Original URL: http://www.theregister.co.uk/2010/10/28/sx_dot_com_sale/

Sex.com sellers roll eyes at $13m price tag

'A home run. Not a grand slam'

By Kieren McCarthy

Posted in Media, 28th October 2010 05:19 GMT

Sex.com may have been sold for $13 million but that isn’t enough for its owners.

The deal between Escom and soon-to-be new owner Clover Holdings – an opaque company based in offshore tax haven St Vincent – will go ahead after being given formal approval by Judge Geraldine Mund in Los Angeles on Wednesday.

However, the proceeds of the sale are still the subject of a legal dispute after what one lawyer said had been a “home run but not a grand slam” of a sale through online auction house Sedo. They had been hoping for $20 million.

The three main owners of Escom, a shell company based in Delaware, are themselves shell companies, called WTA, DNAG, and DOM Partners. WTA is a corporate face for “social entrepreneur” Mike Mann; DNAG represents domain investors Mike Zapolin and Andrew Miller; and we’re not quite sure who is behind DOM Partners.

The individuals behind each corporate front have been at each others’ throats since it became clear Escom was not going to be able to meet its loan obligations to DOM Partners back in January 2009.

The subsequent legal fight – which has itself cost $773,000 - saw Sex.com put up for public auction, then withdrawn, then posted again for private auction.

The final price reached of $13 million is just one million over what Escom paid for the domain in 2006 but not enough to cover the claims that the various entities insist they are entitled to.

Between $130,000 and $520,000 will go to Sedo as a sales commission, and just over $10 million will go to the current owners (which includes the near-$1m lawyers fees). That leaves roughly $2.5 million.

A fourth equity partner, Nothin But Net, insists that most of that money should be its. Nothin But Net is yet another shell company which invested $1.5 million when payment of the DOM Partners loan was at risk a few years earlier. It says it is out of pocket by $2 million, and is furious about a $2.5 million deal within the company that would see it receive nothing from the sale.

Lawyer for Nothin But Net, Peter Gurfein, complained that the deal gives yet another shell company – iEntertainment, which is itself a subsidiary of WTA - an exclusive contract with Sex.com that it says has to be paid off before anyone else sees any money.

“A lot of facts not before your honor today,” Gurfein argued. “iEntertainment was given the exclusive rights to operate a portion of Sex.com – but no consideration was given for that exclusive right. There was no minimum performance requirements, no audit provision and no termination for failure to perform.”

Gurfein also pointed out that after Playboy had taken over the site on a six-month license in 2006-2007, iEntertainment received $175,000 in fees for waiving its rights. But when Playboy discontinued its license, iEntertainment made no revenue at all for four months.

“It did not perform,” Gurfein argued. “And what was its penalty? A $2.5 million buyout for its rights. This is the ultimate sweetheart deal.”

That deal – in which Mike Mann effectively awarded himself operating rights over Sex.com – was included in an agreement that Nothin But Net had signed when it invested in Escom, argued yet another lawyer, Susan Montgomery, who is charged with seeing through Sex.com’s bankruptcy.

Unfortunately, there are four versions of that operating agreement and so Judge Mund called a halt to proceedings and asked all the lawyers to go away and prepare filings that outline the various legal issues so she can make a judgment.

“I need to make decision whether the prior agreement is trumped by the fourth agreement,” Judge Mund told the court. “Otherwise I will be spinning wheels at a time when I do not have time to spin wheels.” The earliest date she can rehear is the case is 22 December.

A strange circle of history

All of these shenanigans help obscure some startling facts about the sale and continued controversy surrounding Sex.com.

The domain was famously stolen in 1995 by lifelong con-man Stephen Cohen who then kept it from its rightful owner, Gary Kremen, by moving ownership and funds through a series of shell companies, some in offshore tax havens.

Eventually, Kremen was handed the domain back as well as a $65 million court judgment that he has yet to receive one cent of due to Cohen’s financial hall of mirrors (Kremen is still chasing Cohen to this day).

When Kremen sold Sex.com to Escom LLC in 2006 for $12 million plus $2 million in equity, coverage of the sale itself – the largest ever domain name sale - was such big news that no one questioned who was actually buying the domain.

As the current owners squabble over how much money they will receive from the sale – even arguing that they stand to lose money – everyone has forgotten about who will shortly own what is rapidly becoming a poisoned chalice.

Jeffrey Dulberg, as Escom’s lawyer noted at the very start of the hearing that “the most important person is not here – the buyer”. Nothing is known about Clover Holdings except that it is based in St Vincent, was the highest bidder, and that it is required to deposit $1 million now and the remaining $12 million in a fortnight.

Asked outside the court, Dulberg admitted he has no idea who was behind Clover Holdings. Neither does the bankruptcy lawyer Susan Montgomery. The only company that does appear to know is auction house Sedo.

And in that respect Sedo will shortly be put in the position of trying to find a way to identify the buyer to Escom and possibly the court without breaking its own confidentiality rules if it wants to receive $520,000, rather than $130,000 in commission.

As part of the auction deal, Sedo receives between one and four percent on the total sale, depending on who the final purchaser is. If Clover Holdings was already known to have expressed an interest in buying the domain, Sedo receives just one percent; if it was an entirely new party brought to the table by Sedo, it receives four percent.

Now everyone just has to figure out who was actually behind offers the first time around (when a public auction was suddenly called off), and who is actually behind offers this time around.

And if your head hasn’t exploded after all of that, just consider the fact that Escom – or the group of feuding individuals that make up the corporate entities that make up Escom – is so unsure about the money appearing that they have already lined up a back-up buyer in case the whole deal falls through.

“This is not a complicated transaction,” argued Jeffrey Dulberg with an apparently straight face, “it’s the sale of a domain name; it’s a transaction.”

And so the saga of Sex.com continues. ®

Kieren McCarthy has written a book about the fight for Sex.com (http://sexdotcom.com).