, secreting the proceeds of the Northwestern Mutual Life loan with the intent to defraud Plaintiffs. The Northwestern Mutual life insurance policies are an asset of ALG. This representation was confirmed by an Eide Bailey audit report of ALG provided to Whitehall in connection with the acquisition of ALG.
Mertz's various unauthorized uses of ALG funds, and his mismanagement of ALG, constitute acts in breach of his Employment Agreement with ALG. Without authority from ALG or Whitehall, Mertz unlawfully converted funds belonging to ALG for his personal use. Mertz's various unauthorized uses of ALG funds, and his mismanagement of ALG, constitute acts in breach of his fiduciary duty to ALG and to Whitehall, as the sole shareholder of ALG. Defendants have made transfers of funds with the intent to hinder, delay, or defraud ALG and Whitehall in violation of A.R.S. ss. 44-1001 et. seq. Mertz has illegally and without authorization obtained ALG funds with the intent to defraud Plaintiffs. Mertz also transferred funds to other personal accounts and/or used a portion of the ALG funds to secure legal representation for Defendants, for Jonathan Reece, and for Mindi Osborn, the bookkeeper for ALG who was also terminated.
At all times relevant to the allegations set forth herein, a fiduciary and agency relationship existed between Mertz, ALG, and Whitehall, as the sole shareholder of ALG and at all times relevant to the allegations set forth herein, Mertz owed a duty of care and loyalty to ALG and Whitehall, as the sole shareholder of ALG. Mertz's conduct constitutes a breach of his duties of care and loyalty to ALG.
The Defendants have been enriched by the wrongdoing described herein and the Plaintiffs have been unjustly deprived of assets as a result of the Defendants' wrongdoing. There is a connection between Defendants' enrichment and the harm caused to Plaintiffs.
ALG is the rightful owner of, and was entitled to possess, the aforementioned office computer, credit cards, a 2001 Porsche leased without authorization, and a 1999 GMC Yukon. ALG demanded the return of said property and Mertz refused.
Therefore, incorporating the allegations set forth herein, the Plaintiffs requested the Court to grant relief in favor of Plaintiffs and against Defendants as follows:
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A Writ of Replevin directing the Sheriff to recover possession of ALG's credit cards, its office computer, and the two leased automobiles, and to return same to ALG;
A Writ of Attachment against Defendants' bank accounts to prevent them from removing the assets of ALG from the jurisdiction;
An injunction ordering Mertz to turn over records of all accounts where he has deposited ALG funds, and to answer questions regarding same;
An award of damages, including punitive damages, in the form of judgment against Defendants in an amount to be proven at trial;
Recovery of its taxable costs and reasonable attorneys' fees;
Pre-judgment and post-judgment interest at the maximum rate permitted by law;
At the present time, no discovery has been conducted in the case. The Company has amended the complaint to include other charges and another defendant, and in evaluating the circumstances has determined that legal action may be taken against other parties.
On February 13, 2001, Mr. Mertz filed a 14 count lawsuit naming Whitehall, ALG, Luis Alvarez, Whitehall Chairman, Jack Mack, ALG President, Vincent Landis, Whitehall Director, Michael Matney, ALG Vice President and their spouses in an effort to divert attention away from his actions and perhaps in order to compel the Company to settle the action detailed above. On August 20, 2001, the parties submitted to the Court a stipulation dismissing as defendants Messrs. Mack and Matney and their spouses.
Although the Superior Court of the State of Arizona, County of Maricopa, has upheld and affirmed ALG's valid and enforceable lis pendens acquired against real property (the home located in Paradise Valley) purchased with funds misappropriated by Mertz from ALG, the Company is not opposed to settlement as suggested by opposing counsel. However, the Company will not agree to do so unless the Company recovers all monies lost as a consequence of Mertz' actions and will proceed to trial if necessary. Both parties have submitted settlement proposals to the other party, but have been subsequently rejected.
Also at issue in the Arizona Litigation is ALG's entitlement to proceeds of four "key man" insurance policies issued by Northwestern Mutual Life Insurance Company ("Northwestern Mutual") on the life of Mertz (collectively, the "Policies"). Mertz died on March 8, 2001, reportedly from acute cocaine intoxication. On that date, ALG, Mertz' former employer, owned the Policies, which Mertz assigned to ALG in 1995 and in 1997.
