Deposition of the Liar & Fraud. Jim Ellerton. The longest Suicide Note in Corpo’rat’e History!

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PROCEEDINGS

JOHN

J. ELLER TON,

the Defendant herein, having been first duly sworn, was

examined and testified on his oath as follows:

BY MR. DAVENPORT:

Would you state your full name and spell your

last name for the record.

Q

All right. Mr. Ellerton, what is your home

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address?

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A    790 Washington Street, Apartment  1001, Denver,

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Colorado 80203.

Q

And what is your business address?

A

2050 South Oneida Street, Unit 102, Denver,

Colorado

80224.

Q

Okay.  How old are you, Mr. Ellerton?

A   Sixty-four.

Q

Mr. Ellerton, we met a few minutes ago.  My

name is

Gary Davenport, and I represent Dillabaugh in

this proceeding.

If at any time you don’t understand my

question or it’s confusing to you, would you please let

me know?

And rn try to rephrase it so we’re on the

same page, in essence.

My goal here today is to find out what you

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background information from you before we get into the

facts of the case. What is your educational background?

High school in the United Kingdom, university

in

Canada.

Q

What type of degree?

A

I have an honors Bachelor of Science degree

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from University of Toronto.

Q

And where — what’s your Bachelor of Science

in?

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A   Geology and- with a math and physics minor.

11 Q

And since getting your B.S., just generally,

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if you could, go through what your employment history has

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been for me.

A

I’ve basically been in the oil business the

entire time.

Igraduated in ’69 and worked for a major

oil company, Texaco, for a number of years. And since

then, I’ve basically been running my own companies.

And what companies are those?

A

J. Ellerton Consultants, Inc., COM-TEK

Resources, Inc.

I’m sorry. What was that last one?

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A   COM-TEK, C-0-M, hyphen, T-E-K, Resources,

Inc.; Sefton Resources, Inc., which was fonnally TEG

Resources,  Inc.

What is your present position?

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I

know, what your position is. rm not here to attempt to

trick you in any way. I want you to understand my

question and respond to what rm asking. And ifthere’s

any confusion about that whatsoever, let me know and rn

to make it clear.  Fair enough?

A

Fair enough.

Q

Okay. Ifyou need a break at some point, just

let us know.  We’re happy to accommodate you in that

regard.

So at this point, do you generally have an

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understanding of what a deposition is about?

A

Yes, sir.

Q

You understand you’re under oath –

A

Yes, sir.

Q

–just as if we were in a court oflaw before

a judge or jury?

Yes, sir.

Q

All right.  Have you had your deposition taken

before?

Yes, sir.

Q

How many times?

A

Can’t remember.

Q

A number?

A

Yes.

Q

All right  Mr. Ellerton, rd like to get some

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A  CEO of Sefton Resources, Inc.

Q

And how long have you been CEO of Sefton?

A    Approximately

15 years.

Q

How long has Sefton been in existence?

A    Approximately

15 years.

Q

So you started it?

7 A

Correct.  I was one of the cofmmders.

Q

It’s a publicly traded company; is that

correct?

Correct

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Q    How many shareholders does it have?  Do you

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have any idea?

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A   Several thousand.

Q

Where is it incorporated?

A    The British Virgin Islands.

Q

And is its headquarters here in Denver?

A

Yes.

Q

All right.  How many employees does Sefton

have?

Sefton and its subsidiaries have

approximately– about seven or eight employees full

time.

Q

And how would you characterize -I know you

said it’s the oil and gas business.  But is it

production? Is it- what area does Sefton primarily–

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I A   Exploration and production.

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Q   All right. And primarily what geographic

areas?

Q

Would you tell me, please, Mr. Ellerton, who

the officers and directors are of Sefton?

7 A   The directors of Sefton are myself; Bruce

Hany Barnum, B-A-R-N–

B-A-R-N-H-U-M (sic); Jeremy Delmar-Morgan; and Tony

!0Ashton,A-S-H-T-0-N.

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Q   Where are these gentlemen located?

A    Jeremy Delmar-Morgan is in the United Kingdom,

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any Ashton is in Canada, Harry Barnum is in California,

Bruce Mackay and myself are in Colorado.

Q   So those are the directors, correct?

16 A   Correct.

17 Q    Who are the officers?

18 A    The officers of Sefton Resources, Inc., are

president; Bruce Mackay is the executive vice president;

and Kris Short is the assistant secretary.

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Q    Whafs the present status of the business?  Is

it ongoing?

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Q   Okay.  And Sefton commenced doing business

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of Sefton at some point; we know that.

Ifyou will, just

characterize for me how the relationship went from the

time you met him in a social arrangement of coaching his

son in soccer.

The previous company I had formed or co-formed

merged with a company that Gary had an interest in, and

Gary was associated with that company for a while.  And

I

believe we’ve stayed in touch over the years.  And then

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we, in terms of professionally, were reacquainted again

in

the – about — in the early days of Sefton forming

and developing.

Mr. Dillabaugh eventually became an employee

ofSefton?

Correct.

!5 Q

Tell me how that happened. How did that

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occur?

A

Basically, Gary had provided some funding for

myself, and basically I lobbied the directors to bring

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him in as a – originally as a consultant and eventually

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as a full-time employee.

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Q   All right. And to consult on what?

22 A

Helping in whatever manner we needed help.

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Q    I mean, when you were —

A

Primarily shareholder relations

and/or involved in invoicing and– I mean, invoice

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approximately, you said, 15 years ago?

A    Correct.

Q    All right.  And been in business continually

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since then?

A

Correct.

Q   Has the number of employees of Sefton over

that time changed dramatically or has it been primarily

in the seven to eight area?

It started originally with just myself.

Q   Okay.  So from one to eight has been sort of

the lay of the land, if you will, on the number of

employees?

Correct.

Q

All right. Now, you are familiar with Gary

Dillabaugh, are you not?

Yes.

Q   When did you first meet Mr. Dillabaugh?

A    Twenty plus years ago.

Q    Twenty plus?  I’m sorry.

A

Yeah.

Q    Okay. And how did that occur?

A    I coached his son’s soccer in Littleton,

Colorado.

Q    And just tell me how the relationship went

from there. Obviously, Mr. Dillabaugh became an employee

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management, if that’s a term that you understand.

Q

I think l do.

A

Yeah.

Q    S.o let me make sure I understand this,

Mr. Ellerton.  You went to the board– I don’t know if

you used the word “lobby”; I thought you did -lobbied

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the board to bring Mr. Dillabaugh into the company?

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A  Correct.

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Q   And Itake it when you did that, you felt that

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he would be a valuable asset or contributor to the

company; is that correct?

Partially correct, yeah.

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Q   Why do you say “partially”?

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A   Well, part of it was for assistance in helping

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me and it was kind of a reward phenomena.

Q   Can you be any more specific as to how he was

helping you?

