E-Mail Debacle Puts Spotlight on EFront’s Troubles

Even before the recent death threats, Sam Jain was under siege.

Advertising revenue at his Internet company, Costa Mesa-based EFront Media, plummeted. The firm stopped paying scores of creditors. Most of its 45 employees had quit or been fired.

EFront’s problems would seem to resemble those of many other Internet firms struggling to survive in a depressed dot-com economy--except for one major difference.

Jain’s computer was hacked in early March and the company’s internal communications were stolen and put on the Internet. At least three Web sites posted thousands of pages of what appear to be Jain’s confidential conversations with employees and friends over an online instant-message system. The messages put on public view had a tone of desperation and discussed how to fend off creditors, snoop on partners and bully customers.

Jain, EFront’s chief executive, said the computer logs were altered. “I clearly did not say a lot of things that were in there,” he said. “Disgruntled employees and management launched a smear campaign against EFront. It’s in their interest to see us in bankruptcy.”

But three former EFront executives said the message logs were an accurate portrayal of some electronic conversations with Jain about the troubled company. “[The posted versions of] my logs matched up perfectly with what I have,” said Matt Levine, one of the former executives.

Now EFront’s near-collapse has become a living nightmare for Jain, his employees and his vendors. These computer logs quickly made Jain, 31, a poster child on chat rooms for discussions about the shady business practices and greed that have destroyed many Internet companies.

After the logs hit the Internet, Jain was deluged with antagonistic e-mails. He said he has endured castigation over the Internet as well as personal threats that he “will be run down in the street.” To avoid the onslaught, he cut off his cell phone and moved out of his home.

“Some companies would just close shop,” Jain said. “I’m not about to do that.”

Jain emphatically denied any wrongdoing and defended his actions as necessary to keep EFront afloat.

The three former EFront executives countered that the blame for the company’s spiraling financial problems rests largely with Jain. “When Sam started destroying our trust, he destroyed our business,” said Jerry Ziegler, the company’s former president.

At its peak, EFront ran a network of 200 Web sites featuring everything from games to baby names, software and celebrity photos. The company became one of the fastest-growing Internet properties by aggressively acquiring Web sites and sharing advertising revenue with its partners.

In recent months, the company has fired 28 employees. There also has been turnover in the executive suite: Levine, EFront’s chief technology officer, quit in March; David Rudolph, director of business development, quit in December; and Ziegler was fired in February. Ziegler has filed a lawsuit in Orange County Superior Court asking for back pay and damages, claiming defamation and wrongful discharge. All three agreed to be interviewed for this article.

Now Jain is scrambling to reorganize EFront or find a merger partner.

Ownership Reverting to Web Site Founders

Two weeks ago Carlsbad, Calif.-based Space4Rent, which hosts EFront’s Web-server computers, cut off its service for nonpayment, according to EFront spokesman Lloyd Berry. EFront informed Web site managers that they must immediately find alternative Web hosts. Berry said Jain is turning the ownership of most sites back to their founders and will attempt to reorganize EFront’s ad network under an affiliate model.

Jain also has tried to renegotiate contracts with operators of various Web sites in an effort to stem EFront’s bleeding. This involved drastic cuts in monthly purchase payments to Web site operators. “[These are] the market conditions, this is the reality,” Jain said.

Like many Internet companies, EFront had to reduce expenses to stay alive. But former executives Ziegler and Levine said that, at Jain’s direction, EFront manipulated the payments to Web site operators to cut costs.

For example, EFront’s payments to the Web site managers were keyed to page views--the total number of times a Web page is seen by a visitor. Founders of some of the Web sites said they knew the volume of viewing traffic before they sold their sites to EFront. Afterward, the measurement of such traffic was left to EFront. Some Web partners complained that EFront regularly reported traffic results below many sites’ previous levels, which cut their compensation.

“They cheated us,” said Garrett Hylltun, co-founder of two EFront Web sites based in Tacoma, Wash., that distribute free software. Hylltun and his partners sold the sites to EFront last year.

“We were getting in excess of 2 million page views a month. As soon as EFront takes over, their page-view count on us went down incredibly, to . . . around 1.5 million.”

