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Penthouse Company Sues Accountants

BOCA RATON, Fla. (CN) - Friendfinder Networks fka Penthouse Media Group says its accountants cost it $50 million by overlooking massive tax debts owed by a swinger's Web site that it bought in 2007. Friendfinder's accountants allegedly omitted the acquisition target's European tax exposure when they prepared a financial report before the buyout.

In early 2007, Penthouse Media was contemplating the acquisition of Various Inc., which runs the swingers' Web site

The porn industry giant hired accountants at Grant Thornton to outline the assets and liabilities of Various in a broad-based financial review, according to Friendfinder's complaint in Palm Beach County Court.

The buyout was a logical step for Penthouse to expand its online swingers' connection business. Penthouse already operated, an adults-only "social networking" site and the namesake of its new corporation, Friendfinder Networks.

Penthouse bought Various December 2007 for $500 million.

But Various' huge tax debt wasn't factored into the price, Friendfinder says. It claims accountants at Grant Thornton neglected to note more than $80 million in online service taxes that Various owed the European Union.

In 2003, the EU implemented a blanket value-added tax on foreign online and electronic services that reach end users in certain European countries. Various didn't pay the taxes and accrued a sizeable debt that never was resolved.

The tax exposure was nowhere to be found in Grant Thornton's final report, Friendfinder says.

Grant Thornton claims the accusations are a concoction of Friendfinder executives who are disgruntled by a less-than-productive acquisition.

"Management appears to be inappropriately passing off responsibility for an acquisition that may not have met their expectations," a Grant Thornton spokesperson said in a telephone interview.

Friendfinder says it has reduced its tax liability from $83 million to $38 million, in part through a settlement with Various' previous owners.

In its accounting malpractice complaint against Grant Thornton, Friendfinder claims that when the legal expenses are counted, the damage exceeds $50 million. Friendfinder also says its public stock offering has been delayed by entanglements arising from the debt.

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