A    The board lmew that he had helped me during a

time when the company was unable to pay me, and basically

they recognized that and rewarded him to some extent by

involvement in the company.

So I’m a little confused by this.  Let me be

sure.  The board rewarded  Mr. Dillabaugh as a result of

helping you personally?

A   Correct.

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Q

Okay. Did you have conversations with the

board members about the — about that fact?

A

Yes.

Q

And what board members did you discuss that

with?

A

That was the existing board and any prior

board members.

Okay. Would it be different board members

than the names you’ve already given me?

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Q  Who would they be?

A

Alan Thomas, John Killer, Karl Arleth, Norm

Thachuk.  For the moment that’s-

And where are these gentleman located?

A

Norm Thachuk is in Canada; Alan Thomas, John

Killer in the United Kingdom; and Karl .Arleth is here

in

Colorado.

So do you recall approximately when

Mr.

Dillabaugh went to work for Sefton?

A

In an official capacity?

Q

Yes.

A

I believe it was in – about ’02, thereabouts.

Q

Okay.  Now when you say 11an official

capacity,” are you differentiating between a consultant

and an employee?

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that he was paid but there was v.rithholding taken out for

taxes and–

A    rm assuming so, yes.

And when he was paid as a consultant, you

probably didn’t do the v.rithholding.   He was probably just

given a gross check; is that right?

A   I can’t remember.

Okay. Now, would you describe for me, when

Mr.

Dillabaugh became an employee, exactly what his

duties and responsibilities were. And then take me

forward until the time he was no longer associated with

Sefton, and tell me if they changed over time or they

remained the same.

I believe he was made corporate secretary.

And his function, job description

Ww I don’t know if!

can give you a precise job description

ww was that of

helping with the administration side of it and with the

shareholder relations side.

Okay.  That was commencing in ’02?

A

Pretty well what he was doing as a consultant,

and then it became more official.

All right.  So in ’02, he’s helping with

administration and shareholder relations?

Correct

Q

Did he work full time at Sefton, then,

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A  Correct.

Q

All right.  So that he was a consultant for a

while, then became an employee; is that correct?

Correct.

Q

So how long was he a consultant before

approximately ’02 when he became an employee?

A year or so. rm not completely clear on

that.

How was he compensated as a consultant?

A

As a consultant, cash.  And I’m not sure —

rd have to check the records regarding stock

opportunities or options.

In Sefton?

A

Correct.

Q

Okay. And then he came on board as an

employee?

Correct.

Q

And how was he compensated then?

A

Inthe normal manner of employees:  cash,

medical benefits, stock options — stock opportunities,

options, things of a normal nature for a company.

Just like any other employee of Sefton at that

time?

Correct.

Q

Now, when you say “cash,” I assume you mean

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Well, we know Gary had a dental practice, so I

believe it was not full time, no.

Okay.  And through the period of time or

through the time where he was no longer an employee of

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Sefton, did his duties and responsibilities change at

all?

Not really.

Q

Now, how do you assess 1-ir. Dillabaugh’s

performance on behalf of Sefton when he was an employee?

Was he a good employee, bad employee, mediocre employee?

Vhat’s your view of that?

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A    My personal view?

Q   Uh-huh.

A

I would say mediocre.

Q

Okay. Was he ever reprimanded in any way for

nonperformance or not fulfilling his obligations or

duties?

No, other than dialogue that things weren’t

getting done or- or things of that nature.

Okay.  Was he ever put on any probationary

status-

Q

-in any way?

A    No.

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money that he put in your possession was a loan or an advance?

A Periodically, money that had been

M- that had

been money advanced, and periodically that would be put in a written document that would be

in the form of a loan.

Q

Uh-huh.

A    And some of those loans might have been

reduced against what offset and/or any outstanding monies advanced were anticipated being an offset against

benefits received.

Let’s take a look at- do you have any idea

about what the total amount of money was that was lent to you, the gross amount, not – exclusive of interest, lent

to you by

Mr. Dillabaugh over time?

A   I believe the amount of funds that were

advanced to me by

Mr. Dillabaugh were, to the best of our ability, were reflected in Exhibit A of my -M what do

they call it– interrogatories.

Okay.  Let’s get those out. (Exhibit Number  1 was marked for

identification.)

Q

(By Mr. Davenport)  Would you take a look at Exhibit 1 for me, please, Mr. Dillabaugh (sic)?

A

Mr. Ellerton.

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just for clarification

M- I think he inadvertently said

Exhibit E.

MR. DAVENPORT:  Exhibit

A.

THE WITNESS: Exhibit

A.

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MR. DAVENPORT:   Right.

Q   (By Mr. Davenport) And the number you

eventually arrive at is $367,751.70; is that correct?

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A   Correct.

Q   All right. Now, I’d like to work through

this. And we need to look at another exhibit to make

11    sure we can understand what’s going on here.

(Exhibit Number 2 was marked for

identification.)

Q    (By Mr. Davenport)  Now,

I’lltell you what my

understanding is, Mr. Dillabaugh (sic), so maybe we can

shortcut this a little bit.

A    Mr. Ellerton.

Q   I’m sorry. Mr. Ellerton.

And maybe we can shortcut this a little bit in

terms of having to work through all this laboriously.

Would you look at Exhibit Number 2 now for me.  See that?

A    Yes.

Can you identify what is it?

A   It’s a letter from myself to Gary dated

December the 31, 200 1, outlining, at that point in time,

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mean, Mr. Ellerton.  Sorry.

A

rn look at it too.

MR.

LUELLEN:  At least I won feel bad when I

do that this afternoon; I undoubtedly will.

DAVENPORT:   It’s easily done.

THE WITNESS:  That’s all right.

I know who I

am.

MR.

DAVENPORT:  Just so long as I don’t call myself the wrong name,Iguess we’ll be fine.

Q

(By Mr. Davenport)  Do you have that in front

of you?

A   Yes, sir.

Q

Those are your answers that you provided and signed under oath in this case, is that right, to interrogatories that were submitted to you?

A    Correct.

Q

Now, you had mentioned an Exhibit A.  Does it help refresh your recollection as to how much money was loaned to you by Mr. Dillabaugh to look at that?

A    As I said, monies that were advanced by

Mr.

Dillabaugh were reflected in Exhibit E (sic), to the best of my records and my attorney’s review of those records.

Q

All right.  So the number —

MR.

LUELLEN:  Yeah, rm sorry.  But I think–

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what our various dealings were and the status of our

understanding of them was.

Q    All right.  And you sent that to

Mr. Dillabaugh?

5

A    Yes, sir.

Q

And you signed it?

A

Yes, sir.

Q    Now, as I understand

it, what this was is a

total recapitulation, if you will, of all of your

10   dealings coming to exactly where you stood as of Decembe

31, 2001; is that correct?

A   “Recapitulation.”  I don’t understand that

13  word.

