Seeking Answers in Slatkin Puzzle

Los Angeles Times/May 14, 2001
By Liz Pulliam Weston

Investment guru Reed E. Slatkin's 50th birthday bash in early 1999 had all the trappings of a gilt-edged, Southern California soiree. The highlight of the party at the Santa Barbara Biltmore Hotel was a short, star-studded video made just for the occasion. The ballroom erupted in cheers as Kevin Costner, dressed in a baseball uniform, praised Slatkin's athletic prowess, and Arnold Schwarzenegger jokingly lauded the 180-pound money manager's weightlifting skills.

"It was incredible," says longtime friend and investor Doug Neuman, one of more than 150 people who attended. Even though both stars say they did not know Slatkin personally, many of those who attended say the video seemed to be just one more example of the valuable connections that helped Slatkin build his network of investors over the years.

Unfortunately for Slatkin and his investors, the cheering has stopped. The Hollywood insiders, Internet entrepreneurs and just plain folks who turned to Slatkin for help with their investments now are trying to find out what happened to the hundreds of millions of dollars they entrusted to a man who wasn't even a registered investment advisor.

And they're not alone. The 52-year-old Slatkin, a co-founder of Internet provider EarthLink and a Santa Barbara socialite, is under investigation by the Securities and Exchange Commission for investment fraud. He also faces lawsuits by investors and filed for Chapter 11 bankruptcy two weeks ago.

Federal investigators raided his office Friday, but have been able to locate only a fraction of the money Slatkin controlled, and investors' claims eventually could surpass $600 million, officials say. Indeed, government investigators say the collapse of his investment empire may be one of the largest Ponzi schemes they've ever encountered.

Slatkin's attorneys decline to comment about whether Slatkin was running a Ponzi scheme, which is an investment fraud in which new investors' money is used to pay bogus returns to earlier investors. They will say only that he is "cooperating fully" with investigators. Slatkin has not returned calls seeking comment.

Longtime friends say they still are reeling from the idea that Slatkin--a family man, civic activist and spiritual leader--could have done anything wrong.

"This is not the Reed that I know," Neuman says. These friends say Slatkin didn't start out to become an investment guru. Instead, his first passion was the Church of Scientology.

In a deposition given to the SEC in January 2000, Slatkin traced his interest in Scientology to his father's death when Slatkin was 14. An uncle introduced Slatkin and his Detroit family to the religion's tenets, and Slatkin's growing interest took him to England, where he spent two summers during high school studying at Scientology founder L. Ron Hubbard's institute in Sussex.

Slatkin came to Los Angeles in 1974 after graduating with honors from the University of Michigan and studying Asian languages at UC Berkeley's graduate program. He worked at Scientology's Celebrity Centre and became an ordained minister of the church.

Long hours and low pay eventually took their toll, Slatkin told the SEC. In 1983, he began learning from another Scientologist about how to make money in the stock market.

Slatkin moved his wife and two young sons to a two-story, four-bedroom home in Goleta. He converted its garage into a computer-lined "war room" for his investment practice.

By 1985, he was investing for a small group of fellow Scientologists, describing his work as an extension of his "church-related efforts" to help ensure others' financial stability. Investors said they were told their money would be pooled with other investor funds to buy stocks, according to SEC documents.

As their account statements showed steady growth, these early investors say they gave Slatkin more and more money--retirement funds, their children's college money--and encouraged their friends and family members to invest as well.

"He never promised enough that it was unbelievable, just enough so that [investors] didn't want to be left out," says Michael Stoller, an attorney for an investor.

A Second Home in Santa Barbara

In 1993, Slatkin and his family moved to an estate in Santa Barbara's Hope Ranch area--where swans glide on the golf course lake and horse trails wind through the oak-covered hills. Slatkin kept the Goleta home as his office.

Not all of Slatkin's investments took off. Slatkin says he tried several times to launch fledgling businesses as a venture capitalist. In 1990, for example, he acquired 20% of a company called Havenwood Ventures Inc. that planned to build a theme park and theater in Sedona, Ariz., public records show. The project, tentatively named the Sedona Spirit Theater, was to feature live actors interacting with animatronic American Indians. The theater apparently never was built.

Slatkin's big break as a venture capitalist came in 1994, when he was approached by fellow Scientologist Kevin O'Donnell, whose son had gone to school with a young man named Sky Dayton. Dayton, then 22, wanted to start a business that would make it easier to get on the Internet.

"It was the last thing in the world that I thought was going to work," Slatkin told the SEC, adding that he invested $75,000 in the venture.

The company they founded, EarthLink Networks, would go on to become one of the nation's three largest Internet service providers. By February 2000, Slatkin's stake in the company would be worth more than $122 million.

The EarthLink investment also enhanced his investment management practice, introducing him to a new crowd of Internet players, Fortune 500 executives and wealthy investors, friends say.

