Court Appoints Eric Johnson Receiver for Private Media Group

LAS VEGAS—In the Nevada version of Consipio v. Private Media Group, Judge Elizabeth Gonzalez has issued an Order appointing current Private Board director and Sureflix chief executive Eric Johnson as a receiver for the company, tasked with managing all assets belonging to the Barcelona-based company. Johnson also is ordered to promptly schedule and conduct Private’s 2011 shareholders meeting, during which a vote will likely take place to determine Private’s board of directors and its resulting management going forward.

Private says it will file an application with the Supreme Court of Nevada early next week seeking an emergency writ "to stay the Order of the Court, and to set aside the appointment of a receiver." Oral arguments on a related matter in the case have been scheduled for September 8 before all seven Nevada Supreme Court judges. Private intends to request that the Sept. 8 hearing also consider the emergency writ of stay request if the emergency stay is not granted prior to that hearing.

Whether the Order indicates an imminent dénouement to this case or whether it will be stayed, it certainly signals a dramatic escalation by the lower court in its determination to gain control of a case that has been as slippery as an eel. As AVN readers who have been following our coverage are aware, the outcome of this case—which pits the current management and Board of Private against former management, creditors and some shareholders—will determine the future makeup of the management and Board of this iconic European adult brand.

The case has certainly had as many twists and turns as a Formula One race. A good indication of its fluidity can be found in the 13-page Order, issued Aug. 25, which includes a Findings of Fact section that provides the groundwork for the current Order. One part in particular describes the outlook of the court with respect to Private’s behavior thus far.  

“Throughout the course of this lawsuit, Private has demonstrated a propensity for disregarding or resisting clear and unambiguous orders of this Court,” it reads. “Most egregiously, as set forth in the Court's June 20 Order, Private knowingly disobeyed the Court's October 21, 2010 Order, causing Consipio to be disenfranchised of its right to vote 3,950,000 Private shares at the 2010 annual shareholder meeting. Had Private complied with the October 21, 2010 Order, the Consipio slate of directors would have been elected by a margin of well over 3,300,000 shares and an orderly change in control of Private would have ensued. Instead, since November 18, 2010, Milton has retained control of Private.”

Today, Private, which is publicly traded on Nasdaq, filed a Form 8-K with the Securities and Exchange Commission, which states, in part, “On July 26, 2011, the Court, on its own motion, decided to reconsider its Order entered on November 17, 2010, insofar as it had previously determined that it would be inappropriate to appoint a receiver for the Company.

“On August 25, 2011, following a hearing held on August 23, 2011, the Court entered an Order appointing Eric Johnson, a director, as a receiver for the Company, to serve in such capacity until further order of the Court. The Order purports to appoint a receiver for the purposes of (i) preserving the Company’s assets and business, and (ii) setting the date for and conducting the 2011 Annual Meeting of Shareholders. The Order places the receiver in control of all of the assets of the Company. The current Board of Directors will remain in place until the Annual Meeting of Shareholders and until their successors are elected by the shareholders, to be held later this year. The current directors will continue to perform its duties as required by federal law and the Nasdaq Marketplace Rules until their successors are so elected.”

The 8-K statement also challenges the legality of the receivership appointment by Gonzalez. "The company believes that the court’s appointment of a receiver violates state law, as the statutory and other legal requirements for appointment of a receiver have not been met, and that Judge [Elizabeth] Gonzalez’s decision was improperly motivated by personal bias" certainly provided a more fair commentary from our side, especially given the plaintiffs quote, on the ruling.”

The current position of the court is that despite its earlier denial of the plaintiff’s 2010 application for the appointment of a receiver, subsequent developments have made such an appointment necessary and apparently urgent. Indeed, the current Order is in and of itself a detailed articulation of precisely why the appointment of Johnson as receiver is being made.