Just a setting forth, if you would.  You were

setting forth exactly what your relationship was in terms

of stock, advances, loans, et cetera, as of December 31,

17 2001?

Q   All right. And what you came up with was

principal and interest at 12/31/01 of$65,661.88,

correct?

A   Yes.

Q And you also – and

I’ll try to direct your

attention to this a little bit – applied an interest

rate to money that had been loaned to you by

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consultation with counsel.  So how you view it and

analyze it, really, I’ll stand by both documents.

Q   All right.  So your position   –whether we’re

going to call it a loan or advance, whatever– let’s

call it funds that were transferred to you by

Mr.

Dillabaugh.  Your position is that it was 7 $367,751.70?

A   Correct.

All right.  Now, do you have any recollectior

of an Oatley loan?

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A    Don Oatley?

Q

Oatley?

A

Oakley.  I think it’s Oatley, yes.

Q   And

Mr. Dillabaugh taking over that note?

IS

A I believe so, yes.

Q   All right. Would you think he would be

entitled to anything in addition to the 367- for that

if that was a deal with the

company or with me.

Q    Okay.  So as you sit here today — and, again,

exclusive of credits that we’re going to talk about, et

cetera — this is the amount that you believe was

advanced to you by

Mr. Dillabaugh, the 367,751.70.

A   Correct.

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I document like this, no.

Did you think you were getting it interest

free?

No.

5

Q   Did you have any notion, in your own mind, as

to what interest rate should apply?

No.

Q

Do you have any idea today what interest rate

should apply?

No.

ll

Q Do you think some interest rate should apply?

A

Depending on the offsets.

Q

But, I mean, interms of just the money, the

money that was advanced by

him before you apply the

offsets, is

it your position that interest should or

should not apply to that money before applying any

offsets?

No.

Q

You don’t have any opinion?

A

No.

Q

Okay.

A

Well, my opinion is that there shouldn’t be

interest.

Why not?

A

Well, what happens if the offsets are in

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Q All right. Now, what about interest? Does

this document include any interest whatsoever?

doesn’t appear so.

Q

All right. What was your agreement with

Mr.

Dillabaugh in terms of what interest rate would apply

to monies advanced by him to you?

There wasn’t any.

Q

Let’s look at Exhibit Number 2 again.

A

Right.

Q

It seemed to me in looking at that that you

were saying that interest was earned at 12.5 percent.

And you applied that, in fact, to get to a number of 13  65,661.88, did you not?

Correct.

Q

Okay.  So are you telling me that there was no

agreement, at least in December 31 of’01, on interest?

Well, there’s obviously an agreement, December

31, with interest on that particular  occasion.

At 12.5 percent?

A

Correct.

Q

All right. Now, what about after December 31,

’01; did you have any understanding or agreement with

Mr. Dillabaugh on what interest rate would apply to funds

that were advanced by him to you?

No.  Unless it was rendered in the form of a

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excess of the money owed? Then the interest doesn’t

apply.

Well, are you telling me that if you had

interest applied on the amount that was advanced and then

the offsets discounted all of that, applied to

all of

that, that wouldn’t be appropriate?

I don’t understand what you’re saying.

Q

All right.  So you’re telling me that today,

it’s your position that no interest should apply on any

advance made by you

MM   made by Mr. Dillabaugh to you

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since December 31 of’01?

A

No.

Q

You’re not saying that?

A

No.

Q

Then are you saying some interest should

apply?

Ifthere’s an agreement to how much money I

owe

Mr. Dillabaugh, then it seems reasonable that

interest would apply to that money on some occasion, and

that is what was never agreed to.

Do you ever recall having any discussions

whatsoever, at any time, with

Mr. Dillabaugh as to what

interest rate should apply on monies that were advanced

by him to you over the period from 2001 to today?

I believe Mr. Dillabaugh discussed 12.5

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percent, and I believe the records will show that I

disagreed

with that.

Q

Okay. Can you tell me what records you’re

talking about?

Various correspondence between us, as well as

oral communications.

oral communications.  I want to know everything you

recall of any conversations you had with

Mr. Dillabaugh

after December 31, 2001, about what interest rate would

11   or would not apply to any monies he advanced to you.

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A   I don’t recall all the conversations.

Q

rm asking you for any; rm not asking you —

rm asking you for — understand, what I want is what you

do remember.  Obviously, I don’t want what you don’t

remember.  So if there’s anything you remember about any

conversation you had during this entire time period with

Mr.

Dillabaugh about what interest rate would or would

not apply, rd like to know about it, please.

I had conversations with Mr. Dillabaugh-

obviously, I believe the records will show there are

subsequent documents that have interest on them, and so

that would have been agreed to. I also know more

recently

Mr. Dillabaugh has indicated that- that he

desired a 12.5 to reflect something to do with his credit

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about.

A

Well, there’s a document subsequent to this

that is for 123Mand-some-odd-thousand with an interest

rate of

10 percent, so there was obviously more than just

a verbal communication; that was written.

A

You asked the question — you asked anything

after this. Okay?

And remember what — and maybe that time I

didn’t ask it as specific as I should have.

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A   Okay.

Q

But rm separating now very clearly documents

which we’re going to look at–

Okay.

Q

-or conversations that you recall having

with

Mr. Dillabaugh.  We’re now strictly in the

conversational area. What conversations, if any, do you

remember with

Mr. Dillabaugh after this date,

December 31, 2001, to date, about interest?

Basically the best of my recollection would be

the most recent ones where

Mr. Dillabaugh requested, in

his conversations and communications with me, 12.5

percent. And I said no, because that was not reflective

of the current interest regime, and we hadn’t decided on

offsets.

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cards. And my recollection is that my argument against

that was the interest rate’s been coming down since

December 31, 200 I. And so it’s not – it’s not in my

mind — what’s the term — it should certainly not be

going up if the interest rate–

ifthe prime interest

rate is coming down.

Well, we know that you applied 12.5 percent up

to December 31, ’01, correct?

Correct.

Q

How did you get to 12.5 percent at that point

in time?

was something we agreed to, and it’s

probably related to what, you know, some degree, what

prime was at that point in time.

All right. Now, I want to- I want to really

get specific with you. And

if you don’t recall, you

don’t recall,

Mr. Ellerton.  That’s fair enough.

A

Okay. All right.

Q

But I simply want to know your recollection of

any conversations you had with

Mr. Dillabaugh after you

agreed on 12.5 percent interest

in December 31 of’01 as

reflected on Exhibit 2; anything whatsoever you recall

where you talked about: it was going to go up, it was

going to go down, there wasn’t going to be any interest

at all. Anything you recall, fd like you to tell me

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Q Any other conversations that you recall at

all?

I can’t remember.

Q

Okay.  Fair enough.  Now, when you

used twelve– or agreed upon, as you put it- 12.5

percent in December of’01, in your mind, when further

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funds were advanced by Mr. Dillabaugh as you went along,

did that interest rate of 12.5 percent apply to them?

