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And why not? It certainly sounded plausible. If we assume that there are millions of porn consumers staring lustily at their glowing monitors, why not also a gaggle of porn millionaires making a living off them?

In October, however, IEG filed a lawsuit that took a bit of the shine off the porn industry's alleged profits. The company sued two former employees and its former staff counsel; Warshavsky claimed the three had stolen data and were planning to compete with him. That lawsuit has now been settled, but it seems to have boomeranged on Warshavsky.

A Washington Post story about the lawsuit brought out information that painted a much less rosy picture of the economics of online porn. Former employees accused IEG and Warshavsky of inflated revenue reports and fraudulent billings. The case ultimately raises the question: How well does online vice really sell?

Warshavsky disputes the accusations, but the accounts of former employees show a company that seemed to have manufactured much of its revenue by systematically overcharging customers -- and yet had cash-flow problems so bad that IEG payroll checks sometimes bounced.

The three onetime associates sued by IEG -- chief operating officer Bert Reitsma, editor Evan Wright and onetime counsel Eric Blank -- secured a pile of affidavits from former employees alleging that IEG created revenue by overcharging customers who had given IEG their credit cards for access to Clublove.com, IEG's flagship porn site, and other sites in the company's network. According to the affidavits, which were sent to Salon Technology by an anonymous source, the former employees say that IEG billed customers several times over and reactivated closed accounts. (Salon Technology was not able to reach all those who signed affidavits, but did speak with six former IEG employees.)

In one affidavit, Ron Chao, IEG's chief technical officer from June through August 1999, says that Warshavsky several times asked him to program the company's computer systems to double-bill customers. "Shortly before I left," Chao wrote in his affidavit, "Seth demanded that I cause the billing system to generate between $400,000 to $2 million on various occasions." Chao's affidavit also asserts that Warshavsky told him that improperly charged money should never be returned to customers unless they called to complain.

Several former IEG customer-service representatives signed affidavits saying that in the course of their work, they saw accounts that were charged several times and regularly received complaints from customers who said that their accounts had been reactivated without their permission.

These ex-employees suggest maneuvers like this may have added substantial amounts to IEG's bottom line. One customer-service representative, John Zicari, wrote in an affidavit: "In July of 1999, almost every account I came across in Clublove.com was billed two or three times and some were billed as many as a dozen times in a single day."

Even counting bills that might have been improper, the money rolling in from online pornography doesn't seem to approach Warshavsky's figures.

Two former IEG accountants, Jason Yankow and James Trujillo, say in affidavits filed in connection with the lawsuit that the company's online revenues were generally $30,000 to $35,000 a day, though in some days in August they saw revenues spike upward to between $60,000 and $100,000 a day. Yankow says in his affidavit that he was told that the revenues jumped because the company's billing system had been programmed to accept cancelled credit cards. Trujillo confirmed his account in an interview.

Another former IEG accountant pegs IEG's online revenues at an even lower number. After credit card processing charges, he said that IEG generally took in about $65,000 to $95,000 a week, and that those numbers fell 35 to 40 percent last summer. The accountant said that the drop could have resulted from users getting tired of stale content, but could also have resulted from changes in billing practices. Chao was chief technical officer of IEG at the time and, by his own account and that of other former employees, he refused to execute Warshavsky's requests to double-bill customers.

Reitsma, the former chief operating officer, told the Washington Post that revenues for IEG during his tenure were just $700,000 to $900,000 a month. Salon Technology could not reach Reitsma for comment.

Next page | Did IEG bill closed accounts?