The star - best known for his role as Dr. Evil's diminutive sidekick Mini Me in the spy spoof movie series, also starring Mike Myers - reportedly filmed himself and his ex-girlfriend Ranae Shrider indulging in sexual activities in their apartment.
The footage was taken by a third party and now celebrity porn broker Kevin Blatt - who was instrumental in the releasing the now infamous Paris Hilton sex tape - is allegedly set to pay US$100,000 for the footage.
The 39-year-old 'Austin Powers' star - who is famous for his 2ft 8in height - is seen passionately kissing Ranae in the short teaser clip posted on gossip website tmz.com.
Ranae has lived with the 'Love Guru' star for the past six months and is reportedly planning to marry the actor.
However, the aspiring model is less than happy about the footage emerging, and claims the home movie was stolen and illegally distributed without her knowledge or consent. Confronted by photographers in Los Angeles on Thursday, Ranae snapped: "Do I look like I should be smiling about this?"
Verne is so distressed by the footage's release that he has filed a US$20 million lawsuit against tmz.com, claiming they violated his privacy rights and infringed on his copyright and trademark by putting a teaser clip for the tape on their site.
He is the latest in a long line of stars who have had their recorded bedroom activities leaked to the public. As well as Paris Hilton’s ‘One Night In Paris’, Pamela Anderson, Colin Farrell and Tom Sizemore have all appeared in sex tapes.
The 39-year-old actor – who is currently starring alongside Mike Myers in 'The Love Guru' – recently revealed he has no problems with people ridiculing his size in movies.
He said: "The way I look at it is - it's a movie. You've got to be able to have fun with it and laugh at it. If it were outside the movie, yeah, some of that stuff would be insulting. Get over it. I'm sorry - it doesn't offend me. Why should it offend you?"
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