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The subsequent legal fight – which has itself cost $773,000 - saw Sex.com put up for public auction, then withdrawn, then posted again for private auction.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