Replies to post #1536 on Vertical Computer Systems Inc (fka VCSY)

[RLHMAN]

Here you go. Have fun


CAUSE NO. _________________
LUIZ VALDETARO, INDIVIDUALLY,
AND BILL KISH, STEVEN JUNCKER,
AL GALVAN, THOMAS BACHA,
AL ECHEVARRIA JR., RUSSELL AND
TERESA HACHEY AND
WILLIAM CALHOUN, DERIVATIVELY
ON BEHALF OF VERTICAL COMPUTER
SYSTEMS, INC.,
Plaintiffs,
v.
RICHARD S. WADE and
WILLIAM MILLS, Esq.,
Defendants.
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IN THE DISTRICT COURT
_____ JUDICIAL DISTRICT
DALLAS COUNTY, TEXAS
PLAINTIFFS’ ORIGINAL PETITION FOR DAMAGES AND INJUNCTIVE RELIEF
TO THE HONORABLE JUDGE OF SAID COURT:
Come Now Plaintiffs Luiz Valdetaro, Individually (“Valdetaro”), and Bill Kish of
Wadsworth Ohio, Steven Juncker of Universal City, Texas, Al Galvan of Austin, Texas, Thomas
Bacha of Naugatuck, Connecticut, Al Echevarria Jr., of Niskayuna, New York, Russell and Teresa
Hachey of Waltham, Massachusetts, and William Calhoun of Huntington Beach, California
(hereinafter collectively “the Derivative Plaintiffs”) and file this their Original Petition
complaining of Defendants Richard S. Wade (“Wade”) and William Mills, Esq. (“Mills”), and for
same would show the Court as follows:
I. THE PARTIES
1. Plaintiff Valdetaro is an individual citizen and resident of Dallas County, Texas.
The Derivative Plaintiffs are shareholders of the common stock of Vertical Computer Systems,
PLAINTIFFS’ ORIGINAL PETITION PAGE 2
Inc., each of whom own at least one million shares currently and, collectively, a total of over forty
million shares. Defendant Wade is a resident of Dallas County, Texas where he may be served
with process at his residence of 3717 Cole Avenue, Apt. 293, Dallas, Texas 75204, or he may be
served at his place of business located at 101 West Renner Road, Suite 200 Richardson, Texas
75082. Defendant Mills is a resident of California, where he offices at 800 West 6th St, #500, Los
Angeles, California 90017, and he may be served through the Secretary of the State of Texas
pursuant to the state’s Long Arm Statute. Mr. Mills has been one of two directors, along with
Wade, of nominal Plaintiff Vertical Computer Systems, Inc. (“Vertical” or the “Company”) as
well as its corporate Secretary, for approximately 20 years. Vertical has maintained an office in
the Dallas –Ft Worth area for all of that time. As a result, Mills has subjected himself to personal
jurisdiction in the State of Texas and of this Court.
II. VENUE
2. Venue is proper in Dallas County, Texas because it is the personal residence of
Defendant Wade and the location of most of the tortious acts complained of herein.
III. DISCOVERY CONTROL PLAN
3. In compliance with Texas Rule of Civil Procedure 190, Plaintiffs hereby invoke
Discovery Control Plan Level 2 in accordance with Texas Rule of Civil Procedure 190.3. Pursuant
to Rule 47 (c) Plaintiffs seek damages in excess of $1,000,000.00 jointly and severally from the
Defendants.
IV. FACTS COMMON TO ALL CAUSES OF ACTION
A. The Defendants Control the Company by Ignoring its By-laws.
4. Vertical is a Delaware Corporation which holds itself out to be a global provider of
application software, cloud-based and software services and intellectual property assets with
operations or sales in the United States, Canada and Brazil. Vertical is essentially a holding
PLAINTIFFS’ ORIGINAL PETITION PAGE 3
company with interests in a number of subsidiaries, the most important of which are its 75%
ownership of NOW Solutions Inc., (“NOW Solutions US” also a Delaware Corporation), and
NOW’s wholly owned subsidiary, NOW Solutions Canada, Inc. Vertical’s operating revenue is
generated by these two subsidiaries.
5. For almost two decades Vertical and its subsidiaries have been controlled
completely by the directorship of Defendants Wade and Mills. During that entire time there has
only been one shareholder meeting although the company bylaws and the general statutes of the
State of Delaware require an annual meeting. In fact, the only annual meeting ever held was in
2015 and that was as a result of a lawsuit filed by a Florida shareholder. By being the only two
directors of Vertical, Wade and Mills have been able to effectively control Vertical by never giving
the shareholders the right to vote on its Board of Directors.
6. Although Vertical is a Public Company with over 1.1 billion shares issued, Wade
effectively has unbridled power because he has been the President and CEO of Vertical the entire
time and, as shown below, Mills has completely abrogated his fiduciary responsibility as Wade’s
codirector.
7. More particularly, the Plaintiffs would show that under Wade’s mismanagement
the stock price of Vertical has gone from approximately $5 a share to less than one penny as of the
date of this filing. The Company has seen its revenue drop almost in half in recent years as a result
of the gross negligence and self-dealing of the Defendants. No annual 10K report has been filed
since May 10, 2018 (for the year ended December 31, 2017). During that time Wade has done
nothing to market the Company’s valuable intellectual property.