Income Linked to Web Page Traffic

Then in late February, EFront tried to get Web operators to accept a new method for calculating payments based on daily “unique visitors,” instead of page views. Because many users view several pages per visit, the new formula would have trimmed payments dramatically. Hylltun and his partners would have received less than half of what was promised in the original contract.

“They promised us the world,” Hylltun said. “They said the total value [of the EFront deal], with cash and stocks over the next three years, was $1.75 million.”

But Hylltun said he never received the stock options, and cash payments ended abruptly in January. His company ended up with a total of about $8,000.

Hylltun had relied on his Web site as the main source of his income. To pay rent and buy food for his family, Hylltun applied for welfare. He was rejected because EFront failed to respond to welfare agency requests for information, he said.

Recently, EFront returned ownership of the sites to Hylltun and his partners, who say they will try to rebuild their Web business.

Last year EFront bought an animation site from Hacienda Heights college student Johney Dou, 19. By December, Dou had maxed out his personal credit cards after EFront’s payments ended. Dou said he is owed more than $40,000.

The first controversy surrounding EFront’s business practices surfaced last summer.

When the dot-com frenzy was at its peak, EFront was among the many Internet companies that strove to post high “traffic” ratings in monthly surveys by the audience rating firm Media Metrix. Higher ratings would increase company prestige and help ad revenue.

To boost EFront’s traffic, the company contacted Web sites all over the world and offered each as much as $10,000 to combine its audience numbers with EFront’s, even though the sites would have little or no other relationship with EFront, according to former executives Ziegler and Levine. EFront also began to pool its audience numbers with those of sites with which the company had failed to cut deals, Levine and Ziegler said.

Members of EFront’s top management team were unaware of the arrangement at the time, according to Ziegler and Levine.

In July, EFront became Media Metrix’s 18th-most-visited Web network--with more than 12 million unique users. This figure surpassed even the numbers for Napster, the wildly popular music-sharing Internet site.

These numbers soon were challenged by an EFront competitor. After doing its own research, Media Metrix issued a terse correction in October, stating that EFront “unintentionally submitted inaccurate information.” EFront was dropped from Media Metrix’s top-50 list and has not returned. Neither Jain nor Media Metrix would comment.

In an interview, Jain answered some questions, but he later declined to comment on many other aspects of EFront’s difficulties.

Even Jain’s detractors say that EFront began with a good idea: Help little Web site operators in a world dominated by Internet titans Yahoo and AOL. EFront bundled diverse, specialized Web sites into a single network to compete for ad dollars. EFront bought more than 200 sites in 25 countries by agreeing to pay cash over several years, plus stock options.

The original owners maintained the Web sites while EFront handled ad sales, marketing and legal issues. EFront is privately held, so the stock options carried only hypothetical value. But to some small entrepreneurs dreaming of Internet riches, the deal looked like a ticket to the big show.

For a while the model worked. EFront’s network audience soared through the first half of 2000 as the ad market surged, and some of its Web site operators were ecstatic.

EFront depended heavily on ad revenue. But at the end of last year, some advertisers--including struggling dot-coms--slowed payments or stopped paying their bills. In December, EFront collected about half the $800,000 it was owed by advertisers, Jain said. By February, EFront’s billings had slumped to $250,000, according to Ziegler.

By some accounts, Jain is an unorthodox risk taker with tremendous drive and a willingness to burn bridges. He started EFront in 1999 with then-17-year-old technology whiz Matt Levine.

The company got off the ground with modest funds. Rudolph and Ziegler said the company raised $750,000 in working capital from friends and family, including Los Angeles Lakers player Brian Shaw, who said he invested $150,000 and is attempting to recover those funds.

As a small, private company sinking in a sea of dot-com trouble, EFront probably would have faced scant public scrutiny but for the theft of message logs and their publication on the Internet.

AOL Time Warner Inc., the owner of the instant messaging system used by Jain, bluntly warns users that its message technology is highly insecure. And in one purported message, Jain was explicitly warned by a friend that his software allowed intruders to easily copy any file on his computer, including the logs.

He apparently disregarded the warning.

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Times staff writers Joseph Menn and Tim Brown contributed to this report.