A House Divided: Anatomy of a Public Private Feud

NEW YORK—In addition to the ongoing lawsuit in Las Vegas pitting defendant Private Media Group against recently ousted CEO Ilan Bunimovitz, Consipio Holdings and Tisbury Services, the long-running legal battle between Consipio and Private is also being played out in a New York courtroom. The cases not only share some of the same parties and issues, they also are linked by the fact that key decisions pending in the latter will have a direct bearing on key decisions already made in the former, according to court documents and SEC filings.

At stake is the question of who will be in charge of returning the great Private brand to its former glory. While certainly not as decimated as some other once-prominent adult brands struggling to stay ahead of the sharp curves created by the digital revolution, Private, as one of a handful of publicly traded adult companies, has flirted for the better part of a year with being delisted from Nasdaq. Some previously strong divisions are back on their heels while others are seeing steady if not spectacular growth; new business models are being put into play while others are on the drawing board. But they are all waiting for a conclusion to an internal struggle that has created deep divisions within the Private family.

By year’s end, the decision whether current CEO Berth Milton (pictured) remains as chief executive or whether a new CEO, possibly Bunimovitz, takes over, will most likely be decided. The light at the end of the litigation is in sight, and a shareholder meeting is scheduled for Nov. 18; and while no one is yet claiming victory, recent rulings have seemed to put a slight wind at the plaintiffs' back. During a call with AVN last week, Milton sounded relaxed and said he was resigned to whatever the shareholders decide, and yet also expressed an unambiguous desire to continue on as chief executive of the company his father founded as a magazine in 1965, and which he has run intermittently since 1991. If there was a point he wanted to drive home, it was that he feels uniquely qualified, and is currently poised, to return Private to its leadership role as an innovative company second to none.

“I think the key to Private’s success in the past was that we were all equal,” he said. “I may have been the front figure, but we were all working as a team, we were like a family, and I want to get that feeling back.”

Dueling Lawsuits

The original Consipio v Private lawsuit was filed in New York May 1, 2009. According to the original complaint, Private had borrowed $4 million from Commerzbank AG in 2003, guaranteeing the loan with 4,950,000 shares of Private common stock held by Slingsby Enterprises, a Gibraltar corporation controlled by Milton.

By March 2003, according to the complaint, Private had failed to pay Commerzbank any portion of the amount due, and in April the bank sold the debt to Consipio, a Netherlands corporation, which then entered into an agreement with Private to extend the note until April 2008, with an annual interest rate of 9.9 percent. In an SEC filing Oct. 8, 2010, Private disputed the 9.9 percentage as being the correct one to use to calculate interest on the loan, asserting instead that the original 7 percent amount was still valid.

Private continued to make payments on the note, including principal and interest, through February 2008. In April, Consipio requested that Private pay off the remaining balance, which Private failed to do, alleging the above argument with respect to the calculation of interest. In August 2008, Consipio notified Private that it was in default and that all payments were due. Private still contested the amount due, and in May of the following year, Consipio sued. The court dismissed the case in March 2010, however, for lack of subject matter jurisdiction.

The matter was only just beginning, however. In August, Bunimovitz, Consipio and Tisbury, a major shareholder, sued Private in Las Vegas, alleging, among other things, that Bunimovitz had been fired without cause.

Then, according to the Oct. 8 SEC filing by Private, “On August 12, 2010, [Private] received notice that Consipio had re-filed a Complaint against [Private] and Slingsby to enforce the Note and guaranty in New York State Court, entitled Consipio Holding BV v. Private Media Group, Inc. and Slingsby Enterprises Limited (Case No. 650462/10). The new Complaint contained allegations and sought relief similar to the allegations and relief sought in the case previously filed on May 1, 2009, in U.S. federal court. Both [Private] and Slingsby intend to vigorously defend against these claims.”

Back in Nevada, according to an Oct. 22 SEC filing by Consipio, the plaintiffs contended that their lawsuit had been “filed on grounds that [Private] has been mismanaged by its present Chairman and board of directors.” They filed a motion requesting a temporary restraining order, and the motion was granted Aug. 13, immediately barring Private from issuing any additional shares of stock, incurring any additional debt, disposing of any business assets outside of the ordinary course of business, or making any loans to any officer or director or paying any bonus to any officer or director of the company. For all intents and purposes, the company was and remains frozen in place.

But the Nevada plaintiffs were not done. Consipio wanted to be able to vote its 5.6 million shares of Private common stock at an upcoming shareholders meeting. Private attempted to prevent that from happening by filing a motion with the Nevada court asking it to deny Consipio “votable shares,” but the motion was denied Oct. 6. With more than 50 percent of Private shares now controlled by individuals or companies unsympathetic to the current management, a shareholder rebellion was in the works.

On Oct. 8, the story advanced yet again. The Nevada plaintiffs filed a motion with the court asking it, among other things, to confirm that Consipio “will have the right to vote the Shares pledged as collateral for the Slingsby guaranty of the Note and the balance due from [Private]. On Oct. 14, the court ruled that Consipio “will have the right to vote all of the Shares unless a New York court rules to the contrary.”

