Dan Bender, a former business partner of New Frontier Media, Inc., owners of the TeN Channel, has given a deposition in a controversial lawsuit which has been filed against that company.
On Feb. 20, Bender testified, among other things, that New Frontier Media executives said they had no intentions of honoring a business agreement with J.P. Lipson, a Colorado financier. Lipson was supposed to have bailed the company out of financial straits in exchange for certain concessions, among which, apparently, was the running of the company. When those concessions supposedly weren't met, Lipson filed suit against New Frontier Media, a publicly-held company out of Boulder, CO. The suit was filed Jan. 7 in Boulder's 20th Judicial District.
Besides New Frontier Media, Inc., Lipson's lawsuit names Mark Kreloff, New Frontier Media's chief executive officer, and Michael Weiner, the company's executive vice president, as defendants.
In his lawsuit, Lipson, a former Wall Street financier and an agricultural baron believed to be worth in excess of $500 million, alleges that Kreloff and Weiner committed fraud, diverted company funds for personal benefit, defrauded shareholders and creditors of New Frontier Media, and made personal withdrawals from company bank accounts and loans to themselves without proper corporate procedures, board meetings or shareholder notices. Lipson's lawsuit also petitions for a jury trial. A date hasn't been set for the trial.
New Frontier Media in its SEC quarterly report [Form 10-QSB] filed Feb. 16, 1999, formally replies to the Lipson suit.
"The Company believes that Mr. Lipson's suit is entirely without merit and intends to vigorously defend itself against same," states New Frontier Media.
New Frontier Media filed counter claims to the Lipson suit on Feb. 5, alleging that Lipson committed fraud in the inducement of a $1.2 million loan, Lipson claims, in addition to committing two counts of tortious interference.
Bender's three-hour testimony, which was given in Denver to Lipson attorney Jim Ghiselli, is expected to be a key issue in the lawsuit.
Bender, a former partner in the Exxxtasy Networks, found himself in the middle of a political squabble at the time Lipson was, allegedly, being courted as a potential investor for New Frontier Media. Though it may or may not have related to Lipson, Bender was subsequently fired by fax. Kreloff denies that Bender was fired in this manner. In a letter sent to AVN publisher Paul Fishbein, Kreloff states, "Mr. Bender was not fired by fax. An agreement had existed for several months prior to his mutually agreed to departure to consolidate his San Diego office functions to Boulder."
According to Bender, about a third of Kreloff's statement is correct. Bender's San Diego office was closed, but there was no mutual agreement to Bender's termination, according to Bender. It all came as a surprise to him, he says.
AVN is in possession of the fax, dated Oct. 29, 1998, which reads: "Due to accounting irregularities surrounding the purchasing of films your services have been terminated." Bender claims those charges are blatantly false. Bender says the channel never attempted to prove them but operated on mere hearsay to make a case for firing Bender, who had been openly critical of their licensing payment schedules, among other things. Another bone of contention between Bender and New Frontier Media was the status of its accounts payable, particularly with bandwidth provider Loral Skynet.
Obtaining information from sources close to the Loral Skynet deal, AVN, in its January 1999 issue, reported that New Frontier Media might have been in arrears on its Loral Skynet contract from anywhere between two to four months, and stood to have their operations shut down as a result.
Kreloff has categorically denied this, stating for the record that New Frontier Media actually "prepays" its transponder bills.
On the other hand, Lipson outlines the entire alleged Loral bailout scenario in his lawsuit, in which Lipson supposedly advanced the company $1.2 million to satisfy the Loral debt.
"They [New Frontier Media] can say what they want about fraudulent inducement, but the fact remains that the company was on the brink, they had no other way to make those payments," says another Lipson attorney, Howard Bittman. "It's ludicrous to call this fraudulent inducement. They [New Frontier Media] were ready to go down the tubes."
According to Bittman, New Frontier Media has repaid Lipson $690,000 of the loan, including interest, but claims it isn't a simple black-and-white issue of the company owing Lipson a balance on the loan.
"Both parties signed binding agreements," says Bittman. "Lipson was committed to loaning them $10 million in increments. He is not a bank. This was strictly a high-risk venture. Lipson took them from the brink of insolvency, and he feels he's entitled to a lot more."
New Frontier Media denies there is a balance of any kind.
"We deny the claim Mr. Lipson has made," New Frontier Media's attorney Frank Visciano told the Boulder Daily Camera in its report on the Lipson suit. "There is no basis whatsoever for [it]," Visciano said.
In its 10-Q report, New Frontier Media contends that Lipson "also paid $481,000 to a vendor [Loral Skynet] at neither the request or direction of the company."
When contacted for verification, all Ted Corus, Loral Skynet's vice president of sales, would say is that it wasn't Loral's policy to comment on the payment history of their clients, that it enters a "confidentiality agreement."
But it is public record that Loral provides transponder service which New Frontier Media subleases through a company called Fifth Dimension. According to AVN sources, Loral had supposedly threatened to pull the plug on the TeN Channel and had notified Stuart Duncan of Fifth Dimension to that effect. Duncan, coincidentally, is also a New Frontier Media board member. Loral's Corus said that if the information about the debt had come out of Duncan's office, Loral wouldn't comment one way or the other.
Threatened with a shutdown, New Frontier Media, according to the Lipson suit, was to have enlisted Lipson's support to pay the bill in an eleventh hour bailout. Lipson in his suit alleges that he made a quick loan of $1.25 million to cover the Loral bill in exchange for certain concessions. In an interview with AVN, Lipson said these matters were discussed in an Oct. 5, 1998 agreement between Lipson, Kreloff and Weiner. Lipson, according to the agreement, was to be placed in charge of the company. Lipson also details these facts in his suit.
