Natalie Cedeno, FriendFinder's former director of human resources, was fired in January without cause, she says, after a series of run-ins with management over practices she believed were improper or illegal.

Cedeno claims the atmosphere at the company changed substantially after Penthouse Media Group acquired Various Inc., the operator of Adult FriendFinder and other websites, in 2007 and changed its name to FriendFinder Networks. Various was buttoned-up, she says, despite operating websites where users planned hookups. Penthouse, by comparison, was pure frat-boy raunch — an attitude which culminated in an incident where a Penthouse Pet draped her boobs on an unwilling female employee in a staged photo meant to humiliate her.

There's more. The complete lawsuit is included below, but here are the highlights — or lowlights:

25. In or about April, 2008 plaintiff received complaints regarding racist comments concerning employees and prospective employees being made by the company's Controller, Al Mercado. Mercado made racially disparaging comments regarding Indians, Asians and people whose spoke English as their second language, which he admitted to Plaintiff. Plaintiff met with and counseled Mr. Mercado on three separate occasions, yet his discriminatory conduct continued. The complaints regarding Mr. Mercado's racially disparaging comments were received from Accounting Supervisor, Brinda Calori who had asked to be given a new assignment because she was distressed by Mercado's conduct. Plaintiff went to Carmela Monti and recommended that Mercado be discharged. Monti refused to terminate Mercado and instead ordered that Ms. Calori be terminated. Plaintiff objected to Monti's decision to terminate Ms. Calori and complained to the Vice-President of Finance who refused to become involved. Plaintiff is informed and believes and thereon alleges that Ms. Calori has filed a complaint with the EEOC for retaliatory discharge resulting from her complaints.

28. In May 2008 FriendFinder brought two Penthouse Pets and a male model into the Sunnyvale office to serve ice cream to the employees. The Pets were dressed in revealing attire that caused a female supervisor to complain that their presence and the fact that they were "porn stars" made her so uncomfortable that she would stay in her office away from this activity. The Pets went up to the supervisor's office and one of them placed her breasts on the employees head while two other employees' took pictures. The supervisor came to Plaintiff's office in tears. She was visibly shaken and upset and informed Plaintiff that she was afraid the photos would be put on the Internet. Plaintiff had previously telephoned Carmela Monti, informed her that the Pets were pinching the nipples of the male employees, rubbing their bare chest and inappropriately touching staff, and asked that Monti allow her to have the Pets removed from the office. Monti had refused Plaintiff's request and after the incident involving the supervisor Plaintiff called Monti again, asking that the Pets be removed because their behavior violated the company's sexual harassment policy. Monti again refused Plaintiff's request that she be authorized to direct the Pets to leave the office. COO Tony Previte appeared supported Monti's decision, stating that the employee who complained was a "trouble maker."

39. In or about August or September, 2008, the Chief Technology Officer (CTO) of the Las Vegas office, Jason Rasberry, made inappropriate sexual comments concerning a female employee (TE). The CTO said to 5-6 male coworkers in the presence of TE (the group was standing together on a smoke break) "I've had seen TE naked and her breasts are too small." The CTO admitted having made the comment. The CTO had a history of previous misconduct in the workplace for which he had received disciplinary action. Prior to this incident the CTO had asked a male applicant who was interviewing for a position in the company's Technology Department to "chose any item and he would have one of the girls on cams.com insert it into her vagina."

FriendFinder appears to be facing severe financial trouble. The company filed for a $460 million public stock offering in December, in an effort to pay off more than $400 million in debt incurred during the Penthouse acquisition. That IPO has yet to happen. But the stock market remains unfriendly to IPOs, and FriendFinder has defaulted on some of its debt, according to a new SEC financing. A tipster tells us the company recently laid off eight marketing staffers in an effort to cut costs. And top executives seem to disagree on whether the company can afford to keep publishing the print edition of Penthouse. (FriendFinder's corporate website now softpedals the company's porn business, highlighting G-rated social networks like BigChurch.com instead.)

Cedeno v. FriendFinder - Get more Legal Forms

Two sources close to FriendFinder says that Anthony Previte, FriendFinder's chief operating officer, "announced he is closing down Penthouse because it does not make any money and is in the red for production."

We called FriendFinder CEO Marc Bell to ask him about the rumor. He laughed, and then pointed out that since his company had filed with the SEC for an initial public offering to raise $460 million, if he planned to close the magazine down, he'd need to disclose that to the investing public.

Either way, folding the magazine wouldn't be a big blow to FriendFinder Networks — one source pegged losses from a recent issue at $16,000 — since the company makes most of its money off of raunchy personals websites like Adult FriendFinder, which Penthouse's publisher acquired in 2007. The bigger issue: The company's management can't seem to agree on whether to stay in the print business. On top of that, the company's facing a lawsuit from its former director of HR.