B. Wade Stops Paying Trust Fund Withholding taxes to the IRS.
8. Beginning in approximately 2013, Wade determined that he would stop remitting
withholding taxes from the paychecks of employees of NOW Solutions. These taxes are denoted
PLAINTIFFS’ ORIGINAL PETITION PAGE 4
as “trust fund” taxes because they are collected by the employer and held in trust for the Internal
Revenue Service. As the person who controlled the checkbooks for Vertical and its subsidiaries,
Wade made a conscious decision that he would just simply not pay those taxes although he knew
it would certainly jeopardize the viability of the Company. This decision on his part caused the
Chief Financial Officer of Vertical at the time, Mr. Freddy Holder, to resign. Although it was a
requirement of the bylaws that there be a Chief Financial Officer, Wade and Mills never
reappointed anyone to that corporate position nor was there ever an internal audit committee
formed. This effectively meant that there was no one with supervisory oversight at Vertical or its
subsidiaries to act as a check on the financial actions of Mr. Wade after 2013.
9. Over the next several years the liability to the IRS including penalties and interest
ballooned to the hundreds of thousands of dollars. Plaintiff Valdetaro, although he was the Chief
Technical employee of Vertical and its subsidiaries, nonetheless became aware of the failure of
Wade to remit the withholding taxes. Whenever he confronted Wade about the debt, he was always
told that the matter was “under control” and that payout arrangements had been made with the
IRS. Moreover, Wade assured him that he had no personal liability and that the company’s tax
lawyer was actively protecting Mr. Valdetaro from any personal liability. In fact, none of this was
true as Mr. Valdetaro was to learn to his complete shock.
C. Mr. Wade Abandons any Pretense of Honest Dealing with Vertical’s Revenue.
10. Upon information and belief, Mr. Wade had recently been paying himself his
annual salary of $300,000. However, he routinely underpaid Mr. Valdetaro, as well as the
Company’s chief operating officer and corporate general counsel, among others. For example,
even though he did not pay other executive officers and employees their salaries for weeks and
sometimes months at a time, Wade always made sure that he got at least his annual salary by
writing checks to himself and his fraudulent use of the Company debit card for personal expenses
PLAINTIFFS’ ORIGINAL PETITION PAGE 5
and cash withdrawals. This was being done on a regular basis even though Wade knew that the
salaries of other employees and payment of the trust fund taxes to the IRS were his first
responsibility.
11. After Mr. Wade’s failure to comply with the payout plan which had been arranged
with the IRS, a tax lien was filed against NOW Solutions (US) in the fall of 2018. Simultaneously,
Mr. Valdetaro also received a letter from the IRS informing him that the government intended to
levy against his personal assets for the trust fund taxes. When he talked directly to Mr. Larry Garr,
the tax lawyer who had been representing Mr. Wade, he found out that he had been lied to the
entire time. In fact, Mr. Wade had not honored the many payout arrangements negotiated on behalf
of the company nor had Mr. Valdetaro’s lack of control over the trust fund taxes been shown to
the IRS. Moreover, because he had relied on the misrepresentations of Wade concerning the lack
of personal responsibility, it was then too late for Valdetaro to challenge the assessment made
against his personal assets. This was even though Mr. Garr later on filed an explanatory letter with
the IRS explaining Valdetaro’s complete lack of authority or involvement in the payroll tax
problem. A true and correct copy of that letter is attached as Exhibit “1” hereto and incorporated
by reference.
12. Valdetaro then took it upon himself to look at the bank records of Vertical and
NOW Solutions and realized the extent of Wade’s self-dealing and breach of his fiduciary duties.
More particularly, he saw that Wade had been writing checks to himself from the Vertical bank
accounts in the tens of thousands of dollars and then negotiating them for cash in order to avoid
the IRS lien. Moreover, he saw that Wade had been using the Vertical bank account debit card as
his own personal credit card, routinely making cash withdrawals from ATMs and charging
personal expenses such as repairs in excess of $8,000.00 to his Porsche and expensive meals at
PLAINTIFFS’ ORIGINAL PETITION PAGE 6
Dallas restaurants. By making unauthorized charges for personal expenses against the debit card
and embezzling cash through multiple ATM withdrawals and checks Wade actually paid himself
almost twice his annual salary of $300,000.00 in 2018. He also learned that Wade had directed
NOW Solutions Canada to wire money directly to Vertical for his benefit, thereby bypassing its
parent NOW Solutions US and avoiding the IRS tax levy.
13. There was no annual 10K report filed in 2019 for the year ending December 31,
2018 as a result of the actions of Mr. Wade. Vertical’s long-time outside audit firm, MaloneBailey,
resigned in 2019 expressly because of the lack of internal financial controls at Vertical and its
subsidiaries. Mr. Valdetaro for his part called Mr. Wade a “crook” to his face and threatened to
resign. He knew that the six hundred thousand dollars that Wade had paid himself in 2018 alone
could have been used to virtually eliminate the tax lien as well as fund the full salaries of key
executives at the company who received only a fraction of what they were owed in 2018 and prior
years.
14. Wade’s response was to remove Plaintiff Valdetaro from the Company in May
2019 by placing him on “paid administrative leave” under the pretext that an investigation needed
to be made regarding some unspecified allegations of impropriety. This of course was a ruse by
Wade intended to silence Valdetaro and keep him from disclosing what was going on at the
Company. Wade then told the other employees that they could not talk to Mr. Valdetaro until such
time as the “investigation” was concluded. To date the “investigation” has never been concluded
although Wade did cut off Valdetaro’s paycheck completely shortly after he was placed on
administrative leave. Upon information and belief Wade continued to receive virtually his entire
salary in 2019 although other senior executives at the company were not paid and the penalties
and interest on the outstanding tax liability continued to grow. Upon information and belief Wade
PLAINTIFFS’ ORIGINAL PETITION PAGE 7
continues to write checks to himself and to use the company debit card to obtain cash and pay for
his personal expenses and meals although senior executives have received no salary at all in 2020.
