3 Co-Founders Quit Before Digital Entertainment IPO

Three co-founders of Santa Monica-based Digital Entertainment Network have unexpectedly left the company in the midst of preparations for an initial public stock offering, in part because of a civil lawsuit alleging sexual misconduct by one of the founders.

Marc Collins-Rector, the 40-year-old founder and chairman of the company, resigned last week, a month after a complaint was filed in U.S. District Court in New Jersey that he had engaged in sexual activity with a minor in 1996.

The suit was quickly settled under undisclosed terms, although Collins-Rector denied the allegations.

The company said in a statement that Collins-Rector had always planned to leave the company once it was up and running on its own, but the suit “accelerated” his departure.

“It was his idea entirely to leave early,” said Collins-Rector’s attorney, Ron Palmieri.

Palmieri said that Collins-Rector thought it was best to leave to keep Digital Entertainment Network from being further blemished by the lawsuit.

After Collins-Rector’s departure, two other co-founders of the company, Chad Shackley, 24, and Brock Pierce, 18, also resigned to join their partner in a new venture, which Palmieri said had to do with encryption technology.

Shackley and Pierce were not involved in Collins-Rector’s lawsuit.

The company had little to say about the resignations, citing Securities and Exchange Commission rules on public comments prior to an initial stock offering.

But in a prepared statement, it said Collins-Rector’s resignation was mutually agreed on and that his departure would not change the leadership of the company, which remains unchanged under CEO Jim Ritts and President David Neuman.

Digital Entertainment Network creates video, audio and music programming for “Generation Y” Web surfers. It is scheduled to officially launch its programming next week.

In September, Digital Entertainment filed plans for a $75-million IPO.

Collins-Rector owns about half the company’s stock and has put voting control of his stake in the hands of two board members.

IPO experts said that the resignations of the three was an unusual event that could impact the company’s stock offering.

Manish Shah, publisher of IPO Maven, said the allegation of sexual misconduct would probably have little impact on the company, which was originally included in the lawsuit, but later removed by the court since it did not exist at the time of the alleged incidents.

But he added that the departure of the co-founders could be serious. “Maybe they didn’t have much operational control of the company; it just leaves a lot of questions open,” he said. “To leave at this time creates a sense of instability.”

Stephen Lacey, managing editor of IPO Reporter, said that he would not be surprised if the company delayed its stock offering for several months.