I'm flabbergasted. Sorry you are going through this hellish sich. I would feel the same way you're feeling now or worse.
I'm sure everything seems absolutely bleak now, but let's see what's positive:
1) D11 trusts you enough to tell you her secrets. This is great. Continue encouraging her openness, so wait before you talk to your W (until you're calm enough.) Otherwise, she might blame her D and D would not trust again. 2) You're having open conversations with the kids. 3) You have legal advice.
As of steps to take: 1) I would contact the L and express what is going on to protect the kids. Get her advice. 2) Wait till you're calm to decide about asking her to move out/call her on her lies. This is what happens: when you do an intervention, the person in the center of it feels attacked. That's what we do in our culture but it does not work. What works is telling the person what is good about that person--but this is not the time to do that--- yet. If you talk to her now and tell her what you know, she will feel attacked and might take it on the kids. She might do something crazy like spend all the money or whatever. Careful. 3) I would definitely try to come up with some $$ to talk to a coach. HSA might cover-check with your insurance. Even if it's an hour, it'll help. Mine is wonderful.
In the meantime:
Imagine yourself asking her to move out and what would ensue. Notice the feelings inside of you, esp your physical reactions. Do you feel at peace? Do you feel like it's good? Do you feel relieved? Then ask her, but only when you are calm. If it feels wrong, wait, but definitely address this issue with the OM ASAP. I would not want my kids meeting that man.
Have you read, "The Ultimatum" in the DB book? Read it and think about it. You would tell her the agreement now is NO meeting OM at all, and if she's not ok with this, you want out of the M. Follow through. Tough one. Make sure this is what your heart tells you to do before you do it. It's all about the bottom line thing we've been talking about.
She's behaving like a crazy teen, emotions are raw, so think twice before taking any action.
My coach said WAS's act like 5 or 16-year olds. They are rebelling, they want to take control, they are confused and don't like the confusion. Your W has a lot of emotional issues from prev M so you guys will have to address these at some point but not yet; only if you can find your way back to each other.
Hang in there. I'll be sending you my positive energy. Tori