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.

Such are the kind of details emerging from FriendFinder Networks's S-1 filing. The disclosure, a precursor to an initial public offering, shows a business far less sexy than its brands would suggest.

Penthouse Media Group bought Various Inc. from Conru last year for $500 million, and assumed the name of its best-known website. Dropping "Penthouse" makes financial sense; Internet revenues from Adult FriendFinder and other websites account for most of the combined company's revenues. The company, which borrowed heavily to buy Conru's company, owes $420 million; the IPO would raise $460 million, most of which would go to pay off that debt. It is possible FriendFinder's lenders might foreclose on the company before it manages to go public.

Conru, at least, seems well taken care of. FriendFinder even bought a car from him for $125,000. The business rationale for the purchase was never explained. The vehicle is now worth $95,000. Who will make up that loss? FriendFinder's prospective investors. A bizarre twist to a bizarre startup saga: Isn't the sale of a company the moment when a founder goes out and buys an expensive car?

Web 2.0 was a bubble that never inflated — a shimmery illusion that popped well before we stopped talking about it. Precious few people got rich from the notions its proponents championed, such as user-generated content and social networks.

Calacanis was the only person of note to cash out on the blogging craze, selling a set of blogs to AOL for $25 million. That was a paltry figure in the grand scheme of things, but enough to set him up in a comfortable home in Brentwood and buy him a $109,000 electric sports car. And enough to make him a Web celebrity, with thousands of followers on Twitter and friends on Facebook — the quantifiable metrics of fame preferred by those who are not really famous.

The startups of the Web 2.0 era have proven similarly vacuous in their success. Skype, the Internet-calling service, sold for $2.6 billion to eBay in 2005; the auction giant wrote off $1.4 billion of that purchase last year. YouTube, sold to Google for $1.65 billion, is an acknowledged failure, with product managers scrambling to bedaub it with enough advertising to merely pay for its bandwidth bills. And the IPO market that powered the '90s bubble? All but invisible. The most recent big offering was in August for Rackspace, a boring company which hosts servers, and its stock has since fallen by half. With Wall Street on its knees, no one expects another IPO soon.

Will there be another bubble? Technology moves in cycles and is prone to investing fads, so yes, almost certainly. But there is nothing that looks set to inflate it. Cleantech, the next big hope of Silicon Valley, requires vastly more capital than Internet startups, and capital is now in short supply. (Falling oil prices, too, discourage the development of green energy.) While Internet users are devoting more attention to social networks, advertisers are staying away. Calacanis's venture, Mahalo, is a spiffed-up rehash of the kind of Web directory Yahoo built in 1995; he's now cooking up a new, secret project — which suggests that the loquacious entrepreneur realizes his original plan fell short. He may be onto something, if only in admitting failure. If this bubble fell short in making the likes of Calacanis rich, they have their own paucity of ideas to blame.

Founders Keith Daubenspeck and Dwight Badger have suspect pasts as stockbrokers. The start of their careers as VCs is equally inauspicious: They raised $28 million for Pixelon, an online-video startup later revealed to be a fraud run by a con artist. Advanced Equities has been involved in several lawsuits with clients, Forbes reports; has a poor track record of profitable exits; and a reputation for overpaying to get in deals.

But what speaks most to Daubenspeck and Badger's bad business judgment is this talk of going public. In the last bubble, CMGI, an Internet holding company with a large venture-capital arm, posted overheated returns by flipping its startups for cash, and then crashed all the more quickly when the tech-IPO market seized up. With private equity abundant, why would Advanced Equities even want to tap the public markets? Especially with the scrutiny that would mean. If Forbes was able to find all this dirt with a little digging, imagine what the company would look like under the glare of analysts and short-sellers.

Last November, one of its datacenters was brought low, embarrassingly, by a truck crashing into a nearby power transformer. That's precisely the kind of thing datacenters are designed to survive, but Rackspace's did not. Its employees all got bonuses anyway. That's a fanatical disservice to its investors, who now include public shareholders. A more deserving tech company, one hopes, will come to the public markets soon, and erase the memory of Rackspace's broken offering.

The swift executive rotation was a deliberate strategy of former eBay CEO Meg Whitman, a management consultant by training. She called it "repotting" — moving executives around through different parts of the business. While it may have helped her charges' careers, it did nothing for PayPal. The latest potted plant to occupy PayPal's C-suite, Scott Thompson, is bragging to investors that PayPal will soon derive more than half its revenues from websites other than eBay. A good thing, considering how growth in eBay's core auction business is grinding to a halt.