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Promptly upon Mertz's death, ALG submitted to Northwestern Mutual a claim and demand for all benefits payable under the Policies. Mertz's surviving spouse opposed that claim and demand, contending that ALG's interest in the Policies did not exceed in value the total premiums paid to Northwestern Mutual by ALG. On June 27, 2001, the court ordered Northwestern Mutual to disburse to ALG $93,231.40, an amount equal (in Northwestern Mutual's view) to that portion of the insurance proceeds not claimed by Mrs. Mertz. Thereafter, on or about August 3, 2001, Northwestern Mutual commenced in the Arizona Litigation an interpleader action (the "Interpleader Action"), offering to deposit with the Court the undisbursed insurance proceeds. On August 21, 2001, the Company filed a counterclaim against Northwestern Mutual for its nonpayment of the insurance proceeds.
On May 6, 2002, ALG filed an amended counterclaim complaint against Northwestern Mutual. The complaint charges that ALG had the sole right to obtain loans or advances on the policies and that in or about October 2000 Northwestern Mutual negligently approved and made to Mertz (not ALG) a loan against the policy in the approximate amount of $100,000 even though it knows or should have known that Mertz, who requested the loan (a) was not duly authorized by ALG to obtain the loan or (b) would misappropriate the loan proceeds or otherwise utilize the loan proceeds for his personal benefit. Subsequently, when the cash value of the policy was insufficient to cover the premium, Northwestern Mutual converted the policy to "Paid Up Insurance", thus, substantially reducing the value of the death benefit payable under the policies. Therefore, as a direct and proximate result of Northwestern Mutual's negligence, ALG has been substantially damaged, and demands payment from Northwestern Mutual for any and all sums under any of the Mertz policies plus compensatory damages.
In its action against the Mertz estate in its defense of the Interpleader Action, and in its action against Northwestern Mutual, ALG will pursue vigorously its claim of entitlement to the Policies and will proceed to trial if necessary, unless the parties reach a settlement where the Company recovers all monies lost as a consequence of Mertz's actions.
On July 15,2002 the Mertz estate advised ALG of its intent to sell the Paradise Valley house and requested ALG's assistance by providing a total dollar amount represented by ALG's Lis Pendens on the real property. Mertz would then attempt to post a bond to secure ALG's interest and sell the property. ALG advised that it would not assist Mertz' efforts to sell the real property in which ALG has asserted an interest. ALG's interest is in the residence itself, hence the Lis Pendens is not a claim for money damages secured by the residence. The Lis Pendens provides the world notice of ALG's interest in the residence, effectively preventing sale or disposition of the residence. Mertz filed a motion with the court to compel ALG to set forth the value of the Lis Pendens. The court denied the Mertz motion on August 13,2002.
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On October 31, 2001, Messrs. James Mack, Wallace Qualls and Michael Matney resigned from ALG. The Company has investigated the facts surrounding the unauthorized misappropriation of Company funds by previous employees Messrs. Mack and Qualls. In the future the Company will be filing a complaint against the parties in the State of Michigan, Oakland County Circuit Court for, amongst other charges, Breach of Contract, Breach of Fiduciary Duty, Fraud/Misappropriation, Misappropriation of Confidential Information and Trade Secrets.
On November 21, 2001, Barbara Guerard ("Guerard"), a former employee of Interactive Medical Technologies, Inc. ("IMT"), a Company subsidiary, filed in Miami-Dade County, Florida, Circuit Court a complaint styled Barbara Guerard v. Whitehall Enterprises, Inc., Case No. 01-27941 CA 3 (the "Complaint"). Guerard alleges in the Complaint that the Company owes her substantial unpaid wages. She alleges, too, that the Company violated the Florida Whistleblower Act (the "Act") when in constructively discharged her for objecting to the Company's handling of its contractual dispute with the licensor of IMT's DocPal medical software.
There is no merit whatsoever to the Complaint. The Company did not employ Guerard, it owes to Guerard no back pay and did not discharge Guerard, constructively or otherwise. Moreover, the decision to which Guerard objected involved no violation of any law, rule or regulation.
