Weather Underground, Incorporated v. Navigation Catalyst Systems, Incorporated et al

Filing 205

RESPONSE to 189 MOTION for Partial Summary Judgment filed by Weather Underground, Incorporated. (Attachments: # 1 Index of Exhibits, # 2 Exhibit A, # 3 Exhibit B, # 4 Exhibit C, # 5 Exhibit D, # 6 Exhibit E, # 7 Exhibit F, # 8 Exhibit G, # 9 Exhibit H, # 10 Exhibit I, (Schaefer, Enrico) Modified on 8/17/2011 (DWor). [EXHIBITS D THROUGH I ARE SEALED PURSUANT TO 208 ]

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN

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THE WEATHER UNDERGROUND, INC., )
a Michigan Corporation,
)
)
Plaintiff,
)
)
vs.
) Case No. 2:09-CV-10756
)
NAVIGATION CATALYST SYSTEMS,
) Volume I
INC., a Delaware corporation; )
BASIC FUSION, INC., a Delaware )
corporation; CONNEXUS CORP., a )
Delaware corporation; and
)
FIRSTLOOK, INC., a Delaware
)
corporation,
)
)
Defendants.
)
_______________________________)

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DEPOSITION OF DAVID GRAFF
New York, New York
Friday, June 24, 2011

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Reported by:
NDS Job No.:

Danielle Grant
143388

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claim?

And when I say "resolve," I don't mean

pay it, because, as I understand it, the

payment to resolve the plan was made after the
combination of the companies closed in May of
2010.

Was it resolved by agreement

prior to the -- to the consummation of the
merger agreement?
A

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It was -- the case was

I may

be off by a couple of days.
Q

And the closing date on the

A

May 4th.

merger transaction was when?
Q

During the due diligence

process, when you were in communication with
Art Shaw and Chris Perrone and discussing
whatever aspects of the process you were

discussing, did the Weather Underground lawsuit
come up in the discussion?
A
Q

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No.

settled on or around May 12th of 2010.

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44

Yes.

Did you learn whether or not

during the due diligence period whether

Connexus had established a loss reserve for
that case?

Not asking you what it was, I'm

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just asking whether -- whether it was done.
A

45

I don't recall ever being

informed by anyone at Connexus that a loss
reserve had been put on their books in any
amount associated with this case.
Q

What was the other lawsuit

besides the Weather Underground lawsuit that
was pending on the Connexus side during due
diligence, was there one?
A

There -- there was a lawsuit

filed by a plaintiff called Beyond Systems.
Beyond Systems is a small Internet service
provider located in Maryland.
Q
A

Is that a collection matter?
No.

Beyond Systems has a

history, along with an associated company

called Hypertouch of filing what I'm going to
call CAN-SPAM suits.

They filed dozens over

the past couple of years.

And Beyond Systems

filed a lawsuit against Kraft and several other
companies including -- it's either Connexus or
Traffic Marketplace, I'd honestly have to look
at the caption to tell you -- alleging

violations of the California and Maryland state
statute's equivalence of the federal CAN-SPAM

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occurred some six months or so after the
merger.

57

And you're nodding your head yes, but

I'm just providing you the background for my
question.

And we know that Art -- or we

learned that Art was the CEO of Connexus at the
time of the merger, and on the board and
possibly the CEO of some of the Connexus

companies underneath it at the time of the
merger.

And my question is:

After the

merger, what was the corporate structure of
Connexus?

Did Art Shaw remain the CEO of

Connexus or not?
A

So, after the acquisition,

the -- Connexus became -- this is a little bit
roundabout, I'm just trying to think of the
right way to answer the question.
Q
A

Sure.

After the acquisition, Connexus

became a wholly owned subsidiary of Epic
Advertising.

Art Shaw was the CEO, Don Mathis

was the president of the company.

With respect

to all of the other corporate subsidiaries,

they did not -- the -- the directors of those
subsidiaries were essentially myself and

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Mr. Mathis.

58

That's what we would do as sort of

part of our corporate structure.

Art was the

CEO of the -- sort of the entire enterprise.
Q

So, for instance, let's just

take Connexus as an -- as an entity.

Did it

have a CEO after -- after the merger and
acquisition?
A

It was essentially Art Shaw who

sort of did double-duty as the CEO of the

combined -- of the Epic Media Group or Epic
Advertising and also of Connexus.
was the president of First Look.

Seth Jacobi

Don Mathis

was the president of -- sort of the U.S./Epic
Marketplace.

I'm sorry, I'm just relaying --

reviewing the corporate structure visually in
my head.

Q

Were there CEOs for any of the

A

Are you referring to Traffic

Q

Sure.

A

So, for -- so, for First Look,

other Connexus side companies after the merger?

Marketplace and --

First Look, Net Blue

Vietnam, Navigation Catalyst?

Seth Jacobi was the president of the company.