I believe subsequent documents will show, no.

Q

All right  I’m asking just for your

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understanding. Do you recall having an understanding?

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In other words, when additional funds are advanced

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in ’02, in’03, in- in ’02, ’03, ’05, ’06, do you

recall having the thought process of, Well, 12.5 percent

is going to apply to this, or it’s not going to apply to

it, or it’s going to be something different?

Obviously, it won’t apply to this since

there’s been subsequent loans with a 10 percent, as an

example.

Well, let me ask you that.  Was it your

understanding  that loans- and let’s look back at

Exhibit Number (sic) A again, the first page of it.

Starting with loans or advances that were made after

3/18/02 up until ’06, was it your understanding that on

those advances, that a 10 percent interest rate would

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apply?

A    No.

Was it your understanding that any interest

rate would apply?

My understanding was that it was never really

discussed because of– it was never — the only time

it

was ever discussed was when something was rendered to

in

v.rriting as to what we both agreed at that point

in time.

Q

So what your testimony is that there — as far

as you’re concerned, there was no interest to be applied?

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A  If there was interest to be applied, it needed

to be discussed and put in writing.

And what you’re saying is, that never

occurred?

No. Other than what I’ve indicated-

Q

That’s the promissory note of

120 something dollars?

And anything else that reflected numbers.

Q

Let me talk to you about how these loans

happened- advances, whatever we want to call them.

Yeah.  I’m content with you using the term

“loan,” if, indeed, you understand that my response will

be, you know, “advances” as opposed to the word “loan”.

Whichever.  We can call it transfer of funds.

A

Okay.  There you go.

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A That would be one- that would be one way.

And

then the other way would be he would ask me,

occasionally,

if I needed anything.

Q

And what would you respond?  If you did or

didn’t-

A

If I did or didn’t. And if I did, Gary would

or would not advance money.

All right.  What would be the more typical

situation:  You coming to

him or him coming to you and —

A

Inthe early days, it would be me going to

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Gary.

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Q  All right.  And why were you doing that?  Why

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were you coming to him for these sums of money?  I mean,

these were fairly substantial amounts of money.  We’ve

got one in 9/27/02 for $40,000.  I mean, why were you

coming to him for money at that point?

Well, the company had – I was not paid any

salary for a 5 year period. They wrote it off, the

salary, for 3 years, and I took stock for 2 years.  So

for a 5 year period, I took no salary from the company.

And if- sometimes it might have been that the company

needed the money, and it was done through my borrowing

money from Gary, and then money going into the company

that way.  I mean, I can’t recollect every one of these

at this point in time sitting here.  I’d have to go back

37

I

Q  All right.  Transfer of funds. Let’s start

with the first page of Exhibit A

Now, we’ve got- and

you prepared this, did you not?

I believe I did, yes.

Q

And we’ve got a variety of transfers that were

6

made.  It starts with 4,000 in 4/22/02; 4,500 in 4/15/02;

5,000, etcetera, etcetera.

Q

Tell me how this would happen.  In other

words, when a loan or – pardon me – a transfer of funds

was made, would it be at your request?

Not always, no.  Gary would sometimes say, Do

you need money, or, Can you use any money?

Okay.

A

And sometimes it was cash.  Gary carries a lot

of hundred-dollar bills.  And he would go into the room

and come out with sometimes several thousand dollars of

cash, or it would be a check or maybe electronic

transfer.  I can’t remember all the mechanisms.

And rm not really talking about the

mechanisms. rm trying to figure out now how these

occur.  And was it a situation where, you know, you would

typically come to him. and say, Hey, I need some money

for this, that, or the other, and he would say okay or

not okay and transfer the funds?  Would that be typical?

39

and check through it.

But clearly, every time this occurred, it was

a situation where you needed money and Gary was willing

to transfer it to you?

Not every one, but certainly it looked like

the majority of these would be.  $300, obviously, is one

where maybe- I don’t know, maybe – in the past, I

remember being on a business trip and Gary would, you

know, have $300. I don’t know what it was. But, you

know, $50, I mean, that’s not the sort of request! would

make.  It must come about from another different —

another circumstance.

Well, you obviously put this together from

some documentations that –

we had some indication that money was advanced, yeah.

All right.  Did you consider these funds that

were advanced to you by Mr. Dillabaugh as gifts?

Q

What did you consider them to be?

A

An advance of funds that had the possibility

of being offset against opportunities that

Mr. Dillabaugh

realized through association with myself and also with

Sefton.

Let’s go to Exhibit -this exhibit again —

40

Exhibit Number  1. Would you tum to page number 3. Do

4

Sefton, leaving a number at 12/31 outstanding, and that

44

I

A  Correct.

Q

You took the number- so at that time in

December of2002, after taking the offsets, this was the

number you came up

with?

A

Correct.

Q

What were the offsets?

A

I can’t remember, sir.

Q

Do you remember how the number was arrived at?

A    No.  !just remember that Gary felt that he

was — this was a number he was happy with. And I

11

remember, at the time, looking at my numbers and being

12

happy v.r:ith that number as well.

13

Q  So, in essence, what you’re telling us then is

in 2002, there were some offsets applied to advances that

had been made by

Mr. Dillabaugh to you?

A

Correct.

Q

And you arrived at this number?

A

Correct.

Q

Okay. Where did those offsets come from?

What were they?

They were probably a combination of things:

dealings

with Sefton, opportunities for stock,

opportunities for options.  You know, I can’t remember

individually, but they were likely to come from

all of

those.

46

MR. LUELLEN:

I’m going to object to that at

this point.

MR. DAVENPORT:  Okay. Well, we’re being told

here today, now, that things that Sefton did vis-a-vis

Mr. Dillabaugh benefited this man

by reducing the amount

of money he owed him, and that’s income.  And I’m going

to be making a request for tax returns, I can tell you

that, from a credibility standpoint.

MR. LUELLEN: And, Mr. Davenport, you’re more

than happy to make – feel free to make the request. We

will either produce or not produce

in accordance with the

applicable rules and

ww   but Jim not going to make a

representation as to how we’ll deal with a request at a

future point in time.

MR. DAVENPORT:   Fair enough.  We’ll be making

the request.

(By Mr. Davenport) Where do you file your tax

returns?

How do you mean?

Q

Well, what – do you file them in the United

States? Do you file

-w

A

Oh, yeah, yeah, yeah.

Q    Okay. Where else?

A

Jim a resident of the US, so I file inthe US.

Q   Okay. Do you file anyplace else?

45

Q

They would –I mean, it would have all been

from Sefton: options and Sefton–

3

A Sefton and/or stock or options that I had.  I

can’t remember the specific ones, but it would be either

Some came from Sefton?

7

A   I believe they might have now.  I can’t

remember.