The Company answered the Complaint and on February 15, 2002, moved for summary judgment. There, the Company makes clear as a matter of law that it is not liable for unpaid wages or under the act. Its motion for summary judgment will be heard in due course. However, Guerard's counsel has agreed that ALG is entitled to judgment on count II of the complaint, the claim for damages under the Whistle-Blower Act, and has therefore abandoned that claim. The court has instructed counsel to prepare an order to that effect (Summary Judgment on count II).
On January 2, 2002 Whitehall Enterprises initiated arbitration against Windmill Scientific Corporation for its illegal cancellation of its Licensing Agreement with Whitehall. Windmill wrongfully repudiated the Agreement by refusing to honor its commitment to accept payment of the amount due and owing on October 15, 2001. Pursuant to Whitehall's investigation it amended its arbitration statement of claim to include: (1) Fraudulent Inducement, (2) Negligent Misrepresentation, (3) Declaratory Judgment; and (4) Breach of Contract. Windmill fraudulently induced Whitehall to assent to the Agreement by knowingly misrepresenting the accuracy, completeness and marketability of the Software. Furthermore, the damages occasioned by Windmill's deceit, inclusive of Dr. Barcala's previous legal matter, together with those sustained by Whitehall as a result of Windmill's repudiation of the Agreement, far exceed the aggregate amount payable to Windmill under the Agreement. However, further investigation and an opinion letter from an independent intellectual property attorney qualified as an expert revealed that Windmill is not the sole owner of the proprietary rights in the DocPal Medical Review software licensed to Whitehall. Therefore, on August 23, 2000, the date of the Agreement, the software could not be licensed to Whitehall unilaterally by Windmill. Thus on July 17, 2002 Whitehall notified Windmill of its rescission of the Agreement and demanded restitution of all sums paid to Windmill pursuant to the Agreement, or $333,335.00. Subsequently Whitehall filed a Complaint for Rescission in
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Miami-Dade County Circuit Court for (1) rescission ab initio of the Agreement,
(2) for restitution of all sums paid to Windmill pursuant to the Agreement together with interest thereon, (3) for reimbursement of Whitehall's Agreement-related expenses as proved at trial, (4) for its costs of the action including reasonable attorney's fees; and (5) for such other and further relief as the Court deems appropriate. Subsequent to this lawsuit being filed, Windmill's attorney resigned and Windmill did not file an answer with the Court. Pursuant to the company's on going investigation, it appears that the principals of Windmill may be abandoning the Windmill corporation and moving its assets to DigitalMed Corporation where it will attempt to continue conducting business with previous Whitehall associates along with attempting to influence Whitehall shareholders by posting as, among others, "6063" in internet message boards. Whitehall will vigorously prosecute this lawsuit and continue tracking its interests until such time that this matter is concluded and Whitehall is reimbursed.
On March 15, 2002 Scott J. Weaver a shareholder of MiB Group prior to Whitehall's acquisition of MiB on October 3, 2000, filed in Marion County Circuit Court a complaint styled Scott J. Weaver v. Whitehall Enterprises, Inc. and Alternative Lending Group, Inc., Case No. 496D20203PL000466 (the "Complaint"). Weaver alleges in the complaint that the Company guaranteed that the $225,000 Whitehall shares paid to him for his stake in MiB would have a value of $1.00 per share by October 3, 2001 or Whitehall would issue additional shares to make up the difference. Since the share price on October 3, 2001 was $.01 per share, Weaver demands 22,275,000 Whitehall shares. The Company did not defend the lawsuit.
On May 2, 2002 a Default Entry and Final Judgment was entered in Marion County Circuit Court ordering the Company to issue 22,275,000 freely tradable shares of common stock of Whitehall Enterprises within ten days of the Judgment. Notwithstanding the Company's inability to comply with the Court's Order in a timely fashion, it will issue the shares due Mr. Weaver as soon as possible.
The Company attempted to negotiate the debenture with Mr. Weaver in the effort to protect the shareholders and Mr. Weaver. The Company was not successful in its efforts to do so in a timely fashion. The Court Order, however relieves the Company of liability.
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