15. All of the above actions by Wade are a breach of his fiduciary duty as a director
and officer of Vertical and its subsidiaries. He has jeopardized the financial viability of the
Company by not paying to the IRS the payroll withholding amounts over which he had possession
and sole financial control. He and Mills facilitated his self-dealing by maintaining financial control
of the Company in part by refusing to appoint a Chief Financial Officer or conduct an annual
shareholders meeting as mandated by the bylaws of Vertical. His ongoing theft of money from
Vertical by negotiating checks to himself and the unauthorized use of the Company debit card to
withdraw cash and pay for personal expenses is a clear violation of his highest duties of care,
obedience and loyalty owed to the company. This is especially true when there is a regular pattern
of self-dealing by paying himself before the salaries and expenses of junior employees and
executives are paid.
D. Mr. Mills has Joint and Several Liability for Wade’s Breaches of Fiduciary
Duty.
16. As a codirector of Vertical and the Secretary of the Corporation, Mr. Mills owes
the shareholders of the Company the highest measure of fiduciary care. This is certainly true in
the case of a lawyer such as Mr. Mills who advertises on his firm’s webpage that he is an expert
in “corporate governance”. Because he was required to sign off on the Vertical 10K reports for
calendar years 2015, 2016 and 2017 he was certainly aware that Mr. Wade had not been paying
the trust fund taxes that were his responsibility. He knew from the 10K for the period ending
December 31, 2017 that MaloneBailey had given the opinion that there was a question whether
the Company would survive as a going concern.
PLAINTIFFS’ ORIGINAL PETITION PAGE 8
17. Mr. Mills had actual knowledge that, regardless of the nonpayment of the tax lien
against NOW Solutions and the failure to pay employee salaries, Wade illegally paid himself
almost $600,000 in 2018. He knew that the Chief Financial Officer had resigned years before and
that the Company’s outside auditor had resigned in 2019. He therefore had direct personal
knowledge that since that time there had been no financial controls on Mr. Wade whatsoever. He
also had direct knowledge that Wade was siphoning money indirectly through the use of the
Vertical debit card and directly with checks written to him personally, several in the amount of
$30,000.00. He also knew that key employees were not being paid in 2019. Nonetheless, even
knowing Mr. Wade’s dishonest proclivities, he did nothing.
18. Finally, not only did Mr. Mills look the other way when Wade was violating his
fiduciary duties, he facilitated the breaches of those duties by violating his duty of obedience to
the Company bylaws and Delaware corporate law. He knew that the Vertical bylaws as well as
Delaware corporate statutes mandated an annual shareholders meeting at which time a new Board
of Directors would be approved. He and Wade maintained control by never scheduling an annual
shareholders meeting. He did, however, manage to collect his $42,000 annual directors fee even
though he knew Wade was defaulting on other corporate contractual obligations. Thus, by ignoring
the bylaws he helped to ensure that there would be no change in corporate governance. Moreover,
he has ignored for over 7 years the requirement under the bylaws that the company was required
to have a CFO. Nothing has been done in the past year to replace the outside auditor even though
Mills knew that MaloneBailey resigned specifically because there was no internal financial
oversight. Mills has thus ensured that corporate executive salaries, taxes and corporate debts
remain unpaid while Wade continues to enrich himself at the Company’s expense. Mills’ gross
PLAINTIFFS’ ORIGINAL PETITION PAGE 9
negligence and complete abdication of his fiduciary duties as a Director now threaten the very
existence of Vertical and its subsidiaries.
19. The Plaintiffs are keenly aware of the demand requirement as a prerequisite to filing
an action against a Board of Directors. Prior to filing this lawsuit, Plaintiff’s counsel did send a
letter to Mr. Mills detailing all of the above improprieties. A request was made to the effect that
Mr. Mills take some specific actions to fulfill his fiduciary obligations to Vertical and its
shareholders by exercising some financial controls on Wade. A true and correct copy of this
correspondence is attached hereto as Exhibit “A” to the Affidavit of Luiz Valdetaro in Support of
Injunctive Relief which is attached as Exhibit “2” (“Valdetaro Affidavit”) hereto and incorporated
by reference the same as if fully copied and set forth at length. To date there is no indication that
Mr. Mills has done anything in response thereto, nor has he bothered to answer the letter. Given
the past conduct of the Defendants it should be obvious that making a demand on these Directors
would be futile. There are only two Directors and neither is disinterested with regard to these
matters. Moreover, if Wade is in fact not paying other principal executives ANY salary for all of
2020, he may have so depleted its cash that Vertical’s continued existence is in jeopardy and
irreparable harm is threatened thereby. As a result, there is no time to waste and injunctive relief
is vital.
20. Plaintiffs are also aware that Vertical’s bylaws contain a Delaware Corporate Code
Section 102 (b) (7) provision which offers a “business judgment” defense to a Board of Directors.