So was — I just want to be clear about this.

10 A   Uh-huh.

II

Q    So the situation is that benefits that

12

Mr. Dillabaugh got from Sefton were used to offset

13

advances of money that he made to you?

A

Correct.

Q

All right.  Did you ever report that as

income?

I can’t remember, sir.

Q

Well, stop and think about it.  Do you think

it should have been reported as income?

I don’t know. My –I have accountants do my

books and they might have done that.  I don’t know.

Okay.

A   They said–

Q   Would you be willing to provide your tax

retwns to us to show

if you did it or not?

47

Q

Have you filed tax returns for the years 2002

and a:ftenvard?

Yes.

Q

All right. Now, is that consistently what

your position is, is that Sefton provided opportunities

or benefits, including salary, to

Mr. Dillabaugh that

operate as offsets to money that had been advanced to you

by Mr. Dillabaugh?

A   No.

11

Q  That’s not your position?

12

A    No.

13

Q  Where did these benefits come from?

A

Benefits can come from myself and/or Sefton

and then negotiated with

Mr. Dillabaugh as the situation

arises.

Well, is it your position, or is it not, that

some of these offsets that you believe you’re entitled to

were the result of benefits that

Mr. Dillabaugh got from

Sefton?

Correct, yes.

Q

Okay.  So again, do you recognize that that

would be income to you?

In other words, if the

24

corporation –let’s say it’s an offset for salary.  And

25

I know you’ve said that you get an offset for salary. Do

48

I

you recognize that if, in fact, there was an offset for

his salary, the corporation, in essence, had paid some of

your obligation to

Mr. Dillabaugh?  Do you recognize

that’s income to you?

rm going to object both as

being irrelevant, as calling for a legal conclusion, that

he’s not a tax attorney.

lvlR.

DAVENPORT:  I understand he’s not a tax

attorney. Ijustwantto know as a taxpayer, does he

recognize that that’s income to him?

II

:MR. LUELLEN: Again, that assumes facts not in

evidence.  That assumes that your evaluation is correct.

you want to ask him whether it may constitute income,

that’s fine.

MR. DAVENPORT: And

I-you know, Jack, I

appreciate your objection. But rd just assume that-

just assume that you just object as to form and let me

ask my questions of

Mr. Ellerton.

MR. LUELLEN:   Sure.

(By Mr. Davenport) Now, do you recognize that

that may or may not be income to you?

A

Ifmy tax -M my accountant deems that to be

income, then

-M then, yes.

Q

Well, if somebody else pays your debts, do you

view that as being income to you?

50

Q

Did you ever pay it?

A   No.

Q

Why not?

A

Well, at that point, Mr. Dillabaugh, I

believe — subsequent to December 31, ’02, there was

additional money advanced, and Mr. Dillabaugh never

really pressed for it because he was receiving

opportunities and benefits from Sefton and/or myself.

Okay.  Well, let’s get real specific about

this.

It calls for a date. It says, “Shall be paid to

ll

holder,” which is Mr. Dillabaugh, “on December 31, 2003,”

a year later.

A   Correct.

And you’re telling me you didn’t pay it?

A   No.

Q

Did you talk to Mr. Dillabaugh about whether

you were going to pay it?

A    No.

You just didn’t pay it?

A    Well, Mr. Dillabaugh didn’t request it.

Q

And you’re saying he had to request it before

it was to be paid?

A    If Mr. Dillabaugh requested it, I would have

probably found a way to pay it, yes.

And you’re just saying he simply didn’t

49

MR. LUELLEN:  Object as irrelevant.

THE VITNESS:

Ifmy accountant M- if my

accountant deems that’s it, then, yes.

(By Mr. Davenport)  You don’t have any

personal opinion on whether that would constitute income

to you or not; is that right?

A

If,you know – it’s like anything. Itwould

depend on the circumstances on what’s

M- what – if

there’s any offsets against it or situations like that.

That’s why Ijust refer to

M- I would refer it to my

II

accountant.

Q

I think we’ve M- now, is it your testimony

that Mr. Dillabaugh put together Exhibit Number 4?

A    Yes.

Had it prepared?

A   Had it prepared, yes.

Q

And presented it to you?

A   Yes.

Q

And that it was net of all offsets and credits

that you were entitled to at the time?

A   Yes.

So when we got to December 31, 2002, what

you’re saying is that:  That’s the number at that point

that

Iowed Mr. Dillabaugh net of credits?

A    Correct.

51

I

request it-

A   No.

-and you didn’t pay it?

Now, has that amount continued to run at

interest- 10 percent to date?

A    I have no idea, sir.

All right. Well, this note’s never been paid,

has it?

A   No.

All right. And it says it runs at 10 percent

interest, doesn’t it?

A    Correct.

All right.  So would it be your position that

you still owe this to

Mr. Dillabaugh at 10 percent

interest from December two thousand

M- or December 31, 16  2003?

A   No.

Why not?

A    Well, maybe those offsets that he was

receiving or offsets that I was entitled to from benefits

he was receiving from myself or whatever might have –

Well, let’s talk about –

A

M- offset it.

Q   Well, this is a real clear document.

A   Yes.

52

I

Q  This is very crystal clear: You owe it; you

didn’t pay it —

Q

-ran at 10 percent. Now you’re saying, But

I was entitled to some offsets to this 123,000 plus

interest?

might have been offsets or benefits that

Mr. Dillabaugh

was receiving– there might have been benefits that

Mr.

Dillabaugh was receiving from myself or Sefton that

he was content with so that he wouldn’t call the note.

payment of what you owe him, right?

A   Yes.

Q   All right.  So a demand has been made, and you

still haven’t paid?

A   No.

Q   All right.  Why?

A    Well, because this is just part and parcel of

a more larger situation that -I believe that what

Mr.

Dillabaugh has demanded is not payment of this.

Mr.

Dillabaugh has demanded a number thafs excessive in

what I believe rm – he’s owed by me.

Q Well, you – would you agree that you at least

owe this amount, the 123,000 with interest?

54

I

which usually is a copy I keep. So I believe it is

likely to be one, yes.

All right.  Did you ever pay Ms. Dillabaugh on

this note?

:MR.

DAVENPORT:  Well, he’s referenced it in

his answers to interrogatories.

rm trying to get a

sense ofwhy.

Mr. Davenport)  Did you ever pay her on

this?

I have no idea, sir.

Q   Well, it says it had a due date of

May 31,2002.  You have no recollection of whether you

paid her or not?

MR. LUELLEN:  Same objection.

THE WITNESS:  I probably did or she was paid,

but I have no idea. I can’t recollect at this point.

Q    (By

Mr. Davenport)  And it calls for 10

percent interest, doesn’t it?

A   Correct.

Q    Do you have any documentation that would show

if you paid it or not?

A   rm sure I might have, yeah.

Q   Would you mind providing that to us?