"There was no question he came across as a full-scale insider," says Rohit Shukla, head of the Los Angeles Regional Technology Alliance, a nonprofit networking group. "He was not just a fabulous investor, but also close to a successful company. The combination of the two was stellar."

Four top EarthLink directors and executives, including Dayton and Chief Executive Charles Garry Betty, gave Slatkin money to invest. So did Santa Barbara socialites who met Slatkin at various charity and fund-raising events, investors' attorneys say.

Slatkin's reach extended into Hollywood, thanks to his Scientology connections and to O'Donnell's investment in 1999 in Beacon Communications, a film production company headed by Armyan Bernstein. Beacon made the Harrison Ford thriller "Air Force One," as well as Costner's "For Love of the Game" and the Schwarzenegger vehicle "End of Days."

It was Bernstein who asked the two stars to appear in the tongue-in-cheek video for Slatkin's birthday party. Spokesmen for Costner and Schwarzenegger say the actors did not know Slatkin and had no money invested with him.

Other actors and Hollywood players did, however. Among the investors Slatkin named to the SEC were Jeffrey Tambor, who most recently portrayed the mayor of Whoville in "Dr. Seuss' How the Grinch Stole Christmas"; actor Giovanni Ribisi, whose movies include "Boiler Room" and "Saving Private Ryan"; and several producers.

Slatkin's clients also included law firms, accountants, pension funds and scores of smaller investors. Some invested less than $100,000, while others put in $10 million or more each.

Encino resident Alice Wintz is one of the investors who fears the money she gave Slatkin may be gone. Wintz, who was paralyzed in a 1993 auto accident, said in an interview that she gave Slatkin her insurance settlement and her children's college money--a total of $1.5 million.

"It was everything I have," says Wintz, who still uses a wheelchair because of the accident. She attended a meeting of Slatkin's creditors in bankruptcy court in Santa Barbara last week, but learned little about the fate of her money.

By 1999, Slatkin was managing at least $230 million for more than 500 investors, according to an SEC complaint filed Friday in federal court. Yet Slatkin still described his investment management practice as a casual sideline to his personal investing and venture capital work, the SEC documents say. He told investors he would handle their money "as a favor," although investors said they paid him a percentage of their profits, usually 10%, according to the documents.

Federal securities law requires money managers who accept compensation to register as an investment advisor, which Slatkin never did, according to SEC officials.

The SEC first approached Slatkin about his investment practice in 1997, and he promised that he would get out of the business of managing other people's money, according to the SEC complaint. He repeated the promise in 1999, and sent a letter to some of his clients in January 2000 telling them of the SEC probe and his plans to give them their money back.

Reassurances Accounts Were Being Liquidated

From January through December 2000, Slatkin and his attorneys repeatedly assured SEC investigator Andrew Dunbar that the accounts were being liquidated, according to the SEC complaint. In eight letters and 10 telephone conversations over those 12 months, Slatkin's attorneys reported progress in selling off stocks and returning investors' money. On Dec. 27, a Slatkin attorney told Dunbar that all the accounts had been liquidated--a claim that would be repeated in a March 29 letter to the SEC.

That would have been news to hundreds of Slatkin's investors. Although Slatkin gave the SEC documents that showed accounts had zero balances, many of the investors say they never got their money back and still are owed hundreds of millions of dollars.

What's more, investors in interviews and lawsuits say they began having trouble getting money out of their accounts at about the same time that technology stocks began to crash in March 2000.

New money continued to pour into Slatkin's investment coffers, however. Slatkin accepted at least $64 million in new deposits between October 1999 and September 2000 and actively was pursuing new clients until at least February this year, SEC and court documents allege. The U.S. bankruptcy trustee handling the case said investor claims could reach $600 million.

First Suits Filed April 12

The SEC says that some of the money Slatkin took in from new investors was used to make bogus "principal and interest" payments to previous investors in a Ponzi scheme.

SEC investigators have been unable to determine exactly what Slatkin invested in or what became of the money. Slatkin's attorneys declined to comment on the specific SEC allegations.

On April 12, investors filed the first of three lawsuits accusing him of fraud for failing to return $35 million of their money.

Slatkin resigned from EarthLink's board April 26, and filed for Chapter 11 bankruptcy protection a few days later, listing debts of more than $100 million and assets of $50 million to $100 million.

On Friday, agents from the FBI and Internal Revenue Service raided Slatkin's Goleta office. The SEC won a court order freezing his assets, claiming Slatkin had been operating a fraudulent investment scheme since 1985.

The SEC says it has found less than $30 million in Slatkin's brokerage accounts. Swiss bank accounts that Slatkin claimed contained an additional $585 million don't seem to exist, the SEC complaint says.

It's unclear how much--if any--of the money entrusted to Slatkin can be recovered, says attorney Richard Wynne, who is representing investors in Slatkin's bankruptcy. "It's a pretty staggering amount of money. And there's not a lot of available assets that we can see."