However, none of the actions complained of herein could even remotely be considered matters of
“business judgment”. Not remitting payroll withholding taxes to the IRS is a violation of the law
and caused the Vertical CFO to quit and forced the Company to incur hundreds of thousands of
dollars in penalties and interest. Not rehiring a CFO in 7 years as mandated by the bylaws is not a
PLAINTIFFS’ ORIGINAL PETITION PAGE 10
matter of business judgment and left sole check writing authority in Wade’s hands. Embezzling
tens of thousands of dollars on Vertical’s debit card and fraudulently trying to pass it off as
business-related is not a matter of business judgment. It is tax fraud. Allowing the CEO to secretly
take out twice his annual salary in 2018 while other employees were paid a fraction of theirs is not
a matter of business judgment. Wade’s paying himself via ATM cash withdrawals and $30,000.00
checks at a time when the Company is defaulting on its contractual obligations to its employees,
creditors and the IRS is not a matter of “business judgment”. Failure to institute minimal internal
financial systems and controls after the outside audit firm quits for that very reason is gross
negligence.
21. All conditions precedent have been performed or have occurred.
V. CAUSES OF ACTION AGAINST THE DEFENDANTS
22. For purposes of these causes of action the Plaintiffs incorporate paragraphs 1
through 21 above as if fully copied and set forth herein.
A. Breach of Fiduciary Duty.
23. The Derivative Plaintiffs bring this action on behalf of Vertical against both
Defendants jointly and severally. Both Wade and Mills owed the highest fiduciary duty as Officers
and Directors to the Company and its Shareholders. They have ignored Vertical bylaws requiring
the appointment of a CFO and have thereby allowed Wade to engage in self-dealing and outright
theft on a massive scale. By not holding annual Shareholder meetings as required by law and not
filing required Form 10k reports they have insulated themselves from accountability. Although
Vertical is a Public Company, no financial reports have been issued for two years and no one but
Wade apparently knows where the money is going. The fact that senior employees have not
received a paycheck since 2019 is troubling. Either there is no money to pay salaries, in which
case the situation is truly dire, or alternatively, there is money, but Wade is keeping it to himself.
PLAINTIFFS’ ORIGINAL PETITION PAGE 11
24. The Derivative Plaintiffs hereby seek damages for the non-payment of the payroll
taxes together with accrued penalties and interest; all sums of cash removed from ATM machines
using Wade’s debit card and checks written to him and negotiated; all charges on the Company
debit card or other credit that were not for a legitimate business purpose including car expenses,
meals, food and cell phones; and any and all sums paid to Wade for compensation in excess of the
percentage of salaries paid to other employees for each year in which all salaries were not fully
paid. Damages are also sought for any other improper payments or benefits Wade received as may
be disclosed by an accounting.
25. The Plaintiffs also seek the forfeiture of any contractual consideration in the form
of Director’s fees the Defendants received from 2013 forward. The complete disregard of
mandates in the Vertical bylaws to have a CFO or any other financial controls on Wade was
deliberate and grossly negligent.
26. Because of the control of the finances of Vertical by Wade and Mills as fiduciaries,
the Derivative Plaintiffs invoke the discovery rule with respect to any improper payments or other
damages identified in the course of this litigation.
27. Plaintiffs also seek pre- and post-judgment interest, and costs of court. They also
seek their reasonable attorney's fees for bringing this Cause of Action pursuant to the Texas
Business Org. Code Section 21.001 et seq.
B. Accounting.
28. The Derivative Plaintiffs seek an accounting of the following:
(a) Bank records over which Wade had check writing authority from 2013
forward;
(b) All records of debit or credit card purchases, charges or cash withdrawals
used by Wade from 2013 forward;
PLAINTIFFS’ ORIGINAL PETITION PAGE 12
(c) Use of and charges for phones authorized by Wade for himself from 2013
forward; and
(d) Director fees paid to the Defendants from 2013 forward.
C. Fraud.
29. Plaintiff Valdetaro brings this Cause of Action individually against the Defendants,
jointly and severally, for fraud involving the non-payment of trust fund taxes from 2013 forward.
Valdetaro relied to his detriment on Wade’s representations regarding the liability. More
particularly, Wade told him that there was a payment plan in effect to pay the taxes and that
Mr. Garr was representing the Company and its Directors and officers. Moreover, Wade
specifically told him that Valdetaro would have no personal liability because he had no personal
authority over the collection or handling of the payroll whatsoever. As stated in Exhibit “1”,
Valdetaro had no involvement in financial matters and was never involved in anything other than
technical issues at the company.
30. When the IRS threatened to levy his personal assets in November 2018, he learned
the following:
(a) Wade had repeatedly violated the payout arrangements he had made with
the IRS, mainly because he had embezzled over $300,000.00 from the
Company in 2018;
(b) As a result of Wade’s malfeasance, the IRS payout arrangement was in
default;
(c) The Company lawyer had never been representing Valdetaro individually
and no attempt had been made to demonstrate that he was not a “responsible
person” under Internal Revenue Code Section 6672; and
PLAINTIFFS’ ORIGINAL PETITION PAGE 13
(d) By the time Mr. Garr sent the Form 12153 Statement to the IRS it was
already too late for Valdetaro to contest liability.
31. Because of his detrimental reliance on the material representations of Wade,
Valdetaro was forced to enter into a payout arrangement with the IRS to avoid losing his home
and other property. The amount of the assessment, for which payments have already begun, is
$425,000.00.