A

IfI can find it, yes.

53

I

A Unless there’s an offset in excess of it, no.

Q    Okay.  And that’s what rd like to know.  What

are the offsets you think you’re entitled to as a result

of this note?

A   It’s really not been negotiated with

Dillabaugh and myself  At this point, ifs in the

hands of the courts.

Q   So you say the offsets need to be negotiated

to arrive at a number that you owe him?

A   Correct.

Q    Okay. All right.  Let’s go to Exhibit Number

5. This is another one -just to keep you sort of

referenced here, if you will, rm using your answers to

interrogatories with these documents.

A    Okay.

Q    Okay.  So we’re now up to Number 5.  What was

number 5?

A

It appears to be a copy of a promissory note

for $5,000 dated February 2003 between Lisa Dillabaugh

and myself.

Q   Who prepared this?

A    rm assuming

Mr. Dillabaugh prepared it.

Q   And it was  – it’s something that you

individually promised to pay to Lisa Dillabaugh, right?

A   My- the copy I have here is just an initial,

55

I

Q  Okay.

MR. LUELLEN:  rm going to object as

irrelevant again.

MR. DAVENPORT:  Okay.  Your objection is

noted.

Q    (By

Mr. Davenport)  Do you have any idea how

this came about that you signed a promissory note to Lisa

Dillabaugh for $5,000?

A    I can estimate that it was money that was put

into Sefton, and I assumed the obligation.

Q   Who was Lisa Dillabaugh?

A   Gary’s daughter.

Q    Let’s look at Exhibit 6. What is Exhibit

Number6?

A   Well, it looks like it’s a

draft of an

agreement – or a letter from myselfto

Mr. Dillabaugh

dated December the 31st, 2000, regarding stock options

and loan agreements:  Sefton Resources, Inc.; TEG

Resources; and J. Ellerton.

Q   Do you have any recollection of preparing this

document?

A   Well, it looks like I did signed it and

prepared it, yes.

Q   Now, if you look at the second page, paragraph

3, it says under A, “Repayment of cash advances (and

56

I

aforementioned $5,000 premium) in form ofloan (see

12/31/00 statement of principal and interest) bearing 12

So were you saying at that point on money he

advanced to you, it would run at 12 percent interest?

Correct.

Q

Now, this was dated before Exhibit Number 2.

This is dated 2000.  Exhibit Number 2, you then go to an

interest rate of 12.5?

Correct.

II

Q  All right. So it was 12 and then it went to

12

12.5?

A

Correct.

Q

Let’s go to Exhibit Number 7.  Do you see

that?

Yes.

Q

What is Exhibit Number 7?

A

It’s copy of a letter that I prepared, between

myself and Mr. Dillabaugh, regarding an addendum to a

12/31/00 agreement and a 4/2/01 addendum to that

agreement.

Now, in paragraph C, this references that you

say, “It is my understanding that you -..vish to purchase

these shares for the above-indicated  price by applying

said money from outstanding amount owed by myself.”  Do

58

I

dealt with in Exhibit Number 2 when you came to the

bottom line analysis that you were at on December 31

Ifthis is one that was executed and enforced,

yes.

All right.  Let’s go to now your supplemental

answers to discovery, and that is Exhibit Number– I

don’t think we’ve marked that one yet.

II

identification.)

Q    (By

Mr. Davenport)  Okay. I would like you to

take a look at Exhibit Number 9. And !will represent to

you that these are the supplemental answers to discovery

that were provided to me after I made requests of you and

Mr.

Luellen, your counsel, that there be further answers

put together.

There’s two copies of it here.

Q

Let’s ignore that second copy; jus take it

off.  These are your supplemental answers to

interrogatories that were,

in fact, signed by -well,

they’re signed by your counsel, but I assume that they’re

your answers as well.

Correct.

Q

Let’s go to the second page.  And you state in

57

I

you see that?

A   Yep.

Q

And that’s what you did, then, I assume?

A

I assume, yes.

Q    All right.  And that would be –that would

all have been set forth, then, in Exhibit Number 2 when

you come to a culmination of what the situation is. As

of December 31, ’01, this letter would have been taken

into account, correct?

I would assume so, yes.

II

Q All right. Let’s go to Exhibit Number 8, and

that is right there.  What is Exhibit Number 8?

It appears to be an unsigned promissory note

between myself and

Mr. Dillabaugh.

Q

Do you recall the circumstance under which

this was done?

Q

Whose handwriting is it in?

A

Ifs my handwriting.

Q

Okay.  It’s a promissory note dated November

21   30,1999?

22 A

An unsigned promissory note dated November

23   30th, 1999.

Q   Would it be your understanding,

Mr. Ellerton,

that this promissory note, as well, would be embodied or

59

I

your response to number 3, “With respect to offsets and

other consideration due to Ellerton, please see Exhibit B

attached to the initial responses. Despite a good-faith

effort, it is impossible for Ellerton to quantifY the

value of each specific item of benefit conferred upon or

received by Dillabaugh for which Ellerton is entitled to

credit, offset or other consideration.  Nevertheless,

Ellerton has been able to estimate that the value of the

benefits for which credit, offset or other consideration

is due iS to Ellerton to be not less than $2,028,668,

II

which is calculated as follows.”

You start with compensation from Sefton

Resources, $285,000.  Do you see that?

Correct.

Q

Is that the entire amount of compensation that

was paid by Sefton to Gary Dillabaugh for the entire time

he worked there?

That would be the cash that he received, is my

understanding, yeah.

Now, when you say “cash”– maybe we’re not on

the same — that was his salary; that was his

compensation from Sefton, right?

It might have been bonus prior to him being–

rd have to look at the– that number was provided by

Sefton.

60

Q    All right.  But it would be everything he was

paid

by Sefton during the time he worked there, correct?

A   Outside of expenses and other things, I assume

4

so, yes.

Q

All right.  So what you’re saying is that all

of the salary, every bit of the salary that Gary

Dillabaugh made while he was at Sefton, his compensation,

you were entitled personally to an offset against amounts

that you otherwise would owe Mr. Dillabaugh, correct?

A   No.

Q   Well, that’s what it looks like to me.

A   I think

if you read it, 11With respect to

offsets and other consideration due to Ellerton, please

see Exhibit B attached”- “Despite a good-faith effort,

it is impossible for Ellerton to quantify the value of

each specific item of benefit conferred upon or received

17   by

Dillabaugh for which Ellerton is entitled to credit,

offset or other consideration.”

It’s part of the negotiation of what the

possible offsets against money advanced are.

Q    Well, I guess I don’t understand it then.

Because in the next paragraph, you say, “Nevertheless,

Ellerton has been able to estimate the value of the

benefits for which credit, offset or other consideration

is due to Ellerton to be not less than $2,028,668, which

62

I

A  Okay.

Q

And the issue is: I want to know what you’re

claiming and in what amount.