The January, 1999 AVN article went on to report that there indeed had been a palace coup of sorts, and that Kreloff was apparently ousted from New Frontier Media on Nov. 1, 1998. This came three days after Bender's firing. Kreloff has denied this. Kreloff said at the time of the alleged coup, there was neither a J.P. Lipson nor a "pig farmer" in the corporate scheme of things. "Pig farmer" had become the colorful code name acquired by Lipson in a scenario that was beginning to take on cloak and dagger characteristics.
Though the Lipson takeover has been rigorously denied by Kreloff, executive action for it was apparently authorized and signed by none other than Kreloff's second-in-command, Michael Weiner. AVN possesses copies of the authorization, but Weiner has refused to return AVN's phone calls on the matter.
Kreloff then had L.A. attorney Michael Plotkin, counsel to Kato Kaelin during the O.J. Simpson trial, fire off a three-page letter to AVN in which Plotkin describes the contents of the AVN January story as one being riddled with "intentional fabrications" and "false statements."
Plotkin went on to describe the article, as written by Gene Ross, to be one written "with a minimum of research and little, if any, concern for accuracy." Plotkin also denied the Loral Skynet contract aspect of the story and dismissed the pig farmer account as "fanciful."
"Literary license does not extend to his [Ross] publishing false, disparaging, in fact, defamatory statements about the financial status of a public company," Plotkin wrote.
Contrary to the Weiner, Plotkin and Kreloff denials, however, two documents exist which are now in AVN's possession. They are described as "Action Without a Meeting By the Board of Directors of Colorado Satellite Broadcasting, Inc."
The first document states the following: "Whereas it is in the best interest of the Corporation to terminate the current president and CEO, Mark Kreloff, pursuant to the Colorado Business Corporation Act 7-108-303(4); and whereas it is deemed to be in the best interest of the Corporation to nominate and elect J.P. Lipson pursuant to the Colorado Business Corporation Act 7-108-301(2) as the new president of the Corporation to enable the Corporation to conduct business." The action goes on to authorize Weiner to terminate Kreloff's officership and to nominate/appoint Lipson. The second document, also signed by Weiner, delegates signing authority to Lipson and gives him signatory authority at Vectra Bank, the company's bank. Lipson's lawsuit against New Frontier Media, Kreloff and Weiner alleges how this whole scenario came about and what occurred in its aftermath.
According to the papers filed by Lipson, New Frontier Media "was desperate for a cash infusion," that its stock price had dropped almost 80 percent from the period six months earlier. Lipson contends that New Frontier Media was "unable to meet its obligations" and was going to be shut off by Loral.
(New Frontier Media's initial public offering of 1.5 million shares was originally listed at $5.25 per share, but dropped as low as 62 cents, though it had rallied to around $2.96 as we went to press.)
Based on Lipson's reputation for financial bailouts, Lipson alleges that New Frontier Media's local counsel, John Coombs, advised Lipson of the company's problems and inquired about the possibility of Lipson investing in the company.
According to Lipson, he was notified in early October that New Frontier Media was two months overdue on its transponder lease and would result in the "cessation" of New Frontier Media's ability to continue operations. Lipson also claims he was told the company was barely able to make its payroll obligations.
According to Lipson, Kreloff and Weiner were supposed to have guaranteed him as a de facto holder of 70 percent of equity by way of outstanding common stock to protect and monitor his investment. This was in return for Lipson's capital infusion. Lipson says he was told that New Frontier Media needed the money immediately and didn't have time to draft formal documentation but would do so, after the fact, to Lipson's satisfaction. After the creditors had been paid, that is.
Considering this to be a high-risk venture, Lipson says he insisted on effective management control of New Frontier Media to protect his investment and specified liquidated damages if New Frontier Media faltered on its agreement. Lipson admits in his suit that he acted without counsel but went on the word of Kreloff and Weiner.
The Oct. 5 agreement was in place. On Oct. 6, Lipson made a payment of $685,000 to satisfy the oldest of the lease payments and agreed to make available another $10 million to New Frontier Media.
On Oct. 16, 1998, Lipson paid an additional $481,000 to satisfy the second transponder bill. The payment was made directly to Loral. (New Frontier Media says this was done without its knowledge or consent.)
In consideration of Lipson's payments, New Frontier Media was supposed to have made several binding agreements among which was an obligation to deliver 70 percent of equity, or $10 million in liquidated damages if the company in any way faltered. There was also a promissory note for $675,000 with board action and a security agreement for $675,000 pledging all of New Frontier Media's assets.
Lipson claims he managed the operations of New Frontier Media for two weeks in which he negotiated contracts and was given complete access to company records. On Oct. 30, a day after Bender's firing, Lipson, according to his lawsuit, was escorted off the New Frontier Media premises by police. Lipson is now alleging that New Frontier Media refuses to honor any of its prior financial and managerial agreements.
Lipson also contends that Michael Weiner is supposed to have later admitted that New Frontier Media never had any intention of entering into formal agreement with a contract once Lipson made good on the leases. Dan Bender acknowledges this and corroborated Lipson's story in his sworn deposition.
A diversified holding company, New Frontier Media has a number of subsidiaries, including Colorado Satellite Broadcasting, Inc. (CSB), of which the TeN Channel is a part; DaViD Entertainment, Inc.; the Boulder Interactive Group which also does business under the name Inroads Interactive; and Fuzzy Entertainment, Inc. which also does business under the name In-Sight Editions.
Primarily involved in CD-ROM publishing, adult laserdisc distribution and decorative art poster publishing and distribution, New Frontier Media got involved in the satellite broadcasting business when, upon completion of its public offering, it acquired the collective assets of Fifth Dimensions Communications, Inc., a Barbados corporation which owned the Exxxtasy Networks. This eventually became the TeN Channel.