32. Plaintiff seeks judgment against the Defendants, jointly and severally, for the
damages he has suffered as a result of the tax lien, both for the amount of the lien against his assets,
and pre-and post-judgment interest thereon together with costs of Court.
VI. TEMPORARY AND PERMANENT INJUNCTIVE RELIEF
33. The Derivative Plaintiffs seek a Temporary Injunction, and upon trial a Permanent
Injunction, because the imminent harm to Vertical and its subsidiaries is both immediate and
irreparable. As of December 2017, the last period for which Vertical filed a Form 10k statement,
its outside auditor filed a “going concern” opinion for the Company. Since that time, a lien against
one of the two revenue producing entities, NOW Solutions, was filed now in excess of one million
dollars with principal and interest. Wade paid himself $600,000.00 in 2018 and continues to use
the Company debit card and checkbook to support himself. On information and belief Wade has
continued to take his entire $300,000.00 salary since then while the other three principal executives
of Vertical have not received any salary in 2020.
34. Vertical has a probable right to relief under the circumstances. The Defendants are
operating in violation of the Company bylaws. The outside auditor quit a year ago because of the
lack of internal financial controls and no Form 10k was filed for 2018 as a result. If Wade and
Mills remain in financial control of Vertical, it will collapse. If the Company collapses the harm
will be irreparable.
PLAINTIFFS’ ORIGINAL PETITION PAGE 14
35. The Plaintiffs have no legal remedy. The Defendants have acted with impunity and
in flagrant disregard of the bylaws and their fiduciary duties to the shareholders for years. The
owners of the common shares of the Company will have irrevocably lost the hundreds of millions
they invested over the past twenty years. It is doubtful that Wade has any resources left to satisfy
a judgment because of the IRS lien. Unless the Court acts with urgency, the Company will collapse
and the Shareholders will be wiped out.
36. Accordingly, Plaintiffs pray that the Court set a hearing for a Temporary Injunction
no longer than 45 days from the filing hereof, and that upon hearing the evidence, grant injunctive
relief as follows:
(a) That Defendant Wade be prohibited from using any credit or debit cards
issued to Vertical or its subsidiaries and that he be required to surrender the
same;
(b) That Wade be prohibited from having any authority to write checks on, wire
money from or make withdrawals from bank accounts of Vertical or its
subsidiaries;
(c) That the Defendants immediately designate a Chief Financial Officer with
check writing authority on behalf of Vertical and its subsidiaries;
(d) That the Defendants or anyone under their care, custody or control be
prohibited from destroying or hiding any financial or business records of
the Company or its subsidiaries,
(e) That the Defendants hire, within a period of 10 days, an outside auditing
firm directed to make an immediate assessment of the financial condition
PLAINTIFFS’ ORIGINAL PETITION PAGE 15
of Vertical in accordance with standards appropriate for the filing of a Form
10k; and
(f) That the Defendants be prohibited from terminating any employee or
independent contractor except for criminal acts, gross negligence, or cause
as defined in any written employment agreements they may have with
Vertical or its subsidiaries.
37. The Plaintiffs will agree to post an appropriate bond considering the nature of the
actions of the Defendants and the fact that the injunctive relief sought simply requires the subjects
to exercise existing fiduciary obligations.
WHEREFORE, PREMISES CONSIDERED, Plaintiff Luiz Valdetaro and the Derivative
Plaintiffs pray that Defendants Richard Wade and William Mills, Esq. be cited to appear herein,
and that upon trial of this matter, Plaintiffs recover the following against Defendants as follows:
(a) Damages for Breach of Fiduciary Duty against Defendants jointly and
severally;
(b) Reasonable and necessary attorney’s fees and costs of court;
(c) Pre and post judgment interest at the maximum permissible rate;
(d) Damages in the amount of $425,000.00 against the Defendants on behalf of
Plaintiff Valdetaro, together with pre-and post-judgment interest thereon
and costs of court:
(e) Injunctive relief as prayed for herein: and
(f) Such other and further relief, both special and general, either at law or in
equity, to which Plaintiffs may show themselves justly entitled.
PLAINTIFFS’ ORIGINAL PETITION PAGE 16
Respectfully submitted,
/s/ Peter J. Harry
Peter J. Harry
Texas State Bar No. 09134600
[e-mail]
LAW OFFICE OF PETER J. HARRY, PLLC
2828 Hood Street #1201
Dallas, TX 75219
[phone] – (telephone)
[phone] – (facsimile)
Attorney for Plaintiffs Luiz Valdetaro and
Derivative Plaintiffs
Exhibit "1"
AFFIDAVIT OF LUIZ VALDETARO IN SUPPORT OF INJUNCTIVE RELIEF PAGE 1
CAUSE NO. _________________
LUIZ VALDETARO, Individually, et al.,
Plaintiffs,
v.
RICHARD S. WADE and
WILLIAM MILLS, Esq.,
Defendants.
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IN THE DISTRICT COURT
_____ JUDICIAL DISTRICT
DALLAS COUNTY, TEXAS
AFFIDAVIT OF LUIZ VALDETARO IN SUPPORT OF INJUNCTIVE RELIEF
STATE OF TEXAS §
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COUNTY OF DALLAS §
BEFORE ME, the undersigned Notary Public on this day personally appeared Mr. Luiz
Valdetaro, who first being by me duly sworn on his oath, deposed and said as follows:
1. “My name is Luiz Valdetaro. I am a resident of Coppell, Texas, I am over the age
of 18 and have never been convicted of a felony or crime of moral turpitude. I am competent to
make this affidavit and the following matters are, within my personal knowledge true and correct
except for matters of information and belief as noted therein.