Basically – and I think rve already answered

that by saying that’s something that would need to be

negotiated or –

7 Q

Well, assume you can’t–

8 A   —

or what the courts deem.

Q

Well, assume you can’t negotiate it and assume

we go to court and assume we have a trial.  What is your

position going to be as to what offsets you’re entitled

to from

Mr. Dillabaugh against funds he advanced you?

It’s a really simple question.

Asked and answered.

THE WITNESS:

Basically I think I’ve just

answered that.  Basically rUieave that to the

courts–

(By Mr. Davenport)  So you–

A  -to determine what amount I should be

entitled to.

Well, let’s get more basic.  Let’s talk about

agreements that you had with

11r. Dillabaugh about

offsets.  Tell me every agreement you ever recall

reaching vvith

Mr. Dillabaugh about offsets that you were

entitled to, given money that he lent to you.

61

amount was calculated as follows:  $285,000.”   I assume

that what you’re saying is, I’m entitled to a credit of

$285,000 as a result of compensation Mr. Dillabaugh

received from Sefton.  Am I missing something?

No.

Q

So you get -what you’re telling us is your

deal with Mr. Dillabaugh was: For every bit of

compensation he received from Sefton, you got an absolute

total credit against amounts you othePNise would owe him?

10 A

No.

Q   You’re not?

A   I realize what you’re saying. But

nevertheless, offset is due to Ellerton — this number

was basically my estimate of the benefit- the value of

the benefits

Mr. Dillabaugh had received from Sefton

through myself. And I guess maybe my response maybe

needed to be modified where it says this was the number

that we would negotiate from which -what the offset

against monies advanced would be.

Well, are you claiming any compensation that

Mr. Dillabaugh got from Sefton as an offset?

A   I’m basically saying these are the numbers

that need to be negotiated from.

Q      Okay.   We’regoingtohavetogettothe

bottom of this.

63

A   Actually –let’s see. That $123,000 is one

example of an — that would be net of offsets, other —

And let me be real clear with you.  What rm

talking about is something you can identify as a verbal

agreement, and then we’ll get to written agreements.

A    Okay.  Let’s start with written agreements.

Let’s — I want to go to verbal.

A

Verbal?

Q

Yeah.  I want to know every time you ever

recall  sitting  down with

1v1r. Dillabaugh  and  saying to

him, Now, recognize when you’re– something to this

effect– when you’re loaning me these monies or

transferring these, rm going to get a benefit back for

your compensation, stock options you get, et cetera; and

he agreed to that  That’s the kind of thing I want to

know about.

A    All right  Well, one verbal agreement would

be prior to me executing that promissory note that Ijust

referred to.

Okay. Tellmeaboutthatverbalagreement.

A

Itwas a discussion after Mr. Dillabaugh

presented that promissory note to me, his desire for

something so that he could use it in the settlement in

his divorce. So that- we would have chatted about that

before I executed it.

68

I

Q  Where would they take place?

A    Wherever we were together, whether it be in

London, whether it be here, or wherever.

Can you recall a specific conversation?

A

No.

Q

Can you recall anybody else that overheard

these conversations?

A

No.

Q

Is there anybody else we could talk to that

could say — we could talk to and ask, Can you verify

that this occurred or did not occur?

A    I wouldn’t know.  I– not from my mind, no.

Did you ever have any conversations about,

specifically, how these, you know, offsets would be

arrived at?

A    We would negotiate them.

Did you ever have any conversations about

whether or not the fact that his salary that was being

paid by Sefton would be used as an offset?

A   Again, it would be negotiated.

And, again, did you or did you not ever have a

conversation about whether you would use his salary as an

offset?

No.

Q    Okay.  Did you ever have any conversations

70

They were all discussed as one, basically, you know,

overall aspect of benefits that Mr. Dillabaugh would

receive.

4

Q    Okay.  !want-

S

A   We don’t talk about specifics. We would talk

about benefits, plural, and those benefits would be

anything that you’ve referred to so far.

Q    Soiflunderstandyourtestimony.  What

you’re saying is that occasionally, maybe once a year,

you had a conversation with

Mr. Dillabaugh where you said

something to this effect: There’s money that you have

lent me that I owe you, but we’re going to talk at some

point about offsets to that. Is that how it went?

A   No.  It would probably say, you know– my

recollection would be where we would somehow talk about

it, and Mr. Dillabaugh would indicate he was quite happy

with just letting things go the way they are at the

moment, and we would get to it at some future point in

time when we were both — we would both sit doVn and

negotiate it.

Okay.  Andlunderstandthatthat’swhatyou

recall.

Q    What I’m trying to get to is:  Did

Mr. Dillabaugh ever say to you in conjunction with that,

about whether you’d use stock that he had purchased as an I You’re going to get offsets against the amounts rve

offset? 2

loaned you from my salary, my stock rve gotten, my stock

A

Yes. 3    options; did he ever say that?

Q

When? 4 A   That was my understanding.

A

Over that time that rve indicated. 5 Q   Did he ever say it?

Q

So what you’re saying is that stock that he 6 A   Yes.

purchased, that he actually paid money for, you were 7

Q  What did he say?

going to get an offset against monies he’d advanced you? 8

A    He basically said the benefits that he was

A

As part of an overall offset, yes. 9    receiving would be used in the negotiations of what the

Q

How were you going to determine that? 10   final number was that I would owe him.

A

Through negotiations. II Q  Okay. And you recall him specifically saying

Q

Were there any ideas that were thrown out 12  that?

about how these negotiations would go, what you would

13 A   Yes.

use, what percentages you would use, anything?

14 Q   Do you ever recall him saying, My salary will

A   No.

15   be used for that?

Q

How about stock options?  Were there ever any 16 A   No.  It was all benefits in plural, not just

conversations where you talked about that, as a result of

17   salary.

him getting stock options just like the rest of the

18 Q   Fair enough.  Was it ever specific enough to

employees of the corporation, that there would be an

19   say, We’ll do it based upon the stock I bought?

offset against amounts he’d advanced to you?

20 A   As I mentioned, it would be all-encompassing.

A

Ifyou- the rest of the employees didn’t 21 Q   Did he ever mention in regard to stock

always get stock options.

22   options?

Q

Well, take that out of the question. 23 A   In the sense it was all-encompassing, yes.

A   Okay. Well, with that, then, yes.

It was 24 Q   So the — he did mention stock options?

like my aforementioned response to the stock options.

25 A   The benefits that he was receiving.

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I

Q All right. In your mind, when he was saying

that, what benefits did you think he was talking about?

Salary, stocks, opportunity- stock

opportunities, other opportunities that were not

necessarily Sefton but from myself and/or Sefton, stock

options.

Ican recall one other one or two other ones in

examples where Sefton sold -was going to take one of

its subsidiaries public, and Mr. Dillabaugh was offered

an opportunity there.  So that would be stock in another

company.  There was an opportunity I provided to acquire

some shares in a non-Sefton entity through some

associates of mine.

