Porn Hedge Fund Founder Defends Investment Decisions

Apr 8 2009 | 3:00am ET

May 16, 2011: Update -- The SEC performed a one-year investigation in which all of AdultVest’s company records were turned over to regulators. No wrong doing was found and no charges were filed. The SEC sent a letter to Francis Koenig on April 26, 2010 saying the investigation was complete and no enforcement action was recommended.   

ORIGINAL ARTICLE

Is last year’s most provocative hedge fund launch just another fraud?

Sources close to AdultVest Inc., which manages the Priapus Investment Fund, an adult entertainment hedge and private equity fund, say that it is spending investor money on more than just investments, and that what investments there are don’t account for the returns it claims.

A former investor says that founder Francis Koenig is looting the fund to pay for fine art, expensive wines, cars, personal trips and alimony. Meanwhile, a former employee tells FINalternatives “there was no capital being generated” during his time at the firm. 

“There is almost no money left in the fund,” the investor, who said he was privy to some of AdultVest’s financials via a court order, alleges. “Koenig has an American Express black card through the company that he uses on partying, girls and high living. Most money is missing and iPorn.com is not worth what he says it is.”

“It just seems to me the whole time I was there that there was no capital being generated,” says the former employee, who left the firm last year because he felt uncomfortable working in an office shrouded with mystery. “And it seemed like money was being spent for things that didn’t need to be bought like cars, clothes and trips,” he adds.

Koenig calls those claims “absolutely ridiculous” and “slanderous.”

“There’s one investor in our fund who has put himself in a tough financial position and he’s nervous about all of his investments, and not just this one,” Koenig tells FINalternatives. “If it’s the guy I’m thinking of, he wanted to redeem capital form the fund, but the fund has deployed the money already. As far as where I spend my personal money, that’s completely separate from the fund. I do use an AmEx black card to do purchases but that is separate and apart from the fund. I take home a paycheck and I can spend that paycheck however I want to spend it.”

Both sources also question Beverly Hills, Calif.-based AdultVest’s returns.

The former employee alleges that Koenig spent investors’ money on buying domain names such as iporn.com and handjob.com, and shares in a strip club operator, VCG Holdings Corp., which has allegedly produced a 60% loss. Last June, AdultVest announced the acquisition of iporn.com and laid out plans to create an online adult entertainment platform.

“Between the two domains and VCG, I don’t know what else he spent investors’ money on. There were companies under the fund’s umbrella, but those were his companies that he started. I started putting two and two together and smelled a rat,” he says.

“Priapus’ only asset is iPorn.com, which cost about $250,000, yet $3 million is missing,’ the former investor says. The investor also alleges that a related firm, Adultvest Events, a conference company that seeks to bring investors and adult industry insiders together, did no business, and that all of its cash was stolen.

He also says he's filed a complaint with the Federal Bureau of Investigation and the Securities and Exchange Comission, which is taking the complaint "very seriously". The SEC declined to comment on its cases.

Koenig counters that iporn.com is “doing really well,” contrary to online reports that the company has closed its offices in Beverly Hills and that AdultVest went through some $3.5 million of investors money in a two-year period.

The AdultVest founder has been quoted saying that Priapus, which was named Institutional Investor’s best hedge fund launch of the year in 2008, gained 50% last year. But he says he was simply misquoted by the Atlantic Monthly.

“We have not reported a 50% gain to anyone, including our investors,” he claims. “The fund had stopped taking capital at the $50,000 per unit and it raised the price to $75,000 per unit based on the fund’s progress and the investments that it had made. So we increased the per unit buy-in price by 50%.”

However, Tom Johansmeyer, the Atlantic Monthly freelance reporter who interviewed Koenig, says he definitely did not misquote Koenig. "After all, I recorded the conversation with his knowledge and consent," he says.

Meanwhile, the former AdultVest employee paints a grim picture of life at the firm.

“Everyone got paid their salaries, but I was trying to figure out how all of these salaries were being paid, and at one point I was told that it was being individually funded,” the former employee says. “It was a small office and there was a lot of talk and I just didn’t feel like I needed to be around that.”

The former employee, who says there were about 11 employees when he worked at the firm, claims that some of the few remaining staff members, including a secretary and the firm’s Web site manager, have had their salaries halved because the firm is running out of money. He also says that they are only coming into the office once or twice a week.

“In my opinion, this guy raised money to start a company, to live a lifestyle he wasn’t accustomed to,” he says.

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