2. Since 2012 I have been the Chief of Technology for Vertical Computer Systems
Inc. (“Vertical”) and its subsidiaries to include NOW Solutions, Inc. in the United States and its
wholly-owned subsidiary, NOW Solutions, Inc. (Canada).
3. As the employee charged with overseeing the technology of Vertical, I was
principally responsible for the existing software and matters in development. I was appointed to
this position in 2012 and I have a written employment agreement that provides for a yearly salary
of $200,000. Since joining Vertical in approximately 2001 I have authored or co-authored most of
Exhibit "2"
AFFIDAVIT OF LUIZ VALDETARO IN SUPPORT OF INJUNCTIVE RELIEF PAGE 2
the patents on which we rely and until May 2019 have had primary responsibility for overseeing
the technology and its updates. In the last Form 10K, which was filed by Vertical in May 2018 for
the year ending December 31, 2017, I was listed as one of four principals in the company. The
others included Richard Wade as the President and CEO, Laurent Tetard as the Chief Operating
Officer and James Salz, corporate counsel. Mr. Tetard and Mr. Salz live and work in Los Angeles,
California.
4. Under Mr. Wade’s management the Company has been in a continuing downward
spiral. Over the past 20 years the stock price has fallen from around $5 a share to less than half a
penny at present. In the last 10K that was filed (in early 2018) our outside audit firm MaloneBailey,
LLP gave its opinion that the Company had a risk of not being a going concern. Vertical at that
point was not earning sufficient income to pay its bills and, as shown in the 10K, was in default in
a number of its debt obligations. I along with Mr. Tetard and Mr. Salz had deferred a large portion
of our salaries over the years in order to assist the Company with its cash flow.
5. Beginning in approximately 2012, Mr. Wade, who controlled the checkbook at
Vertical and NOW Solutions (US), decided to stop remitting to the government payroll taxes
collected from the employees of NOW Solutions. This decision caused our Chief Financial Officer
at the time, Mr. Freddy Holder, to resign as CFO and as an employee of the Company. These taxes
are known by me now to be considered “trust fund” obligations of the individuals at the company
responsible for collecting and paying the taxes to the IRS. Although our bylaws require Vertical
to have a Chief Financial Officer, our Board of Directors (consisting of Mr. Wade and William
Mills of Los Angeles), never appointed a new CFO after Mr. Holder resigned. Instead, his
responsibility for financial oversight was essentially given to Mr. Wade as the “principal
accounting officer” of the Company as overseen by the Board of Directors (consisting of Wade
AFFIDAVIT OF LUIZ VALDETARO IN SUPPORT OF INJUNCTIVE RELIEF PAGE 3
and Mills). There was no internal audit committee at Vertical either which left Mr. Wade free to
act without any financial constraints or oversight whatsoever.
6. Although I was continuously assured by Mr. Wade personally that the problem with
the payroll taxes was under control, I subsequently learned that he had entered into a series of
payout plans with the IRS since 2013, none of which he honored. The decision not to pay the trust
fund taxes also had a devastating effect on the revenue of the Company because a number of our
profitable customers left when the IRS garnished payments they owed Vertical to enforce the tax
lien. I became increasingly concerned when it became apparent that the size of the tax obligations
plus interest and penalties was far in excess of $1,000,000 by 2017. I knew, however, that Wade
had retained a competent tax attorney (Lawrence Garr) who had experience as an employee of the
IRS. Throughout 2017 and 2018 I was told by Mr. Wade that he and the attorney had the delinquent
tax situation under control. Moreover, he assured me on multiple occasions that because I was a
technology employee and had no involvement in the collection or payment of the withholding
taxes, that I would be protected from any personal liability for his decision not to pay those taxes
to the government.
7. In the fall of 2018, however, I received a notice from the IRS that they had made a
determination that I had personal liability for $425,000 of the unpaid taxes and that they would
levy upon my homestead and all of my assets. When I talked to Mr. Garr, I found out that Wade
had been lying to me all along. He had never tried to shield me from personal liability even though
the company’s tax attorney informed the IRS of my non-involvement in writing. He had failed to
honor any of the payment plans he had entered into with the IRS. He had simply ignored the
growing tax problem and a huge tax lien had been placed against NOW Solutions (US) and against
him personally as a result.
AFFIDAVIT OF LUIZ VALDETARO IN SUPPORT OF INJUNCTIVE RELIEF PAGE 4
8. I immediately started to review the books and records of the Company for 2017 and
2018 in order to determine why the taxes had not been paid. In addition to the unpaid taxes, neither
I nor Mr. Salz nor Mr. Tetard had received anything but a fraction of our salaries during those
years. I saw that in fact Mr. Wade had been using the Vertical company debit card to embezzle
tens of thousands of dollars out of the Company by charging car repairs and gasoline for his
Porsche, daily lunch and dinner meals (including frequent reservations at upscale Dallas
restaurants), and on a regular basis withdrawing cash from ATM machines using the card. These
withdrawals were typically in the amounts of $500 to $1,000.00 and were done frequently
whenever there was cash available in the Vertical bank account. I also saw that he made a practice
of writing checks up to $30,000 to himself and then negotiating them for cash at the bank. He was
doing this in order to avoid the IRS levy and to conduct most of his purchasing with cash in
situations when he couldn’t use the debit card.
