I Invested in AdultVest with Francis Koenig. Here's what really happened...
I happened to meet Francis Koenig socially years ago and become interested in the company he had created.
I happened to meet Francis Koenig socially years ago and become interested in the company he had created. I got to know him personally, followed his career, and became an investor in his fund. This is my story.
Just 10 months after winning Institutional Investor's 2008 "Hedge Fund Launch of the Year" Award, the winning firm and its founder were publicly accused of fraud -- It turned out not to be true.
As an investor in the fund, knowing Koenig personally, and having met several of the employees and other investors, I had a firsthand perspective on what happened. I also had a chance to review the company communications, emails, documents, financials, and kept detailed documentation, so what I'm about to tell you is based on fact -- not fiction, like most of the other articles I've read.
It took well over a year for the SEC to finish their investigation and exonerate Koenig, but the damage had already been done. You can't un-ring the bell.
Koenig is a corageous business man with nothing but the best intentions. This time he (and we) got the short end the stick.
The company was sold, money was lost, and reputations were damaged. After reflecting back on everything that happened, it pretty much boils down to a misquote in an interview, and one investor who got caught cheating on his wife and started telling lies to get his money back. I'm writing the story now, years later, because no one really knows the truth, and everything that's still floating around in cyberspace is riddled with lies and false speculation.
What Happened to Hedge Fund of the Year?
The snowball started rolling downhill when Koenig was misquoted in an article titled “Dirty Sexy Money” published in the Atlantic — a small financial newspaper. The article stated that the Priapus Investment Fund delivered a 50% return to investors during one of the worst market collapses in history. There was instant skepticism and out lash from the press and people familiar with the fund. Accusations were flying. No one was aware Koenig wrote the Atlantic the day he learned of the misquote to request a correction and a re-print.
I received all communications and never received anything that stated the fund I invested in delivered a 50% return. Koenig did send a letter notifying investors the fund would be raising an additional round at a 50% higher price per unit. The fund notified its investors that the price per unit was going to change from $50,000 to $75,000 — a 50% increase. The notice was sent about a month before the Atlantic interview. The reporter who held the interview made a substantial mistake. The Atlantic wrote Koenig back to acknowledge they received Koenig’s request to correct the mistake, but never took steps to rectify it. It seemed like a small thing that would blow over, but that didn’t happen.
Koenig said, “It wasn’t until my phone started ringing that I realized the Atlantic story had been published. I’m pissed. The tone of the article is nothing like the interview we had, and the sensationalism and subject of the story has no resemblance to the proposal they emailed when they asked for the interview. I wrote and asked to have it corrected, but the correction was never published.” All the emails I have from Koenig confirm the truth.
It only takes a small match to lite a propane tank. When comments began showing up on industry blogs from people who had no knowledge of what had happened, they started to say AdultVest was a scam. Koenig told me, “Our investors know we never made these claims. It’s ridiculous. Anyone who reads the investor letter can easily see the Atlantic was a misquote. These blogs don’t do any research or even make any calls to try to find the truth, they just write whatever they want. They’re dying for something controversial to talk about. That’s how they make their money.”
The funny thing is Koenig was right. Bloggers earn ad revenue based on the number of visitors. The more controversial an article, the more people want to read it. Even the site I’m using to write this article pays its bloggers based on how much traffic the article gets. Once the blogs get hold of a juicy piece of information, they just start tearing into it. Most of the writers don’t do any research or contact the people they talk about, and most are published by anonymous authors. I strongly believe we should pass a law to protect from things like this. Websites should be forced to take things down that aren’t true.
Just prior to the Atlantic incident, one of the investors I had met made a request to pull his money from the fund. At this point, Koenig and I were in regular communication and he would ask my advice — although I don’t think it helped much. Koenig shared a long string of emails from this investor. At first Tom said, “I need to pull my money out of the fund. I’m going through a hard time. My wife found my sugardady account and found out about the trips and the money I sent to Alana (adult film star Alana Evans). She’s divorcing me and taking the money, the house, and the kids. Call me as soon as you get this. I need to get my money.”
My understanding was that Koenig called him and explained that he would like to redeem his investment if he could, but all investments in the fund are supposed to stay in the fund until the investment portfolio is liquidated. If Koenig offered Tom the ability to redeem his investment, he would be forced to offer the same conditions to all the other investors — which wasn’t possible. Koenig suggested that he could look to see if there might be another investor who would be interested in buying Tom’s units. Tom apparently didn’t like that suggestion. The next call I got from Koenig was to tell me Tom was threatening to sue him and the fund for fraud.
