DEN Investigated on Alleged Fraud in Liquidation

Digital Entertainment Network, the Internet video company that burned through $60 million of investor money in two years, is being investigated for possibly fraudulent asset sales before it filed for bankruptcy in June.

Court-appointed officials overseeing DEN’s liquidation are investigating the sale of hundreds of thousands of dollars worth of DEN equipment and other assets to company insiders.

DEN bankruptcy trustee Todd Neilson and his attorney for the DEN case, Richard Diamond, said they are looking into the sales, which included the $90,000 purchase of computers and other assets by affiliates of DEN Chairman Gary Gersh.

“We are commencing our investigation now,” Diamond said, adding that he will examine the Santa Monica firm’s high salaries as well as the asset sales in the three weeks before the bankruptcy filing.

Neilson said in a court filing he intended to probe “alleged or probable fraudulent transfers.”

DEN is among the most celebrated flameouts of “dot-com” start-ups. Its creditors include employees, vendors, the Screen Actors Guild and former executives who are owed more than $5 million, court documents show. DEN’s hard assets are less than $1 million, Diamond said.

“Exorbitant salaries and sweetheart deals are fraudulent conveyances if not supported by adequate consideration,” Diamond said. Fraudulent conveyance laws against pre-bankruptcy favoritism are intended to protect creditors.

Gersh, the former president of Capitol Records and part-owner of GAS Entertainment--manager of the Beastie Boys--declined to be interviewed. A source close to him said the purchases were at fair market value and therefore did not run afoul of bankruptcy laws.

DEN won national attention for its pioneering strategy of putting youth-oriented video programming on its Web site. At its peak, DEN had more than 300 employees and its corporate backers included Intel, Microsoft and Dell Computer. DEN was poised to become the first pure-entertainment Web site to sell public shares.

It aired short episodes of teen-oriented video series and secured big advertisers, but the company failed to generate a significant audience or keep its expenses in check. Then the company’s plan for a stock offering was tabled after news of a sex scandal involving founder Marc Collins-Rector.

DEN’s bankruptcy lawyer, Ronald Leibow, said the company’s executives checked Internet auction prices on similar equipment to make sure the sales were at fair prices. “It sounded to me like it was based upon fair value,” Leibow said. “If they were paying full value, I don’t think anyone could complain.”

Yet several others who bought DEN assets described a fire-sale atmosphere in late May. They said they heard about the sell-off through word of mouth and got deep discounts.

“It was sold dirt cheap,” said former DEN Vice President Melinda Moore, now chief executive of an Internet media services company called They. “We got laser printers that are normally $2,000 for $300.”

Similar reports of other sales have reached the trustee.

“We will do a thorough analysis of all transfers from the company,” bankruptcy trustee Neilson said. “There could be serious problems with it, and there could be an explanation for it.”

DEN executives who helped sell off the equipment, including Chief Executive Greg Carpenter, couldn’t be reached for comment. Carpenter himself paid about $5,000 for computer equipment in the sale, which raised $282,000 in the weeks before the company filed for bankruptcy.

Some creditors, who will meet with the trustee later this month, said they were concerned about the last-minute sales and about the salaries paid to top executives.

Gersh, who was elevated to full-time chairman in February, received $1.2 million in salary, bonus and other compensation in DEN’s last 12 months, bankruptcy filings show. President David Neuman received $1.6 million, ex-CEO Jim Ritts $278,000 and CEO Carpenter $274,000 in that period.

The trustee officials said they will consider trying to recover money from the company’s executives and directors or their insurers. The liability insurance policies are also being targeted in suits by former DEN employees who say they were seduced by Collins-Rector as minors.