FriendFinder's Latest Scandal Sexier Than a Penthouse LetterS

A porn star draping boobs over an employee's head. Lapdances on the company dime. $50 million in back taxes. These are just some of the charges Penthouse publisher FriendFinder Networks is facing from an ex-employee.

Natalie Cedeno, the company's former HR director, says that company executives retaliated against her for pointing out violations of labor laws. She was a top executive at the Internet side of the business, deeply involved in its operations for eight years, before FriendFinder fired her without cause in January, she says. She claims the company then tried to withhold the two years of pay she was owed under her contract unless she agreed to stay silent about FriendFinder's misdeeds — a move her lawyer characterizes as "extortion." Cedeno plans to file complaints with the Equal Employment Opportunity Commission and California's Department of Fair Employment and Housing next month.

And a juicy complaint it will be. FriendFinder Networks used to be called Penthouse Media Group before it acquired Various Inc., the operator of Adult FriendFinder and other online personals sites, in 2007 for $500 million. While they're both porn companies, the office cultures of Florida-based Penthouse and Silicon Valley-based Various Inc. — where Cedeno worked before the merger — couldn't have been more different. That became obvious on May 2, 2008, when the ex-Penthouse executives, now in charge of the combined business, decided to ship in a passel of Penthouse Pets to the old Various offices.

When management announced that the venerable porn magazine's stable of nude models would be stopping by the office to serve ice cream, one female employee objected, as Cedeno tells the story. When they arrived, one of the scantily clad Pets made a beeline for the dissenter. "They came into her office and placed her breasts on her head in an attempt to humiliate her, and they had someone ready to take pictures," Cedeno says. The employee quit soon after the incident.

The evening before Cedeno was terminated last month, she says she brought up at a meeting of executives an employee who had charged thousands of dollars in lapdances to the company — an expense the company's pre-Penthouse management wouldn't have tolerated. "The president laughed and said the CEO had paid for lapdances for investment bankers with company money last weekend," Cedeno says.

But wait a second: Aren't we talking about a company whose main product is porn? What are a few workplace hijinks at a business which makes money off of naked ladies? Well, there's much more than Cedeno's pay at stake. FriendFinder filed to go public last year. It desperately needs the $460 million it hopes to raise in an IPO in order to pay down $420 million in debt. If the company has legal problems and labor issues beyond what it disclosed in its SEC filings, its executives could face heavy penalties, and the IPO would likely be scotched.

FriendFinder Networks CEO Marc Bell did not return a message left requesting comment on Cedeno's allegations. The SEC restricts what companies in registration for an IPO can say publicly about their business outside of regulatory filings, a requirement known as the "quiet period."

According to Cedeno, Various operated Adult FriendFinder and other X-rated adult sites for seven years without drawing a single sexual-harassment lawsuit from employees. The company was as buttoned-down as nearby NASA contractors. Office rules restricted employees from posting any photos on office walls, or even having naughty screensavers. Cedeno says the company's longtime postman had to ask her, after six years of delivering mail, what the company actually did. And founder Andrew Conru, who took no venture capital and therefore owned almost all of the company, is famously mild-mannered. (The raciest he gets: He once told a magazine he'd had a ménage-à-trois.)

Valleywag had previously heard rumblings of discontent at the company. Over the summer, Anthony Previte, a Penthouse executive who was COO of the company, reportedly prompted a mutiny among the Sunnyvale employees by trying (and failing) to replace most of the operations team. We also heard of a messy firing in the sales department. But that was just the tip of the iceberg, according to Cedeno.

Everything changed after Penthouse bought the company and changed its name to FriendFinder Networks, she says. Within four weeks, FriendFinder had its first labor complaint, and soon drew two more. The company's former controller plans to file an age-discrimination lawsuit, Cedeno says.

Cedeno says new management was unresponsive to her concerns. When she pointed out violations of overtime law, the company's VP of operations emailed her, "This garbage stops now." (He meant her complaints, not the violations.) She says she was then ordered to lie and blame pay discrepancies on the company's outside payroll vendor. She refused.

She also says that in January 2008, Rob Brackett, president of the company's Internet group, told her that CEO Marc Bell had complained to him in December — the first day he came to visit Penthouse's new acquisition — that the women in FriendFinder's technology department were "ugly" and that Cedeno should get rid of them and replace them with more attractive workers to keep the male employees happy. Brackett pressed Cedeno, asking her how she was going to satisfy Bell. She refused the request.

The company has admitted in its S-1 filings that it failed to collect taxes owed on Internet purchased in the European Union for years. It has already charged $64 million against the purchase price of Various. (It now reports the acquisition as costing the company $401 million, down from $500 million, thanks to this and other charges.) But it has not disclosed the full extent of its pending tax bills. Cedeno says the back taxes in Germany alone come to $40 million and the company owes $10 million in another European country.

FriendFinder seems to have made a formidable enemy. Cedeno has hired Amanda Metcalf, a former prosecutor now in private practice who's best known for her role in a lawsuit against Death Row Records. I asked Metcalf why she took on Cedeno's case. "Woman done wrong," she replied. If Cedeno proves her allegations in court, FriendFinder's executives will learn a hard lesson: It's one thing to profit from women. It's another to take advantage of them.