New Frontier Sues Investors, Alleging Securities Violations

BOULDER, Colo.—Publicly traded New Frontier Media filed a lawsuit in U.S. District Court in Colorado on Thursday against a group of investors who in March announced an unsolicited bid to buy the company. According to the complaint, the purpose of the suit is to "prevent Defendants from frustrating the ability of the Corporation’s Board of Directors and its duly-formed special committee of independent directors from fulfilling the fiduciary duties they owe to ALL shareholders."

The complaint specifically alleges that defendant and major shareholder Longkloof Limited filed "false and misleading" SEC reports that failed "to disclose all of the members of its bidding group, or its true plans with regard to [New Frontier]," in order to achieve "preferential treatment" in its bid to take over the Nasdaq-traded media company.

As AVN has previously reported, "A letter sent March 9 by majority shareholder Longkloof Limited informed New Frontier of its intent to acquire all outstanding shares of NOOF it did not already own." That letter as well as subsequent announcements by Longkloof have also complained bitterly about the effectiveness of New Frontier management and its board of directors for what it called its "unfettered self interest."

The March 9 letter also stated, "We are extremely concerned about the capabilities and behavior of NOOF's current Board. We do not believe the current Board is capable or willing to undertake the actions necessary to enable NOOF to compete in the future, as the track record established by the current Board over the past several years has been dismal."

Since then, porn powerhouse Manwin has also announced its own bid to acquire New Frontier, with a $1.50 per share offer that beat Longkloof's initial offer of $1.35/share. On May 23, however, Longkloof upped the ante with a revised offer of $1.75/share, using the occasion to continue its criticism of New Frontier, this time accusing the Special Committee formed to consider the competing bids of dragging its feet.

"It is time for the Special Committee to allow the shareholders, the true owners of the Company, to decide for themselves whether our proposal—providing immediate liquidity at a substantial premium—is a better alternative to the Board of Director's current misguided, time-consuming and value-wasting strategy of remaining a public company and paying the associated exorbitant costs, including the excessive and unnecessary board fees to its non-management directors," it stated at the time.

New Frontier has apparently had enough, stating in the 33-page complaint, "Longkloof ... has used various improper means to try to tilt this process in its favor and obtain preferential treatment. Instead of accepting the Special Committee’s invitation to participate in the sales process on an equal footing with all other bidders and focusing solely on sharpening its pencil and coming up with the best bid it possibly can, Longkloof has steadfastly sought special preferential treatment and engaged in other activities designed to conceal certain key participants in its group, and to intimidate and coerce the Board of Directors into pre-empting its process and embracing it as the 'coronated' buyer of New Frontier Media."

Essentially, the complaint alleges that the attempt at a "hostile takeover" of New Frontier, allegedly by Longkloof, is actually a conspiracy of sorts directed by Adam Rothstein, who is identified in the complaint as "the representative of New Frontier Media’s largest shareholder," Longkloof, which owns over 2,500,00 shares of NOOF.

In a press release issued Friday, the company stated, "New Frontier Media alleges that Hosken, Longkloof, Marcel Golding, Adam Rothstein and the other defendants have been acting as a 'group' in connection with their involvement in a hostile takeover offer for the Company and a threatened proxy contest against the Company.

"The suit," it continued, "alleges that the defendants violated Section 13(d) of the Securities Exchange Act of 1934 by not properly reporting their identity and activities as a 'group,' including that they have failed to disclose that their efforts to acquire control of the Company, whether through a hostile takeover offer or a proxy contest for control of the Company's Board, are being directed and coordinated by Adam Rothstein."

The alleged plot to acquire New Frontier was apparently in play in January 2012, according to the complaint, during a time when, as a Longkloof representative, "Rothstein had the opportunity to become extremely familiar with New Frontier Media and developed a close relationship and friendship with Michael Weiner, the Chairman of the New Frontier Media Board and its Chief Executive Officer.

"As their relationship developed," the complaint continues, "Rothstein involved Weiner in some of his investment opportunities and Weiner entertained Rothstein at major industry events such as the AVN Awards Show in Las Vegas. Weiner also introduced Rothstein to customers, employees, industry partners, as well as members of the New Frontier Media Board. Among the industry partners introduced to Rothstein by Weiner were HCI and its Executive Chairman, Golding."

The January AVN Awards also provided a opportunity for Rothstein to arrange other meetings during which the subject of the acquisition of New Frontier was raised.

"On January 21, 2012," it alleges, "prior to arranging for Rothstein to attend the AVN Awards Show at The Hard Rock Hotel & Casino, Las Vegas, Weiner arranged for a dinner meeting with Rothstein, 'Taj' (a Rothstein associate), Stuart Duncan (Owner, TEN Broadcasting, the largest adult broadcasting company in Canada), Bryan Postlethwait (New Frontier Media Vice President, Brand/Content Development), Marc Callipari (New Frontier Media General Counsel), Walter Timoshenko (a member of the New Frontier Media Board who subsequently became a member of the Special Committee after its formation the following month) and several others. At this dinner, Rothstein discussed his interest in acquiring the Corporation. Rothstein also indicated, during the course of discussions, how he intended to run the Corporation once he acquired control of it."

Longkloof's interest was delivered to the New Frontier Media Board during a regularly scheduled board meeting on January 30, 2012, and two weeks later an official letter of intent by Longkloof was submitted to the board. Each of these instances is contained in the complaint in order to establish Rothstein's leading role in the takeover attempt.

The lawsuit asks the court to direct the "Defendants [to] file truthful and accurate Schedule 13D disclosures, in compliance with the applicable rules and regulations, forthwith," and to issue an injunction directing the defendants and anyone they know from "violating Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder; and (ii) engaging in any further activities with respect to their shares of New Frontier Media common stock until they have made adequate corrective disclosures as required by the Exchange Act."

More pointedly, it also asks the court to enjoin "Defendants from acquiring additional shares of New Frontier Media common stock until accurate and compliant Schedule 13D disclosures have been filed" and to order the defendants to "divest themselves of any and all shares of New Frontier Media common stock that they unlawfully acquired in violation of the federal securities laws in accordance with and pursuant to a plan of divestiture ordered by the Court."

But perhaps the most severe request by the plaintiff is the request that the court find that New Frontier is not required to recognize a slate of directors put forth by Longkloof for consideration by shareholders at the next board election, because, the complaint alleges, "Defendants did not comply with the advance notice of nomination provisions of the Bylaws, Article II, Section 2.17."

Shares of NOOF closed at $1.67 today, down 3.47 percent on the day. The previous close was $1.73.

The New Frontier vs. Rothstein complaint can be accessed here.