9. In early 2019, while the form 10K was being prepared for the year ending
December 31, 2018, I learned that Mr. Wade had paid himself almost $600,000 during 2018, twice
the amount of his authorized salary. This was in spite of the financial obligations of the Company
which had been in default since the prior year and the fact that I and other senior executives were
only paid part of our contractual salaries in 2018. When MaloneBailey conducted their audit of
Vertical and its subsidiaries in preparation for giving an opinion on the 2019 10K, they discovered
the unauthorized use of the Company debit card and other personal charges incurred and
withdrawals made by Wade. Rather than sign off on the form 10K for the year ending
December 31, 2018, MaloneBailey resigned the outside auditor position that it had with the
Company since 2008, citing a lack of “internal financial controls” as the reason.
AFFIDAVIT OF LUIZ VALDETARO IN SUPPORT OF INJUNCTIVE RELIEF PAGE 5
10. After I learned about Wade’s lies and self-dealing’ I called him a crook to his face
and threatened to resign. That would have presented a problem regarding the development of the
Vertical software programs for which I was responsible. In response, shortly after the decision was
made not to file a Form 10K for the previous year, Wade gave me a letter in May 2019 putting me
on “paid administrative leave”. This was ostensibly to conduct an investigation into some
unspecified improprieties that he told me he needed to look into. This “investigation” was to take
a couple of weeks but in fact nothing ever resulted, and I heard nothing further about it to this day.
My pay was cut off completely shortly thereafter. I also learned later that he ordered the other
employees not to have any contact with me because of the nature of the investigation. In fact, it
was all a ruse designed to get me out of the office and to keep me from reporting on what I had
learned to the other executives and employees. Upon information and belief all the while in 2019
he continued to pay himself using the Vertical debit card.
11. At present I am still under a written employment agreement with Vertical and am
Chief of Technology as far as I know. In recent discussions with other employees I have learned
that Wade appears to be on a mission to destroy the company by not paying existing obligations.
He is still paying himself his salary and, on information and belief, is attempting to get around the
IRS lien against NOW Solutions US by directing NOW Solutions Canada to wire revenue directly
to Vertical. He is still living off the Vertical debit card and making ATM cash withdrawals to
support his lifestyle. On information and belief, however, he did not pay the agreed 2019 salaries
of other senior employees, some of whom have not received any salary at all in 2020.
12. Because I felt that Mr. Mills is the only person with the authority to fix the situation
or even attempt to control Mr. Wade, I had my attorney send the letter attached hereto as
Exhibit “A” to Mr. Mills earlier this month. To date we have received no response from Mr. Mills

Peter J. Harry
Attorney
LAW OFFICE OF PETER J. HARRY, PLLC
2828 Hood Street #1201
Dallas, Texas 75219
[phone]
[phone] – Direct
[phone] – Fax
[e-mail]
April 10, 2020
Via E-mail
[e-mail]
Certified Mail # 7018 3090 0000 8855 2998
And First Class Mail
Mr. William Mills
William Mills, Esq.
800 W. 6th Street #500
Los Angeles, Calif 90017
Re: Vertical Computer Systems
Dear Sir:
Please be advised that I represent Luiz Valdetaro as well as a significant percentage of the
shareholders of the common stock of Vertical Computer Systems (“Vertical” or the “Company”).
I have been directed by my clients to contact you concerning the ongoing fraud and looting of
Vertical being perpetrated by its Director and CEO Richard Wade. As Secretary and the other
Director of the Company you know you have a fiduciary duty to act to protect the interests of the
Shareholders in stopping this illegal behavior.
We know that you have direct knowledge of the following matters and yet it appears that
you’ve done absolutely nothing in your position as an officer and Director to address the problems.
More particularly, within the past few years the following has occurred:
1. Wade collected but did not turn over to the government hundreds of thousands of
dollars in payroll withholding taxes owed by the Company and its subsidiaries. This
situation caused the Chief Financial Officer to resign. Wade incurred personal trust
fund liability for these amounts. A tax lien was placed by the IRS against NOW
Solutions in 2018 in order to recover the amounts due. Moreover, an IRS lien was
Exhibit "A"
April 10, 2020
Page 2
also filed against Mr. Valdetaro even though he had nothing to do with paying the
tax and was shocked when it happened.
2. Wade subsequently avoided paying the tax levy by ordering NOW Solutions
Canada to wire revenue directly to Vertical thus bypassing the IRS lien. Upon
information and belief Wade is still not paying payroll withholding taxes for NOW
Solutions and Vertical employees.
3. Last year the outside auditing firm of Malone Bailey resigned because of the stated
problem of Vertical having no internal financial controls. There is currently no
Chief Financial Officer as mandated in the bylaws nor has the company engaged
another outside auditing firm. Thus, there is no financial accountability nor a
system in place to monitor what Wade is doing with the money.
4. Because of the complete absence of any financial controls Wade was left free to
embezzle and engage in self-dealing on a massive scale. On information and belief,
and although his salary was fixed at $300,000 per annum, he purportedly took
almost twice that amount of money for himself in 2018. This was despite the fact
that the aforementioned tax lien was not being paid and some of the employees for
Vertical and NOW Solutions were getting paid less than half their agreed upon
salaries.
