Dark clouds over a guru to the stars

Were celebrities victims of a Ponzi scheme?

US News and World Reports, Business & Technology/May 28, 2001
By Gary Cohen

Reed Slatkin, a founder of the Internet provider service EarthLink, managed money for over 500 clients, including CNN's legal anchor Greta Van Susteren and her husband, tobacco litigator John Coale. He invested for Armyan Bernstein, the producer of Air Force One, and the actors Giovanni Ribisi of Boiler Room and Jeffrey Tambor, last seen in How the Grinch Stole Christmas.

Even the CEO of EarthLink, Sky Dayton, put his faith in his former partner. But the Internet moguls and Hollywood celebrities who had once earned 25 percent returns from Slatkin's financial savvy are now losing hope of recovering up to $600 million they collectively entrusted to a man who was an ordained minister in the Church of Scientology but not a registered investment adviser.

Earlier this month, FBI and IRS agents raided Slatkin's office and the SEC froze his bank accounts as part of a criminal investigation into what they say was a Ponzi scheme of colossal proportions. "I have lost my life savings," says one California investor who wished to remain anonymous.

Slatkin, 52, is cooperating with investigators, his lawyers say. He met many of his investors through the Church of Scientology, a controversial sect based on the writings of L. Ron Hubbard. He told the SEC he felt indebted to the church for helping him overcome the death of his father and wanted to aid fellow congregants by making money for them. Working from a converted garage outside Santa Barbara, his big break came in 1994 when he invested with a fellow Scientologist in a new way of accessing the Internet.

The venture, EarthLink, became the nation's third-largest Internet provider, and Slatkin's initial $75,000 grew to $122 million at EarthLink's peak. At the same time, Slatkin was also managing money for his friends. Although he told the SEC his business was a "casual sideline," he told clients he was managing between $15 and $30 million. Since he wasn't registered with the SEC, he required each of his clients to sign a letter saying that he was doing this service "as a friend." In return, investors would give him anything from a box of Harry and David fruit (Slatkin told the SEC he received 30 to 40 boxes of fruit every month) to 10 percent of their total profits. By 1999, according to the SEC, Slatkin's "gifts" totaled $3.4 million.

Anything but typical. Slatkin's home run with EarthLink no doubt polished his reputation as a money manager. He would typically invite prospective clients to play golf and show them his "command center": a house filled with computers and research assistants who charted investments. "Part of his sales pitch was exclusivity," says Richard Wynne, the lawyer for creditors in a bankruptcy case Slatkin filed earlier this year.

Client Ted Coon remembers Slatkin as "very mild mannered and unboastful." But while clients were attracted to Slatkin's high rate of return, they also noticed his business was anything but typical. "He would just send us a statement every quarter that showed how much our investments had grown," says one former client. "Only at the end of the year did he ever say what stock we might have owned."

By late 1999, Slatkin's friendly enterprise attracted the attention of the SEC. They believe now that his business was essentially a Ponzi, a swindle in which money from new investors is used to pay returns to earlier ones. In a deposition, Slatkin assured regulators that his clients' money was safely ensconced at NAA Financial in Zurich and the Union Bank of Switzerland.

But the SEC learned that NAA Financial didn't have offices at the address on its letterhead and that the account in Switzerland did not exist. On Jan. 7, 2000, Slatkin admitted to clients that he was under investigation and told them he was liquidating their accounts. "

For many years, as an outgrowth of my church-related efforts, I have sought to assist my friends in enhancing their financial security," he wrote to clients. ". . . but . . . it has grown to involve far more time and responsibility than I had anticipated." But even while Slatkin was liquidating some of his present clients, he was soliciting new ones, regulators say. John K. Poitras, a Silicon Valley businessman, sent Slatkin $10 million to invest this February, he claims in a lawsuit.

A week later, he asked for the money back. According to his court testimony, he still hasn't received it. Last week, a bankruptcy judge appointed a trustee to preserve what is left of Slatkin's empire. It includes land and about $30 million in EarthLink stock and cash.