For example, in the Finding of Facts section, Gonzalez states, “Private's directors, most notably Milton, have been guilty of gross mismanagement in the conduct and control of Private's affairs,” that its “directors, most notably Milton, have been guilty of misfeasance, malfeasance or nonfeasance,” that the company “has been unable to conduct its business in accordance with established principles of good corporate governance because of Milton's refusal to allow it do so and his exercise of undue influence over Private's so-called ‘independent’ directors,” that “Private's assets are in danger of waste, sacrifice or loss,” and that “the appointment of a receiver over Private is necessary to preserve its remaining assets and business, and to protect its shareholders.”

The resulting Order specifically stipulates that Johnson “shall immediately take control of all assets of Private including, without limitation, all direct and indirect subsidiaries of Private (including those entities named below) and their respective assets. To achieve control over any such subsidiary, Mr. Johnson or his designee or assignee shall be and is empowered by this Court to remove, suspend and or appoint directors, officers, administrators, managing members and employees of all of Private's direct and indirect subsidiaries including but not limited to:

"Cine Craft, Ltd. (Gibralter)

"Coldfair Holdings Limited (Cyprus)

"Fraserside Holdings Ltd. (Cyprus)

"Peach Entertainment Distribution AB (Sweden)

"Milcap Media Group S.L.U. (Spain)

"Private Media Group Services S.L. (Spain)

"Private Benelux B.V. (The Netherlands)

"Private France SAS (France)

"Private North America, Ltd. U.S. (California)

"Barbuda B.V. (The Netherlands)

"Ceresland S.L. (Spain)

"Private Media Group Canada, Inc. (Canada)

"Fraserside IP LLC U.S. (Iowa)

"ThinkForward, Inc. U.S. (California)

"GreenCine, Inc. U.S. (Delaware)

"Mama's LLC U.S. (Delaware)

"GameLink LLC U.S. (Delaware)

"eLine LLC U.S. (Delaware)

"Sureflix Digital Distribution, Inc. US. (Delaware)

"Entruphema, Inc. (Canada)”

Judge Gonzalez also identifies specific Private subsidies in the Order that have been targeted for the apparent purpose of ensuring without a modicum of doubt that Johnson or his appointees have complete control over them.

For instance, the Order reads, “Ordered, Adjudged and Decreed, specifically with respect to Milcap Media Group S.L.U., Private Media Group Services S.L. and Ceresland S.L. (all registered in Spain), Mr. Johnson, or his designee or assignee, is authorized to conduct all business on behalf of these companies including the removal, suspension and/or appointment of directors, officers, administrators and employees, He, or his designee or assignee, is further authorized to engage these companies as signatory and authorize all and any corporate resolutions of these companies.”

Similar specifics are included for other Private subsidiaries, including Fraserside Holdings Limited (registered in Cyprus), Coldfair Holdings Limited (Cyprus) and Peach Entertainment Distribution AB (Sweden).

The plaintiffs provided AVN with the following comment regarding the Aug. 25 Order. “As throughout this case, we respect the decision of the Court. We have full confidence in Eric Johnson to fulfill the scope of his mandate as receiver including the return of Private to its legitimate owners, its shareholders. We are pleased that poor business judgment and gross disregard for fiduciary duty will no longer be hallmarks of Private's management ethos.”

Regarding the Sept. 8 oral arguments before the entire Nevada Supreme Court bench, the judges will consider a core issue in the case. According to Private's 8-K filing, the hearing will "determine the validity of the lower court’s Order entered in October 2010 that Consipio Holding bv, an unsecured creditor of the Company, has the right to vote 5.6 million shares pledged by Slingsby Enterprises Ltd. in 2001 to secure a $4 million loan from Commerzbank to the Company, which shares have been claimed to be beneficially owned by Berth Milton, the owner of Slingsby Enterprises Ltd."

The defendants declined to comment directly for this article but referred AVN to the 8-K statement. AVN has contacted Eric Johnson for comment, but he did not respond immediately. We will continue to update this story as it develops.