Sex-site IPO to pay Seattle man's IOU

Years before "friend" became a verb, Andrew Conru built an empire of social-networking Web sites where the main preoccupation was a different, shorter "f" word.

The Silicon Valley engineer sold his collection of sex-oriented membership sites to Penthouse Media Group in 2007 for more than $400 million, and quietly relocated to Seattle.

Much of his big payday, however, still hinges on the pending initial public offering of the company, FriendFinder Networks. Conru received notes, not cash, for most of the purchase price, and is still owed hundreds of millions.

If the $220 million IPO happens this week, Conru will have the option of collecting about $80 million of that debt; he'd retain about 8 percent of the Florida company and a seat on its board, and would still be owed a couple hundred million dollars. Or, he said in an interview last week, he may just hold on to all of his high-interest, nine-figure IOU.

The company he started as a Stanford Ph.D. student runs explicit subscription-based sites such as AdultFriendfinder (slogan: "Meet real sex partners tonight") and others where "models" perform on camera for paying Web viewers.

Conru sees them as ahead-of-the-curve social networking: "By making the Web sites more a place to hang out than a database of profiles, we were able to average 35 percent year-over-year revenue growth for the 12 years before the sale."

In a phone interview from India, where he is traveling and looking at potential investments, Conru said he took more than a year "simply to decompress" and enjoy the restaurants and cultural attractions within easy reach of his Belltown condo.

Now he's exploring business investments and philanthropic ventures.

He said he'll soon debut compute.org, an organization to catalyze developers to write software that's "helpful but doesn't necessarily have to make money," such as a way for people with impaired vision to participate in online gaming.

Conru said he's also looking for another Internet opportunity, but the Web is more crowded than it used to be. "It's more of a challenge now to get the same scale or league that FriendFinder was."

Meanwhile, he's advising other entrepreneurs and getting back up to speed on the latest in software. Until recently, "I haven't touched a line of code for a year."

The only detailed story on Conru and FriendFinder, published in the now-defunct "New Economy" magazine Business 2.0 about six months before it was acquired, suggested his Web empire would be hard to sell because it was "far too big for any adult company to afford and far too dirty for any mainstream company to stomach."

That ick factor apparently continues to dog FriendFinder; its IPO is being run by two underwriters with no significant previous U.S. offerings to their credit.

Analyst Nick Einhorn of IPO-watching firm Renaissance Capital says FriendFinder, with yearly revenues of about $350 million, has a fairly solid business that's being dragged down by debt now totaling some $450 million.

"It's definitely kind of a mess with the debt, and that's really why they need to go public," says Einhorn, whose firm isn't involved in the deal.

None of that seems to worry Conru, who's exploring everything from desalination to broadband. "I'm interested in so many different things, it's hard to pick," he said. "For the first time in my life, I can choose."

Bill would keep

bank troubles

'confidential'

A bank seizure, such as those of Horizon Bank and Evergreen Bank recently, usually is the public climax of a long behind-the-scenes drama. When state or federal regulators suspect a bank might be running off the rails, they start tightening the screws with a series of progressively more stringent directives.

Those steps are a matter of public record when federal regulators are involved. But when Washington's Department of Financial Institutions (DFI) acts alone to discipline a state-chartered bank, it doesn't disclose that fact.

Now, bills filed at DFI's request and pending in the Legislature would explicitly exempt all DFI enforcement actions against banks, credit unions and the like from public disclosure. Those actions would be "confidential and privileged," even though federal regulators routinely disclose the same kind of information on institutions they regulate (find them at www.ffiec.gov/enforcement.htm).

Brad Williamson, director of DFI's Division of Banks, said the new provision wouldn't change existing policy. The agency fears that disclosing enforcement actions could spark crippling deposit runs and force banks to be closed prematurely.

News of federal enforcement action at a bank typically triggers an outflow of deposits, he said, though he conceded those outflows haven't been significant.

Toby Nixon, president of the Washington Coalition for Open Government, criticized the confidentiality provision, saying it would keep vital information from consumers concerned about the health of their banks. He noted the proposed bills also broaden the grounds on which DFI can discipline or seize banks.

"At the same time as they're expanding their powers, they're saying 'We're going to exercise those powers in secret,' " said Nixon, a former state representative from Kirkland.

The House bills, 2830 and 2831, were passed out of the House Financial Institutions and Insurance Committee this past Tuesday; their Senate counterparts, 6369 and 6370, followed suit two days later.

On Friday, Williamson said the confidentiality provisions have created such a "hullabaloo" that he and DFI Director Scott Jarvis have discussed removing them. But even if they are, he said, "we wouldn't do anything different that we're doing now."

— Drew DeSilver

Escala prices

are scaled back

Back in spring 2008, as the economy and the Seattle housing market both were starting to cool, the developers of Escala, a 31-story luxury condo then under construction downtown, raised more than a few eyebrows by announcing plans to raise prices.

Skeptics called it a marketing ploy, a bid to juice slow sales by getting prospective buyers off the fence before the higher prices kicked in. But John and Eric Midby, the father and son principals of developer Lexas Cos., insisted the move made good business sense.

Seattle's economy was fundamentally strong, John Midby said — just look at all the new downtown office towers going up. What's more, he said, with other developers postponing plans for new downtown condo projects, demand soon would surpass supply. Escala, the last project in the cycle, would be the only game in town.

Flash forward two years. Washington Mutual has collapsed. Those new office towers, now complete, sit mostly empty — as do many of the units in other new high-rise, high-end downtown condo projects. Many pre-sale buyers, stung by the recession, have delayed closing, walked away from their earnest money or hired lawyers to get their deposits back.

Escala was completed last fall. Now it's ... dropping its prices.

As recently as last summer, while other downtown condo developers were announcing price cuts, Eric Midby insisted that wasn't in the cards for Escala.

"We've all been waiting for yesterday to come back," said Bob Rennie, whose firm took over marketing of the 269-unit tower at Fourth Avenue and Virginia Street in November. "It's time to make business decisions."

Just five units have closed at Escala, according to county records. Rennie says 67 more buyers are under contract — but he knows that in this market, that doesn't guarantee much.

They'll all be contacted over the next few weeks and offered reduced prices as an inducement to stay, Rennie says without giving specifics. Escala's developers also plan to scale back services at the building's private club, he says, so high homeowners' dues can be cut.

Meanwhile, the sales center has shut down. It won't reopen until everything's sorted out, perhaps by mid-March. "We're trying to stabilize the building," Rennie says.

— Eric Pryne

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