Cut to New York. On October 12, 2010, Slingsby filed a motion to dismiss the action against Slingsby on grounds that, "enforcement of Slingsby’s guaranty and the Pledge Agreement are barred by a six year statute of limitations under New York law. A hearing has been set in the New York court on November 8, 2010 to consider Slingsby’s motion to dismiss the New York Action,” according to the Oct. 22 SEC filing by Consipio.

It is unclear whether the New York judge also will address the right of Consipio to vote its shares at the hearing, but it would be a good idea, considering the fact that the current Private board of directors has scheduled a shareholder meeting for Nov. 18, during which a new slate of board members put forth by the plaintiffs is expected to be put to a vote.

In addition to putting forth the slate of new directors, the Nevada plaintiffs and others want shareholders to vote on substantial amendments to Private’s bylaws. It is during the same Nov. 18 meeting that Berth Milton said he wants to outline for shareholders his plan to revitalize the company.

“I Want to Stay on as Private CEO”

In the interview with AVN, Milton declined to speak directly about the ongoing lawsuits, but was eager to talk about Private’s future, which he said would be in excellent hands if he is allowed to remain at its helm. He couldn’t get specific about his plans for the company, explaining that he wanted to unveil them at the upcoming shareholder meeting, but he consistently referred to the years before he left in 2001 as halcyon days for Private, when the company saw consistent growth and rising revenues.

“When I left the company, it was making about 10 million Euros a year and we were growing about 100 percent a year, totally self-financed,” he said. “And after I left, there was no new thinking; just cost-cutting.”

What he wants to do, he told AVN, is put Private back on the right track.

“We’ve been doing some amazing deals while this trial has been going on, and the latest one with Voddler, which I think shows something very different from the whole adult industry,” he said. “Voddler is the biggest IPTV operator in Scandinavia today, with more than 800,000 viewers, and for the first time ever we achieved a deal that is equal to [companies like] Disney and Time Warner, so that we have the same rev-share deal as they do. That is unheard of, and I think it is because I am back and I can explain what Private wants to do, and why it is beneficial for the mainstream to work together with adult.

“I don’t want to say too much right now because we are going to present it at the Nov. 18 meeting,” he added, “but instead of the mainstream hiding that they have adult, they should show that they have adult and make money off of it, but it has to be done in a clever way, and we have the formula for that, and it’s proven in quite a big scale with Voddler. It’s just one of the things that we have planned.”

Milton, as even his most ardent critics will grudgingly admit, is a passionate man with big ideas that he is not afraid to implement on a grand scale. When he spoke about the opportunities available to adult businesses in the middle of chaotic changes to the marketplace, a singular optimism took hold of him, especially when discussing the need to meet the expectations of younger consumers.

“Adult content has to be easy to consume, but it doesn’t have to be that you make money from it directly,” he said. “There are others ways to make money. That’s the ingenious thing that everybody here has been thinking about, because the model we have been using doesn’t work. Content, too; because of the pirating, we need to rethink that model, too. And that’s what we have done, and we have what I think is a tremendous and shocking model that is coming out.”

Of course, the outcome of the lawsuits and a restless group of shareholders may still be an obstacle to his plans for Private. Insisting that he wants to remain as CEO, he also exhibited a striking calm in the face of the challenges he faces, and an admirable acquiescence to what will come.

“Absolutely, I want to stay on as Private CEO, but it’s up to the shareholders to decide that. I have no idea where it will end finally, but I have no problem working with anyone, as long as we can make this a big success.”

While not holding out any hope that the parties can come to any sort of reconciliation, he seemed somewhat wistful about the fallout, without naming any names.

“There was so much that we could have done together; I mean, within the management,” he said. “Unfortunately, that didn’t work out but these things happen. We just have to look at the positive side, whatever the outcome is. Hopefully, I will be able to implement my ideas with Private after the 18th and turn it into the company I want it to be.

“I think we can start to work for an industry that we can be proud of again,” he added, as our conversation came to a close. “And there are many people who believe in me and believe I can do it again, and I would really like to have the chance to show that, and let’s see if I can.”

The Home Stretch

It is never an easy thing when conflicts within the leadership of a company lead to lawsuits, divided loyalties and inevitable hard choices, but a silver lining to the Private situation is the probability that it will all soon be coming to an end. For Private shareholders and those holding Private debt, that has to be a very welcome expectation, considering the fact that everyone involved is dependent in one way or another on the company’s ability to generate significant revenue well into the future.

But if the end is in sight, so, too, is the ultimate decision that will determine the makeup of Private management going forward. Conversations with parties on both sides leave little hope that the prospect of kissing and making up is on the table. This is a fight to the "death.” For better or worse, only one side will likely prevail, and to it will go both the spoils and the responsibility to rebuild what is arguably Europe’s greatest adult brand.