Tom did initiate a lawsuit accusing Koenig and the fund of numerous wrong doings, but ultimately dropped the lawsuit not long after the initial discovery period — there was no evidence to support his claims. A few weeks after dropping the lawsuit, Koenig told me a reporter called him from some website he never heard. Koenig said “the reporter asked about 5 or 6 questions and hung up before I had a chance to discuss any facts or even get his name.” Tom had contacted this reporter and trumped up claims about Koenig and the fund, but failed to tell the reporter that he had already dropped his lawsuit. Koenig said felt as if he had been railroaded.
This was all happening while one of the funds most promising investment projects was just getting off the ground — a website and mobile app called iPorn — YouTube with a twist for adult content. The fund bought the name right around the time the first iPhone came out. iPorn was brilliant. It was one of the first free adult sites for the iPhone. It was still in development when all this was happening. Koenig said, “We were (also) in the middle of negotiating an acquisition to purchase AVN and the AVN Awards. The deal was being co-funded by another larger fund. We were in the final stages of closing, and the other fund pulled out because of accusations being made on the web.”
I don’t think Tom realized how many people he hurt with his little temper tantrum. He knew the Atlantic story was incorrect, and there was no mishandling of funds, he just didn’t want to lose. He didn’t hurt just one person, he hurt himself, all the investors, the people that were employed by the fund, the portfolio companies, and all the family members of those people by damaging the company that their time and money was invested in. His actions dramatically damaged the company’s future prospects.
Koenig’s legal advisors told him not to make any public comments until the whole thing was sorted out, but Koenig said he would fight to clear his name. He called me and said he spoke with someone at the local office of the SEC and was going to volunteer all of his books and records to clear his name. He gave them everything, and waited for them to finish their audit.
After a few months of reeling from the experience, the iPorn investment was bringing in a nice revenue stream, but the damage was done. It was difficult for the company to do business. Koenig said he regretted starting a “sin” investment fund. He said he wanted to set things straight and start fresh.
Not long after iPorn was up and running, the company received multiple buyout offers. Several of the offers I saw were pretty good, but none of them would have generated much of a return for the investors. Koenig wanted to sell, but he felt it was best to talk with a few of the larger investors before making a decision. He called me to say Peter, the largest investor, was against the sale. Peter was willing to take over management and invest more money if Koenig would sell his ownership in the management company. Koenig said “iPorn alone brought in nearly a half a million in revenue in its first two quarters of operations. The company has a lot of potential. New capital and new management would be a good thing for the investors. Even if I have to sacrifice my equity to do it. I’m ready to move on.”
I told him I thought he should sell to Peter. At first it seemed like a good idea. I was wrong.
In 2009 Koenig completed the sale of the management company to Peter. Contractually, Peter was obligated to take over management responsibility and fiduciary duties to run the operation, but he just completely blew us off. Koenig said he spent more than a month talking to Peter to make sure he knew where all the different files, servers, pass codes, and accounts were set up so Peter could take over, but shortly after Peter took over, all the sites went down. Peter fired everyone, shut everything down, cut off the servers, stopped paying the bills, and refused to honor any agreements with vendors. He didn’t seem to care about what would happen to the business or the technology and IP the company spent years developing. It didn’t make any sense to take down a site that pulled in almost a half a million dollars in its first six months.
More than a year later, Koenig was exonerated.
Nearly a year after the sale to Peter, the SEC mailed a letter exonerating Koenig. The letter said they had closed their investigation. They found no wrong doing and no reason to pursue any enforcement action. Koenig said it was the toughest experience he’s ever gone through in his life. "I learned from it, and it's made me a hell of a lot tougher in business, and a lot more careful. It was nice to finally get that letter, but at that point what do you say to people. It's already over and I've moved on."
I can't tell you how many times I've thought about suing Tom, Peter, the Atlantic, FinAlternatives, and the bloggers who's posted slanderous material without having a single fact to back it up. I'm extremely tempted. Tom and Peter tore down their own castle only to damage all the investors inside, and the reporters and bloggers propelled the lies and propaganda. I still feel like justice needs to be served. I used to get regular updates and year end reports from Koenig. Since Peter took over, I haven't had a single report or even a tax return, and he hasn't returned any of my calls or emails. I'm not sure what his original intentions were in stopping the sale and taking over the operation, but I wish I advised Koenig to take the cash sale when I had the chance. I guess part of writing this is to get it off my chest and either move past it or finally decided to go after these people. I know Koenig wants nothing to do with it anymore, but I'm hoping my writing this might be enough to convince him to get involved. Facts are facts, and the truth always wins. There's still time, so you never know. Maybe there will be another chapter to my story.