Itwas all– benefits were all

these opportunities:  salaries, stocks, stock options,

opportunities in other entities.

Is it your position today that as a result of

these benefits, that you don’t owe him anything?

I really haven’t thought about it.

Q

Don’t you think you should?

A

No, because it’s now reduced to a legal

matter.  And so what’s the point?

Well, you know you’re going to have to testify

as to what your position is.  We know that he advanced to

you in the neighborhood of $400,000, correct?

Q

Okay.  So now, what’s your position going to

74

I

haven even figmed out what they are?

MR. LUELLEN:  Object to the form.

WITNESS: No. rve been specific about

what potential offsets there are and that rve indicated

have yet to be negotiated.

Mr. Davenport)  Well, let’s go back to

what you- tell you

what let’s take– it’s about

10:30. Let’s take a break.

WITNESS: Okay.

MR. LUELLEN:  Thank you very much.

(A recess was taken from 10:30 a.m. until 12    10:41 a.m.)

13

Q    (By Mr. Davenport)  I want to go back again to

the supplemental answers to interrogatories, see if we

can get a little — I can make sure I understand what

you’ve done here.

listing

the amounts — “offset or other consideration is due to

Ellerton to be not less

than 2,028,668,” we talked a

little bit about this $285,000. And !just need to know

your position.

get a $285,000 credit against the amount loaned?

Q

What are you saying?

73

be at trial in tenns of, Okay, yes, he advanced me around

S400,000, and I get credits against that of some amount?

You’re going to have to testify to that, aren’t you?

MR. LUELLEN:

I object to the hypothetical

question.

THE WITNESS:

Ifll be- I think I’ve

indicated that my estimate of benefits he’s received, the

value at this point

in time, is approximately $2 million.

II

So, you lmow, as I say, we haven’t negotiated– I really

haven’t thought about

it, to be quite honest with you.

Q

(By Mr. Davenport)  Do you have a position

today as to whether or not, thinking about the benefits,

et cetera, that there’s any net amount that’s owed to

Mr. Dillabaugh?

No.

Q

You don’t even lmow?

A

No.

Q

Do you care?

A

Yes.

Q

Do you think this is fair to Mr. Dillabaugh

that he advanced you over $400,000 and now you’re saying

there’s some -what I’m understanding

MM  some fairly

vague credits out there you’re entitled to and you

75

I

A  What rm basically saying — and I apologize

for that language — but basically what rm saying is

from these benefits, I should get some sort of offset.

And the benefits that

Mr. Dillabaugh has received at this

point just from Sefton is in the amount of, my estimate,

$2 million– approximately $2 million.  And at least

some of that should be offset against what I- money

that he’s advanced.

Okay. And how much?

A

As I say, I don’t know.  We were attempting to

negotiate that and

Mr. Dillabaugh filed suit. And since

then, I have really not spent time or effort.  rve been

extremely busy. And that’s something that, basically, I

kind ofleft at some point to talk to counsel about when

the appropriate time arises.

Was there ever any agreement with

Mr.

Dillabaugh as to – from these various benefits, how

much the credit would be?

No.

Q

Now, you- so let’s go to the next number,

“Settlement Agreement with Sefton:  $15,000.”  What is

that about?  Why are you claiming that as a credit?

rve just said rm not claiming any of this as

credit.  rm basically saying from all of these benefits

received from- by Mr. Dillabaugh from Sefton, that I

76

I should receive some offset against the monies that

Dillabaugh has advanced me. And that applies to any

and all of them.

And why is that?  Why do you take that

position?

Well, that was the position that Gary and I

basically agreed to, and that these benefits were

basically granted Gary for assistance to myself.

So you say you and Gary agreed that there

would be a deduction from the amount he advanced to you

II   from the benefits he got from Sefton?

Correct.

Q

Okay. Do you ever recall Mr. Dillabaugh

saying that to you?

Yes.

Q

What did he say?

A

My recollection was that we would come to an

understanding as to offsets against money he’d advanced

at some point in time.

When did he say that?

A

Over the – as rve said before, over the

course of- over the course of time.

But you never had any discussions whatsoever

about how much?

No.

78

I Well, you know, the better the deal I get, the more the

offset.

When was that conversation?

A

I can’t remember.

Q

Let’s talk about how you came up with these

numbers.  First of

all, the $15,000 settlement agreement

with

Sefton, what’s that?

A

Well, that’s a signed agreement betv.reen Gary

and Sefton

in which he’s paid a severance of$15,000.

Q

And are you saying that you should get some

credit against the amount he lent you from that amount?

Again, I go back to my response saying these

are the kind of basket of benefits received by

Mr.

Dillabaugh that need to be put into consideration and

negotiated.

I appreciate that.  But understand, my

obligation is to try to figure this out for my client.

And I — ifthere’s some in here that you think should be

in the basket or some that should not be in the basket,

that’s what rm trying to get to. Is this 15,000 that he

got in the severance to be put in the basket?

Yes.

Q

Why?

A

It’s just a benefit he received for-

basically because of the association

with me.

77

I

Q  You never had any discussions about when?

A

No.

Q

Was Mr. Dillabaugh specific as to what

benefits would apply to achieve this credit?

No.

Q

Were you?

A

No.

Q    Mr. Dillabaugh ever agree, in your mind, that

his salary and bonus could be used as an offset?

Yes.

11

Q  He did — did he say that specifically to you?

A

You said, in my mind. And I said, yes.

Q

And did you ever hear Mr. Dillabaugh say, I

agree–

No.

Q    Did you ever hear Mr. Dillabaugh say, Shares I

received

in Sefton can be used as an offset?

A

No.

Q

Did you ever hear him say, Options I received

in

Sefton can be used as an offset?

A

Yes.

Q

Vhen?

A

I remember options because we discussed who

would get what when, and Mr. Dillabaugh had input in

that.  And I remember a conversation that was recent,

79

Q

Did it say anything about that in the

settlement agreement?

No.

Q

How about the shares of Sefton?  How did you

arrive at the amount of 1,349,261?

There’s a third-party report put out by

Hardman

& Company that basically said the value of this

company is betveen  11P and 33P. And I basically took the

mid-value of those two, their ranges.

lO

Q   What’s the stock trading at today?

II

A   I don’t know, sir.

Q

It’s not between 11 and 33, is it?

A

No.

Q

It’s much less than 11, isn’t it?

A

Yes.

Q

So, I mean, why would this — why would you

l7

use this number if the stock is trading at much less than

II?

I basically took a valuation of what the

company’s worth, say –let’s say, for the break-up,  as

an example.  You can probably get that mid-range value

if

someone acquired the assets and the money was distributed

or we acquired the company. That might be a very

conservative estimate of what it might be sold for.

What’s the stock trading at today?