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Connexus or Navigation Catalyst or Traffic
Marketplace, and see who the boards of
directors, for instance, are for those
different companies?
A
A

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Yes.

I believe.

Q

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8

60

Okay.

And I think these

have already been produced.

In connection with

the acquisition, there was a series of board

resolutions, minutes, et cetera, that will show
you for each entity the -- the board of
directors, right?

It's essentially just

Mr. Mathis and myself for all of the various
subsidiaries.
Q

With Mr. Mathis being the

president of all those companies and you being
the secretary, for instance, I'm just -- I'm
guessing.

A

I'd have to look at it.

certainly the directors.

We were

I would have to look

at the document to recall if that -- if it's
specified officers as well.
Q

For the Connexus side entities

post merger, you've indicated that the two

corporate officers are either Mr. Mathis or

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yourself.

You indicated that insofar as

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Navigation Catalyst is concerned, you believe
that there may not be corporate officers for
that entity?
A

If you look at the document I

was just referring to, post acquisition, those

corporate officers would probably be myself and
Mr. Mathis.
document.

I would have to look at the

Prior to the acquisition, I really

can't -- I really don't know.
was designated.
Q

I don't know who

Are there corporate record books

for the Connexus side entities that would have,
for instance, minutes of board meetings post
merger?
moment.

A

Q

There are -- let me think for a
No, I don't believe so.

And I guess the question was

whether or not there were any record books.
Have there been any board meetings of the
Connexus side entities post merger?
A
Q

I don't believe so.

Post merger, have you attended

any board meetings other than an Epic Media

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Group, Inc. board meeting?
A
Q

I have not.

To your knowledge, post merger,

have there been any other board of directors
meetings for any entity under the Epic Media

Group umbrella presently, other than the Epic
Media Group board meetings?
A
Q

To my knowledge, no.

Is it your position that the

Epic Media Group, Inc. controls all of its
subsidiaries through its own governance

structure and -- and board of directors?
MR. DELGADO:

Objection; vague

and ambiguous, calls for a legal
conclusion.
A

Well, Epic Media Group is the

parent company, right?

I mean, these are all

wholly owned subsidiaries.

So, whatever

control a parent company can exercise over a
wholly owned subsidiary, that's the type of
control that Epic can exercise over its
subsidiaries.
Q

I'm going to show you what's

marked as labeled Deposition Exhibit 293 from
the Art Shaw deposition, and it's entitled

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sense that cash used -- well, let me back up
for a second.

82

I don't know the originating

bank, but these two expenses, I think it's fair
to say, were paid with cash that sort of

Connexus brought to the table for lack of a
better word.
Q

Were you involved in the

discussion concerning whether to use Connexus
cash to pay these liabilities or was that
simply an accounting side issue?
A

You know, I don't recall

specific discussions about, you know, should we
use Connexus cash to pay for these expenses.

This is post acquisition, so we were operating

as -- at least, conceptually, right, a combined
enterprise.

I don't know if there were

separate discussions at the accounting level or
among the financial team.
Q

Okay.

On the next page, which

is Page 20, there is a Connexus legacy balance
sheet where it indicates at the top under
current assets, cash.

That on March 10th,

there was $6.8 million cash available.

And

then post merger on June 10th, there was only

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Q

So, as a general statement,

104

then, if the Connexus/First Look side of the

business owned domains as assets at the time of
the merger, other than simply releasing some
that maybe were not of any value, there have
been no transfer of those domains?
A
Q

That's correct.

Have there been any DBAs filed

since the merger took place on the Connexus
side, where either Connexus or Traffic

Marketplace or First Look -- or any of those

entities under that umbrella -- are now doing

business under the Epic name, Epic Media Group?
A
Q

No.

Epic Media Group owns the stock

in Connexus Corporation, correct?
A
Q

That's correct.

It's a single share of stock at

this point or -- or is it something different?
A

It's a single share of stock if

I recall correctly.
that's correct.
Q

I recall that the -- yes,

Tell me, from your understanding

or viewpoint, how the merger transaction took
place relative to the transfer of stock,

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107

estate companies, for example, do this all the
time to segregate their assets.
Q

shareholders were able to exchange their stock

for Epic stock under the ratios pursuant to the
agreement?

A
Q

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And, as a result, the Connexus

That is correct.

I didn't bring the document, but

there was a change in the valuation on the Epic
side for the trade of stock, I think in April
as I recall.

The merger agreement had a set of

values for the valuation of stock, and then I
think after that there was a document that we
looked at, at Art Shaw's deposition, that

changed the value significantly downward on the
Epic side.
all?

Are you familiar with that at
A

referring to.

I think I know what you are

I believe you are referring to

the amendment to the merger agreement -- or an
amendment to the merger agreement, which, if I
recall correctly, changed the value of the -of the preferred shares.

Yeah, I do recall the

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