Santa Barbara News-Press 12/15/01

Santa Barbara News-Press 12/15/01 - new Slatkin article

16 Dec 2001

from : http://inferno.newspress.com/2001/12/15/1215slatkin.htm

Bankruptcy trustee slams financier Slatkin Report alleges scheme to bilk investors

12/15/01
By MARK VAN DE KAMP

NEWS-PRESS STAFF WRITER

Bankrupt money manager Reed Slatkin, the supposed whiz kid turned financial pariah, conducted a litany of fraud and tax schemes for years while deliberately duping 800 people out of more than $255 million through his unregistered investment club, a new report charges.

After months of investigation, the report reveals for the first time extensive financial and procedural details of Mr. Slatkin's investment activity.

The harshly worded accounting of the local man's alleged fraud was filed Friday in U.S. Bankruptcy Court in Santa Barbara by Todd R. Neilson, the trustee appointed by the court to investigate after Mr. Slatkin filed for bankruptcy in May. Mr. Neilson will explain his report Monday in court to Mr. Slatkin's investors, some of whom have lost millions.

Mr. Neilson tells a tale of fake Swiss bank accounts, falsified financial statements and worthless investments, which in the report's dramatic language created a "financial castle ... built upon the shifting sands of lies and misrepresentations" to investors and federal agents.

In simplest terms, the report claims, Mr. Slatkin's "club" was a massive Ponzi scheme, where money paid by later investors was used to pay artificially high returns to the initial ones, with the goal of attracting more investors' money. It provides details of Mr. Slatkin's assets, liabilities and financial affairs uncovered during months of investigation by Mr. Neilson's team and a committee of creditors. Because it also reflects their opinions, Mr. Neilson concedes that some may disagree with the team's interpretation.

However, the facts the investigators gleaned from more than 2 million pages of seized documents paint an ominous picture.

For example, Mr. Slatkin received $593 million from investors from 1986 to 2001 and distributed $535 million to investors, the report states. But those distributions were wildly uneven.

A select group of 75 people, who had invested a total of $128 million, were paid $279 million, almost $151 million more than their original investment, the report states. More than 700 others, however, received far less or lost everything.

Furthermore, Mr. Slatkin wasted tens of millions of dollars on "ill- conceived and disastrous investments" and paid "staggering sums" -- millions of dollars -- to certain associates and consultants, the report said. Most of the many millions he invested have disappeared into a "financial black hole."

In the same 15-year period, Mr. Slatkin "reported approximately $700 million in bogus profits to investors."

The fraud alleged by Mr. Neilson extends to tax returns as well.

In 1995, for example, he reported approximately $68 million in profits to investors but apparently had gained only $400,000 on funds still in his care, the report said. His tax returns that year showed adjusted income and profit as $417,233.

Mr. Slatkin and his wife, Mary Jo, lived in Hope Ranch before their home was seized by the Bankruptcy Court. They reportedly are now renting a local residence at an undisclosed address. He has not been charged with any crime.

While he has provided limited assistance to investigators, the trustee said, Mr. Slatkin is "walking the fine line between full and complete disclosure and the protection against self-incrimination afforded under the Fifth Amendment."

According to the report, Mr. Slatkin is considering a request by investigators to appear for several days of formal questioning under oath.

In July, Mr. Neilson told a crowd of 125 investors at a Santa Barbara meeting that they probably would get little of their money back. At that time, he said Mr. Slatkin's attorneys were talking with the Department of Justice about criminal charges, but those proceedings are secret. He expected that matter to be resolved within six months, probably through a written plea agreement.

Because Mr. Neilson's new report was released late Friday afternoon, Mr. Slatkin's attorneys could not be reached for comment. Mr. Slatkin has no listed telephone number.

Mr. Slatkin's credibility with investors apparently was founded in large part on his connections to Earthlink, whose stock value soared after its creation in 1994. And many of his initial investors were members of the Church of Scientology, in which he and his wife are ordained ministers.

"Due to his newfound 'paper' wealth generated by the Earthlink investment, Slatkin was seemingly propelled into a euphoric sense of financial invincibility," the trustee wrote. "Investments were made in highly speculative projects with the assumption that 'financial lightning' would again strike for Slatkin. During the discussions the trustee has had with Slatkin relative to various investments, Slatkin continued to cling to the illusion that the 'dot.com wand' would somehow touch investments in companies that had never generated profits and had no foreseeable hope of doing so, and magically transform them into financial behemoths. In fairness to Slatkin, he is not the only person in the United States so afflicted."

Investigators have reviewed millions of pages and related financial documents to piece together a picture of Mr. Slatkin's 15-year investment club, from soaring start to fallen finish.

There are now an estimated 2 million documents and numerous gigabytes of computer data in the data center shared by the trustee, creditors' committee, U.S. Attorney and the FBI.

To recover assets for investors, the trustee is selling Mr. Slatkin's property. It ranges from houses in Hope Ranch, Goleta and Solvang, and various other real estate properties, to vehicles, stock, a wine cellar and three country club memberships.

Mr. Slatkin's ownership stakes in various companies around the country may not bear much cash, the report said. For example, though he invested $5.98 million in one corporation, it's now bankrupt. Another firm is operating at an eight-figure deficit, and another has no equity.