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The Trials of a Comic Book Hero

Industry Standard
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(IDG) -- On a drizzly day in early March, Stan Lee, the 78-year-old creator of Spider-Man, the Incredible Hulk and the X-Men, is talking on the phone in his office in Encino, California. He hangs up and calls out to an assistant: "You can come in now." The white-haired comic book legend may be the head of an Internet entertainment startup, but he still hasn't quite figured out how to work his computer.

"This is how you save a file," the twentysomething assistant begins.

"And I double-click?" Lee asks.

"No, you only have to click once."

Lee's naivete would be touching if it weren't symptomatic of a potentially bigger problem: gullibility. Stan Lee Media (SLEEQ) was supposed to lead the way to the promised land of online content and community. It attracted dozens of artists, designers and programmers convinced they were going to remake the entertainment world. At its peak last year, Stan Lee Media had 150 employees, a collection of Hollywood deals and plenty of buzz. But today the company is little more than a shell. The staff is down to six: Lee, three executives and two office assistants.

The company's crash was as swift and violent as any that felled dot-coms late last year. It started with the plunge of the company's stock in late November. Suddenly Stan Lee Media couldn't raise money from investors. The rest is now drearily familiar: The staff was decimated by layoffs, Nasdaq halted trading of the stock and shareholders filed suit. On February 16 Stan Lee Media filed for bankruptcy.

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But this is no ordinary tale of a dot-com gone bad. From its inception in 1999, Stan Lee Media was something more -- and less -- than an online entertainment firm. Its suite of offices in Southern California's San Fernando Valley was home base for the business dealings of Peter F. Paul, an ex-convict and disbarred attorney with a fondness for celebrities. Paul's dalliance with Hollywood began with an association with film legend Jimmy Stewart in the 1980s and peaked last year at a star-studded fundraiser he helped produce for Bill and Hillary Clinton. Along the way, Paul managed the career of romance-novel model Fabio, introduced Russian President Boris Yeltsin to Hollywood and tried to go into business with former astronaut Buzz Aldrin.

Paul, who co-founded Stan Lee Media but never held an official job or title there, was cut off from the company in early January. He left behind an enterprise in turmoil. The Securities and Exchange Commission had launched an informal inquiry, and an internal investigation led to the termination of Paul and another executive suspected of involvement in stock manipulation and embezzlement. By then, court documents say, Paul had made plans to flee to Brazil, where he is thought to be today.

Stan Lee and Peter Paul first met in the early 1990s through the American Spirit Foundation, a nonprofit Paul started with Jimmy Stewart. They stayed in touch, and in 1998, as the Internet startup frenzy began in earnest, Paul met with Lee and pitched an idea that sounded like a winner: Launch a Web entertainment company built around all-new Stan Lee comic creations.

It was a chance for Lee, who had toiled under contract for 53 years, to gain financial control of his creations for the first time. He had always earned top dollar from Marvel Comics and DC Comics -- and had the expansive Hollywood Hills home to prove it. But here was a way to cash in on the far more lucrative licensing and movie deals that comic-book characters can generate.

Stan Lee Media made a hit with its first project, an animated online series called the 7th Portal that Paul himself dreamed up. It featured aliens who enter Earth through a "7th portal" -- the Internet. With Lee's name, Paul had no trouble finding partners. Entertainment technology company Iwerks developed a theme-park ride based on the show, and film producer Mark Canton made plans to develop a 7th Portal movie. Meanwhile, the company had a deal with the Backstreet Boys to create action figures and a cartoon series.

By last winter, the business appeared to be humming. It took up the top floor of a Ventura Boulevard office building. Thanks to a "reverse merger" with an obscure, publicly traded company called Boulder Capital Opportunities, investors were able to buy stock in the hot property. By early February 2000, the share price had risen to $27.

But appearances were deceiving. One investor who checked out the company says he sensed there was trouble. Visiting the office, he saw a multimedia firm bustling with young talent. "I met with the head art director, the head writer, a couple of creative people who were so jazzed," recalls this investor (who, having lost more than $500,000 on the investment, asked to remain anonymous). "But the company had a horrible balance sheet. They were living month to month, and there was some desperation to raise cash. It was a long shot."

Nonetheless, the business grew. Lee and Paul rose to greater prominence in Hollywood and beyond, speaking at conferences (including one hosted by The Standard) and basking in favorable coverage in magazines and newspapers from the New York Times to Entertainment Weekly. Last August Lee and Paul jointly hosted a gala fundraiser for the Clintons that raised $1.5 million.

The bad news for Stan Lee Media began November 27. That day, for reasons unknown, its stock fell 49 percent to just about $3 a share; the next day, it shed 29 percent. The next week, the company reported that its second-largest shareholder, a trust that turned out to be controlled by Paul, was forced to dump 171,500 shares in a margin call. The activity was dramatic enough to draw the interest of the SEC and spook investors. On December 16, most of the staff was laid off, and trading in the stock was halted two days later.

Behind the scenes, the situation was even worse. On January 2, the company disclosed that its stock trades were under investigation by the SEC. It also said it was cutting ties with Paul and had fired Stephen Gordon, an associate of Paul's who had been brought in as executive VP. By then, according to court documents, Paul already had revealed plans to flee to So Paulo, Brazil, and was dodging creditors by shifting assets into the name of his fourth wife, Andrea Paul.

The company also had begun its own investigation. What it found was troubling: Paul had ties to many of the companies that had been trading Stan Lee Media stock on margin. Had he been an executive officer of Stan Lee Media, SEC rules would have required him to inform the commission of his affiliations to those companies. But because he was paid as a consultant, he sidestepped those rules.

Stan Lee Media's concerns go beyond its suspicions of stock manipulation. Sources close to the company say executives intend to ask the district attorney's office to charge Paul with fraud and embezzlement. The company may also bring suit against Merrill Lynch. (MER) It claims that several Merrill clients -- companies that Paul, in fact, operated -- held chunks of Stan Lee Media stock. Merrill, say people involved, should have known about Paul's affiliations.

Further, Stan Lee Media claims that Merrill should have been aware of Paul's affiliations with the various companies. In fact, Merrill had its own link to Stan Lee Media through Jonathan Gordon, who was a Merrill broker and the brother of Stephen Gordon. On January 1 Merrill fired Jonathan Gordon for losing money on margin trading, according to filings with the National Association of Securities Dealers. It's unclear whether his firing was related to Stan Lee Media. Merrill Lynch declined to comment, as did Jonathan Gordon. Stephen Gordon could not be reached for comment.

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