Porn's New King

[R. A. Hettinga]

<http://www.forbes.com/2004/03/22/cz_sl_0322galanis_print.html>

Forbes



E-Commerce
Porn's New King
Seth Lubove,   03.22.04, 7:04 PM ET

The son of notorious white-collar scamster John Peter Galanis has quietly
resurfaced as the buyer of the nation's largest processor of payments for
Internet porn.

 Credit card processor Intercept's  (nasdaq:  ICPT -  news  -  people  )
2002 acquisition of Internet Billing, or iBill, may go down in history as
one of the most boneheaded acquisitions ever by a public company. Now, it's
finding it just as embarrassing to get rid of iBill.

 IBill is the largest processor of credit card payments for the purchase of
dirty digital pictures (see "Visa's Porn Crackdown"). It is literally the
engine of paid Internet porn. The company had successfully operated
anonymously behind the scenes until 2002, when Intercept paid $104 million
to acquire iBill from its founders. After first telling investors that porn
comprised just a minor amount of iBill's business, $259 million (2003
revenue), Intercept finally confessed that porn was actually responsible
for 85% of iBill's annual credit card transactions, which once amounted to
as much as $720 million.

 Having agreed last month to a settlement of $5.3 million for the various
class-action lawsuits that resulted from the company's understatement of
iBill's dependence on porn, Intercept also announced a deal to relieve
itself of the business and sell the division that includes iBill for a
lowball $37 million to a group that included management and outside
investors (after dropping plans from October to take all of Intercept
private). Then, on March 15, the company reversed course yet again and said
it would sell iBill separately to yet another buyer, whom the company never
disclosed.

 "None of those names have been made public," said an Intercept
spokeswoman. "I can't respond."

 For good reason. It turns out the identity of what Intercept only
characterizes as "another entity" has become an open secret among folks
close to the deal, and not for reasons that will enhance Intercept's shaky
reputation. In addition to iBill's former chief executive, Garrett Bender,
the other person leading the buyers is none other than Jason Galanis, son
of John Peter Galanis, the notorious white-collar crook who bilked
investors of $400 million before he was thrown in prison, where he still
resides. As Forbes reported in 2000 (see "The Long Reach Of John Peter
Galanis"), the disgraced father has had heavy if not controlling influence
on Jason's businesses, which have been involved in the spectacular blowup
of a Colorado bank and millions in losses for commodity giant Cargill.

 Unlike his father, Jason Galanis has never been convicted of a crime. He
has, however, had at least one scrape with the law. While serving as chief
executive in 2001 of something called EGX Funds Transfer (formerly known as
Incubator Capital), a once-publicly traded financial processing outfit,
Galanis and his brother and sometimes-business partner Derek were arrested
as part of a big Drug Enforcement Agency bust of a San Diego ecstasy
manufacturing and distribution ring. Although all the charges were dropped
against Jason, Derek was convicted and sentenced to 11 years in jail.

 Derek's attorney, Janice Deaton of San Diego, says she will soon file an
appeal of Derek's conviction, citing "prosecutorial misconduct" and asking
for a "huge reduction in sentence based on his actual role." She describes
Derek as a "very minimal player," and adds, "he didn't participate in this
for any financial gain, and didn't contribute any money." Deaton says both
of the Galanis brothers knew one of the principals of the drug ring, Dennis
Alba, from prior business dealings, which is how they got caught up in the
bust.

 But Deaton contends just the brothers' name alone was enough to arouse
suspicion. "Their dad is what got Derek in trouble," she says. "There were
other people more involved than Derek who got their cases dismissed. It's
the Galanis name. It's really a shame." Although Deaton didn't represent
Jason in the matter, she said she's spoken with him frequently, and says
she's "impressed with him as a businessperson."

 In an e-mail exchange, Jason Galanis acknowledges the heavy burden of his
father's name in the DEA bust. "Unfortunately, I was again maligned by
indirect inferences about my relatives, which are, admittedly colorful
people. One cannot choose their relatives," he says. "This has haunted me
for my entire career. My father left our family when I was 16, when he was
indicted and arrested. He has been incarcerated almost my entire adult
life...Since my brother's incident, I have wanted nothing further to do
with my father or his poor life choices."

 At the same time, Galanis also contends he is only acting as an
intermediary for a "handsome fee" in the iBill deal, not as a principal, on
behalf of a "Dr. Molina." Molina is apparently Luis Enrique Fernando
Molina, a Galinas business associate and Mexican hotel developer whose
family controlled Pepsi-Gemex, the largest independent Pepsi bottler
outside the United States. But others familiar with the deal say Galanis is
more deeply involved than he lets on.

 "My role has been a central on in making the transaction come together,"
says Galanis. "It is possible that peripheral parties could form the wrong
impression."

 Galanis similarly described himself as a "part of the investment banking
team" that took Robert Guccione's Penthouse magazine public in 2002, then
helped Molina in a deal in November to put another $107 million into
Penthouse in a real estate/equity swap. But according to Securities and
Exchange Commission filings, Galanis was identified as recently as last
fall as the only person associated with Penthouse Financial, a separate
company from Guccione's teetering empire that controls Penthouse's racy
website. Galanis now says it was more of a licensing deal, and that the
contract has since been terminated.

 Galanis' Penthouse experience provides a nice bit of synergy with iBill,
perhaps, but iBill's role in the Internet economy--at least the part where
people pay for stuff--can't be understated. The company acts as the
critical aggregator and gatekeeper between thousands of websites, porn or
otherwise, and the bank that ultimately processes the bulk of iBill's
credit card transactions and doesn't want the aggravation of dealing with
all those pipsqueak businesses. The bank in this case happens to be First
Financial Bank, a subsidiary of $8.5 billion (2003 sales) blue chip
financial processor First Data (nyse:  FDC -  news  -  people  ).

 The fact that First Data would have to sign off on any deal that hands
over a treasure trove of sensitive credit card data to Galanis, or whomever
he purports to represent, probably doesn't sit well with the conservative
Greenwood Village, Colo., company, which also owns Western Union, TeleCheck
and now Concord EFS. First Data is already said to also be looking to exit
from the porn payments business. The company has been shopping around its
more than $1 billion porn and high-risk merchant portfolio, made up mostly
of iBill and a handful of other big porn payment intermediaries like it.
Considering the business only contributes $10 million to First Data's $1.4
billion in profits, the risk to First Data's hard-earned reputation seems
hardly worth the hassle.

 Like intercept, First Data is also keeping quiet about the possible deal.
"First Data does not selectively comment on its business plans," said a
First Data spokesperson in a statement. "It is not our practice to make
public the details of our specific contractual arrangements or our business
relationships with out clients."

 But if you were clearing credit cards for the likes of
hotlegsandfeet.com., enema-sex.com and my hotwife.com, you'd probably keep
quiet about it too.




-- 
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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'