5. Shortly before he was placed on “paid administrative leave” last year by Wade,
Mr. Valdetaro saw evidence that Wade was writing checks to himself and
negotiating them for cash in order to avoid the IRS levy on his assets. In addition,
he found that Wade was financing his entire lifestyle through the unauthorized use
of the Company debit card to pay for meals, car repairs, personal expenses and to
routinely withdraw cash out of ATM machines. On information and belief this
action continues unabated to this day. It is a violation of the Texas Penal Code, Sec.
32.31 (Credit or Debit Card Abuse). This scheme allows Wade to embezzle money
from the Company in excess of his salary while circumventing the tax levy placed
against his personal assets. All the while employee salaries are still not being paid
today and, in some cases, no paychecks have been received in months.
Furthermore, both you and Mr. Wade have attempted to insulate yourselves from
accountability to the shareholders by ignoring the following obligations mandated by the Company
bylaws and Delaware corporate regulations:
1. Refusal to appoint/elect a Chief Financial Officer.
2. Refusal to engage an outside auditing company to replace Malone Bailey.
3. Refusal to hold an annual shareholders meeting for the last 4 years although it is
mandated by the Bylaws, thereby ensuring that the current Board of Directors
maintains power and control.
April 10, 2020
Page 3
4. Failure to adopt any financial oversight system at Vertical generally or controls on
Mr. Wade individually despite knowing about his ongoing pattern of diverting trust
fund tax receipts to himself, financial self-dealing, misuse of the Company debit
card, and other continuing breaches of fiduciary duty.
While you may believe that you have no personal liability for the serial defalcations of
Mr. Wade, nothing could be further from the truth. Although section 102 (b) (7) of the Delaware
General Corporate Code offers some protection to a director under the “business judgment” rule,
none of the matters discussed above can remotely be considered matters of “business judgment”.
Diverting trust fund taxes to oneself, secretly taking money out of the company in the amount of
twice the officer’s salary while not paying the salaries of junior employees, not holding mandatory
annual shareholder meetings for 4 years, and allowing the unfettered use of the Company debit
card for unauthorized purchases are not matters of “business judgment”. On the contrary they are
uniformly prohibited practices and, in many cases such as embezzlement, flat out criminal in
nature.
Delaware law imposes joint and several liability on directors who have completely
abdicated their responsibilities and consciously chose to disregard their fiduciary duties. You had
actual knowledge that a tax lien was filed against NOW Solutions and Mr. Valdetaro because of
the defalcations of Mr. Wade. You knew that no reporting of information or financial controls
were in effect and yet you have done nothing. You signed off on the company’s 10K filed in 2018
which stated the opinion of Malone Bailey that the company was not paying its bills and might not
survive as a “going concern”. You knew that the Chief Financial Officer had not been replaced
nor had an outside auditor been engaged after Malone Bailey resigned. We know that you have
been informed orally and in writing of the improper financial dealings of Mr. Wade. In all these
matters you had an affirmative duty to act as an officer and director and, other than collect your
annual $42,000 director’s fee, you have consciously chosen to ignore your position. Liability under
Delaware law results from an obvious and prolonged failure to exercise oversight or supervision.
You have violated your corporate duties of care, loyalty and obedience. RBC Capital Markets v.
Jervis, 129 A.3d 816 (Delaware Supreme Ct). Your gross negligence in this regard is all the more
damaging because Vertical has only 2 directors on its board and one of those is Mr. Wade.
Obviously, he has been counting on your continuing inaction to allow him to carry on with business
as usual. You are an experienced lawyer. I am not telling you anything you don’t already know.
Accordingly, prior to filing suit demand is hereby made on behalf of the shareholders that
you immediately undertake the following actions:
1. Take any steps necessary to remove Richard Wade from all positions at Vertical
and its subsidiaries.
2. Engage the services of an independent outside auditor. A thorough audit of the
Company’s books should be directed from at least the point in time when Wade
stopped tendering trust fund taxes to the IRS. It is your responsibility as an officer
and director to determine the full extent of the financial malfeasance attributable to
Wade.
April 10, 2020
Page 4
3. Wade’s Company debit card should be confiscated immediately and all records of
charges thereon preserved. A cursory glance at the expenses incurred in the Bank
records should easily confirm the extent of Wade’s unauthorized use of the card.
He should of course be removed as a signatory on the bank accounts of Vertical
and its subsidiaries.
4. A date must be set for an annual shareholders meeting and an updated list of
shareholders compiled and made available in anticipation of the same.
Your continued refusal to exercise your fiduciary responsibilities with respect to these
matters will confirm your joint and several liability for Mr. Wade’s actions. You should be aware
that a suit has been drafted naming both of you as codefendants and asking for damages to Vertical
which resulted from Mr. Wade’s actions (and your inaction). These damages are in the hundreds
of thousands of dollars already and it is unlikely that Mr. Wade has the wherewithal to cover them.
While it is not our preference to file a lawsuit against you personally, your refusal to act
now in the face of the overwhelming evidence of Mr. Wade’s self-dealing will leave us no other
choice. As an Officer and Director you still have the ability and responsibility to do the right thing
in this situation. If you have any interest in discussing these demands before we file suit, please
contact the undersigned at your earliest convenience. I can assure you that the large (currently in
excess of 175 million shares) block of shareholders I represent will not sit by passively as they
watch their investment evaporate due to your negligence. Because of the possibility of SEC
involvement in response to shareholder complaints we believe that time is of the essence.
Very truly yours,
/s/ Peter J. Harry
Peter J. Harry Esq.
LAW OFFICE OF PETER J HARRY, PLLC