Online Porn Exec Is Alleged Target of Investigation Into Fraud, Tax Evasion

Internet porn mogul Seth Warshavsky and his Seattle-based company are being investigated for possible credit card fraud and income tax evasion, according to former associates who said they have been questioned by federal agents.

Warshavsky, founder and chief executive of Internet Entertainment Group Inc., said he had heard he was under investigation, but added that he has done nothing wrong. If there is an investigation, he said Monday, “I’m sure they won’t find any wrongdoing, and they’ll drop it.”

The probe, which appears to involve the FBI and the Internal Revenue Service, casts new doubt on an online porn empire that has generated as much publicity as profit. For years, Warshavsky has been touted as one of the few Internet entrepreneurs actually making money online. His company is best known for exposing celebrities, having distributed a purloined video of television actress Pamela Anderson Lee having sex with her rock star husband, and nude photos of conservative talk show host Laura Schlessinger.

But last year, two former IEG managers and a former IEG lawyer said in affidavits filed in connection with a lawsuit that Warshavsky had raised cash by double- and triple-charging credit cards of subscribers to his porn service.

They also alleged that Warshavsky, who was planning to take the company public, misstated IEG’s revenue and financial health.

Affidavits from eight other current and former IEG employees supported the allegations of overcharging, but the sworn statements were sealed when Warshavsky settled the lawsuit. Warshavsky sued the two managers and the lawyer, alleging that they violated a non-competition clause in their contracts and stole a company e-mail list. Warshavsky has contended that any overcharges were accidental and that customers have since been reimbursed.

A federal grand jury in Seattle issued a subpoena in March for the documents in the case file. The grand jury also subpoenaed the file from a 1998 civil case in which a former girlfriend sued Warshavsky alleging domestic violence. The assault suit was also settled out of court, and the file was sealed.

At least four potential witnesses have been interviewed by Assistant U.S. Atty. Mark Bartlett in the last several weeks. In some cases, investigators from the FBI and the IRS participated in the questioning.

Bartlett and spokesmen for the FBI and IRS declined to confirm or deny whether Warshavsky was under investigation.

But Eric Blank, Warshavsky’s former attorney, said that he has met with agents and that “they asked me a lot of questions about Seth and about IEG operations.” Warshavsky sued Blank for allegedly violating the non-competition clause when he quit the company.

Investigators have also interviewed former IEG chief editor Evan Wright, former Chief Financial Officer Bert Reitsma and former business partner Peter Steichen and have contacted former IEG employees, including customer service technician Matthew Fischer.

Federal investigators told Wright and Steichen that they were investigating whether Warshavsky laundered money through foreign accounts to evade income tax, the two men said. Wright said investigators were also interested in possible “wire fraud related to allegations of overbilling customers on IEG-operated Web sites.”

Fischer, in his affidavit in October, said he became aware that “IEG was inappropriately billing members’ credit cards. For example, inactive accounts were reactivated and billed without reason, and accounts were billed multiple times for a single monthly membership in a given month.” Fischer said he was told to tell customers who complained that the problem was a “computer glitch.”

The former technician, who says Warshavsky still owes him back pay, was to talk to an IRS criminal investigator this week.

Reitsma, who was interviewed by investigators in May, had given an even more detailed account of overbilling. He also said IEG’s revenue was about $10 million per year, not the $50 million that Warshavsky had repeatedly mentioned in published interviews. In response to that allegation, Warshavsky said in October that IEG had revenue streams that were not under Reitsma’s supervision.

The federal investigation is the latest chapter in Warshavsky’s colorful career. Both Lee and Schlessinger sued Warshavsky in attempts to block his company from distributing pictures of them. Lee settled out of court, and Schlessinger lost.

Most of IEG’s business comes from a subscriber pornography service, in which viewers pay to watch interactive X-rated performances. In recent months, Warshavsky has hired a new chief accountant and said he is concentrating on putting his financial affairs in order.

He said his company was doing better than ever and will still consider the possibility of going public. “We’re looking at different financing strategies. It depends on our options,” he said.

In a conversation several months ago, Bartlett had said the burgeoning area of Internet fraud is generally extremely difficult to prosecute because victims are spread across the country and few are eager to press charges when it comes to pornography.

“There are built-in problems,” he said at the time. “One is that everyone is all over, though that’s not insurmountable. The other is that in pornography, there is an unspoken feeling of, ‘Well, of course they’re lying when they say they didn’t order the service.’ . . . It’s like telemarketing. It’s hard to organize the victims. These are hard cases to make.”