Battle of EUniverse Is Up in the Air

There’s an old joke about how university campus politics are so vicious because there’s so little at stake. From that, we might conclude that the proxy fight over the Internet company EUniverse Inc. would have been more dignified had it concerned an operation that actually turned a profit over the last year and didn’t spend several months in the doghouse of a Nasdaq trading suspension.

Instead, the battle pitting EUniverse’s founder and ex-chairman, Brad D. Greenspan, against a management team that he had largely appointed himself has reached new standards in backbiting and vituperation.

Over the last few weeks, the existing board has been issuing letters to shareholders with lurid headlines such as: “BRAD GREENSPAN -- THE THREAT TO YOUR COMPANY’S SUCCESS,” and “GREENSPAN’S SOUR GRAPES.”

Even the Democrats in New Hampshire backed away from this sort of campaigning.

The board accuses the 30-year-old Greenspan of employing “empty rhetoric” and “petty personal attacks” in order to seize control of the Los Angeles-based company for personal financial gain and self-aggrandizement. It notes that the trading suspension and a huge restatement of financial results going back to 2002 occurred on his watch.

The incumbents further charge that he tried to torpedo an $8-million private equity deal that they deem crucial to the survival of the company, which runs a collection of game and entertainment websites, earning revenue from advertising and memberships.

Greenspan has fired back in kind. His shareholder letters accuse the officers and directors of conflicts of interest, self-dealing and mudslinging. (“THERE THEY GO AGAIN! DO NOT BE MISLED BY INCUMBENT MANAGEMENT’S CONTINUING MISSTATEMENTS, OMISSIONS AND MANIPULATION OF THE FACTS IN THEIR EFFORTS TO DIVERT YOUR ATTENTION FROM THE REAL ISSUES.”)

Greenspan’s core charge is that the board colluded with a private venture firm to seize control of EUniverse from the holders of its common shares, of which he owns the largest block. As for its financial problems in the last year, he acknowledges that he was chairman and chief executive during much of that period. But he says he had left day-to-day operations in the hands of some of the same people now sniping at him from the opposite trench, including President Brett Brewer, 31, a board member and his former UCLA classmate.

Under the circumstances, one can only sympathize with the 4,000 shareholders being importuned to vote for one or another slate of four directors (out of seven) at the company’s annual meeting, scheduled for today. Both sides say their first order of business will be to hire a professional CEO for EUniverse, obviously an admission that no one in place now is up to the job. Both also claim to possess the strategic key to restoring EUniverse’s former luster as one of the rare, pure Internet plays that worked.

Greenspan founded EUniverse in 1999, three years after his graduation from Westwood. The company’s first incarnation was as an online retailer of music CDs, but it evolved rapidly into its current form. Its focus on games and entertainment was successful enough to allow the company to shed its CD retailing operation in 2001, and for a while Greenspan basked in the glory of running a network of websites that actually made money. There were interviews on CNN, paeans from Web consulting guruships like Gartner Group and a $17-million equity investment from Sony Corp. The combined traffic on EUniverse’s websites ranked in the top 20 nationwide.

In mid-2003, the dot-com sector seemed to be emerging from its slump and EUniverse looked to be leading the way. Just then, though, came the sock full of wet sand that awaits every cocksure management: restatement.

“It was a breakdown on the financial side -- in accounting and in operations,” Greenspan told me this week from the borrowed Encino office he’s using as his war room. The company had moved back into retailing, concentrating on high-margin impulse items such as Olympic commemorative berets, and that led to “sales and fulfillment problems.” (The phrase usually means that the company isn’t selling enough, and what it does sell it can’t get to customers.)

Greenspan says the problems came out of the blue.

“I was focused on doing deals and making strategy,” he says, blaming Brewer and other operating executives for the disaster. (Brewer and the incumbent board never responded to my telephoned and written requests for comment.)

The company’s declared profits vanished in the restatement, and Nasdaq suspended trading in May. Greenspan says he wanted to step down from management and move Brewer’s team out, but it wasn’t the most auspicious moment to recruit a new CEO: “It’s very hard to find new people when your stock’s halted and you don’t have any cash.”

He did, however, line up a $2-million short-term loan from the Silicon Valley firm VantagePoint Venture Partners, which also expressed interest in taking a further equity stake. Greenspan talks now as though this was a deal with the devil, for he contends that VantagePoint soon began working with the EUniverse board, behind his back, to take control of the company. VantagePoint’s spokeswoman said the firm couldn’t comment for legal reasons.

The crisis, as Greenspan describes it, came in mid-October, when he had assembled a group of investors for a private placement of common stock worth $2.5 million at $1.85 a share. The money was already being wired to EUniverse’s account, he says, when the board decided to accept an alternative investment from VantagePoint. This was an $8-million senior preferred stock placement at an effective price of $1.38 a share. Greenspan maintains that the transaction will essentially give control of the company to VantagePoint and its friends on the board -- at the expense of the common shareholders.

He says the drawbacks of the deal would have been evident had it been vetted by EUniverse’s investment bankers, as he demanded. But the board refused and, to add insult to injury, ousted Greenspan as CEO two weeks later. He shortly gave up his board seat too.

The incumbents contend that Greenspan is kicking up dust because his ox is the one being gored. If the common shareholders have to trim their stake in EUniverse, that will hurt no one more than Greenspan, who owned 28% of the company before the VantagePoint deal and 21% after. They also maintain that the VantagePoint deal was superior on its face, if only because it brought in more money.

Greenspan’s response is that his investors were willing to invest much more in later rounds, perhaps as much as $5 million more, and at a price that wouldn’t have undervalued the company as much as VantagePoint’s.

Greenspan knows he faces an uphill battle, maybe a quixotic one, when the shareholder votes are cast today. Even if the common holders are about to take a 20% haircut on their equity stakes, as he contends, the VantagePoint investment looks like a done deal.

Meanwhile, the company’s stock has been rising of late, and the current board has been hinting that it’s about to declare a profit for the month of December or even the whole quarter, which would be its first in almost a year and a half. As a guidepost to its bright future, directors also point to a deal they recently closed with the owners of the Kazaa file-sharing network, which will henceforth download an EUniverse search program onto the computers of Kazaa users, a customer base of millions.

That would be a testament to the skills of the current management, except for evidence that it was actually initiated by Brad Greenspan, shortly before his defenestration.

In the end, the biggest factor working against Greenspan is one that managements everywhere depend on: Shareholders are a docile species by nature, and even a fight this nasty probably won’t wake them up.

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his past columns at latimes.com/hiltzik.