Hedge fund magnate Warren Lichtenstein is going soft on the porn business.

Lichtenstein's Steel Partners is selling some of the huge 12.5% stake it has amassed in New Frontier Media ( NOOF), a fast-emerging competitor to Playboy ( PLA) in selling erotic films via cable and satellite television. Earlier this week, Steel sold 594,317 shares at an average price of $10, according to regulatory filings.

Steel, which has about $4 billion in assets, is beginning to cash out after seeing the value of its investment in the Colorado-based company rise 66%. The hedge fund is lightening its load after earlier agitating for a management-led buyout of the company.

To be sure, Lichtenstein, a so-called activist investor with a reputation for targeting companies he sees as undervalued, still owns a significant stake in New Frontier. At last count, Steel owned 2.96 million shares, making it far and away the company's largest shareholder.

But the sale of stock is a clear indication of a shift in strategy by Lichtenstein, whose spokesman declined to comment. Then again, who can blame him for wanting to lock in some of the paper profit his fund has scored on New Frontier.

The hedge fund, which first began gobbling up shares of New Frontier nearly two years ago, paid about $17.7 million for its stake, including brokerage commissions. Steel's holdings are currently valued at about $29 million.

New Frontier's management never took Lichtenstein up on his offer of orchestrating a buyout of the company. Instead, it countered with its own plan to keep shareholders, including Lichtenstein, happy. Last month it announced it would pay a special dividend of 60 cents a share to shareholders of records as of Jan. 15, and would institute a semi-annual dividend going forward.

For Steel, the special dividend equals a one-time payout of $1.8 million.

But with Steel beginning to sell shares, New Frontier investors will need to consider whether the party in the company's stock is over. The stock has surged about 48% since Lichtenstein began talking about a buyout.

Lichtenstein's interest in New Frontier, a small company with less than $70 million in annual revenue, no doubt attracted a following from other investors, including other hedge funds. Some may begin selling their own shares now that Lichtenstein is starting to head for the exits.

Indeed, shares of New Frontier came under selling pressure, after news of Steel's stock sale became public. Shares of the company, in midday trading Thursday, were down 28 cents, or 2.8%, to $9.75.

Then again, Lichtenstein isn't the only one selling shares these days. Corporate insiders at New Frontier also have been selling shares, after exercising options they possessed.

New Frontier CEO Michael Wiener, for instance, recently sold 100,000 shares, after exercising options that were priced at either $4 or $5. The stock sales were consistent with his so-called 10b5-1 sales plan, a regulated procedure for corporate insiders to sell stock.

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