Thiel saw this as a problem back in 2002. eBay was growing fast at the time, but PayPal's investors — the company was briefly publicly traded before eBay bought it — were worried about its dependence on another company. After eBay bought PayPal, executives spent years grinding away at "integration" — even though PayPal, as an independent concern, had managed to neatly fit its payment service with eBay's auctions, without much help from eBay — in fact, with eBay actively trying to replace it with its own BillPoint payment service.

In the years since, what has eBay done with PayPal? It's recycled ideas from the Thiel era, and tried to tout them as "innovatons." It has swollen the size of the PayPal unit to some 7,000 employees. ("What do they do?" a former PayPal executive asked me.) And it has leaned on PayPal to mask slow growth in its core business.

How much would PayPal be worth now on its own, without eBay's bloated management? Would Amazon.com and Google even be trying to challenge it in the payments business? Perhaps it's a question that shouldn't remain abstract.

eBay tried to buy PayPal several times; every time eBay returned to the bargaining table, PayPal's price went up. It finally took the workings of a liquid market to determine PayPal's worth; after PayPal's IPO, eBay had to pay a fair price for the payments company.

Yes, it's time for another PayPal IPO. Too bad Peter Thiel isn't available to run the company — he's making far more money on his hedge fund than he ever did from PayPal.

(Photo by David Orban)

VCs may be frustrated, but they should be happy about having to wait longer. Going public requires a lot of time and focus and energy on things that don’t involve growing a business. And companies that wait longer to go public tend to perform much better once they do. The market is much more finicky, but that means the folks who are planning for an IPO in 2008 have rock-solid finances. The balance sheets are stronger this year than last year because they have to be. Public investors just don’t have the appetite for risk. They’re saying: don’t take these off the grill until they’re well done.

So how's a startup to know it's not still pink in the middle?

It’s double-digit revenue growth. You need to be profitable. You need to be able to convince investors that you’re at the beginning of a very large opportunity, and that whatever advantage you have is sustainable. I don’t think it’s a matter of having $100 million in revenue. That could be the case with many companies, but you also have to show that your business can grow meaningfully in the next couple of years.

(Photo by pingnews.com)

I think it’ll be fascinating because like Google, they like to do things their own way. And that’s been tremendously successful so far. I think that clearly Facebook’s business model needs to be well-proven before anything happens, and that they’ve been smart to put off the process until they put all the pieces into place. Also, though it’s terrific to have Microsoft as an investor, Facebook’s valuation may or may not turn out to be right valuation for public equity investors. But I do think that what they’ve built is tremendous and enduring and that they’ll find a way to turn theirs into a steadily growing, highly profitable business.

True enough — but it turns out that those businesses, cheaply started and cheaply run, did not need much investment; nor would they return much capital to investors. Morgan, a former coprorate lawyer, was counting on public stock-market investors to show up and play the greater fool, taking his startups off his hands for hundreds of millions of dollars. That was venture capital's business model in the 1990s, when Morgan got into the business. It was the one revival he was really counting on. It never happened. And now he and VCs of his ilk have been revealed as the greatest fools of all.

Regulators frown on free communications between knowledgeable company executives and information-hungry investors. LinkedIn offers "compliance" tools, but those tools amount to letting the fox electronically monitor the henhouse. Hedgies surely realize this, and will see LinkedIn's lax policies as a selling point. (Other firms which connect investors with company insiders have, at some expense, created systems which allow the experts' employers, not just the investment firms, to monitor contacts.)

If it gets in trouble, LinkedIn will likely plea that it didn't know how its networking site was being used — the standard we're-just-a-platform dodge. But it will be hard to claim that for two reasons. First, LinkedIn is touting the account managers it's providing who will actively help traders use the service. Second, CEO Dan Nye previously worked at Advent Software, a company which provides portfolio-management software to Wall Street firms. It's not like he's unfamiliar with the SEC's disclosure and monitoring requirements. Rather, one has to think he knows just how expensive complying with those rules are, and that rejiggering LinkedIn's software to obey them will make LinkedIn Research a nonstarter.

It's not a stretch to imagine how an ambitious government prosecutor could make a case for LinkedIn aiding and abetting insider trading. The law doesn't even require that money change hands; exchanging inside information for a thumbs-up reference on LinkedIn could very well qualify as a breach of the rules.

But that assumes anyone in Washington or New York is paying attention. Unlikely, given the mortgage mess. LinkedIn will likely go public on the basis of its hedge fund-juiced revenues long before an overtaxed SEC gets around to looking at how, exactly, the avaricious traders of Greenwich are getting their information.

Those insiders made lots and lots of money, and you won't be seeing any mea culpas from them like disgraced analyst-turned-Web publisher Henry Blodget's. It was your average American investor on the outside who took the hit on their retirement nest egg when InfoSpace went belly-up — not those who profited from flipping shares back and forth along the way.