http://www.sun-sentinel.com/technology/sns-earthlink.story?coll=sns%2Dtechnology%2Dheadlines

(This article was initially by the LA Times but this version a bit more detailed)

Investors sue Earthlink co-founder in fraud case

The Los Angeles Times
3.5.2001

By Liz Pulliam Weston

EarthLink Inc. co-founder Reed E. Slatkin, under investigation for running an alleged Ponzi scheme, told some of his clients more than a year ago that he was getting out of the money-management business, but instead continued to accept new investments for more than a year.

Slatkin, a Santa Barbara, Calif., venture capitalist, told the investors in a Jan. 7, 2000, letter that "a question again has been raised by the (Securities and Exchange Commission) ... whether I should be registered as an investment adviser" -- normally a requirement for anyone investing large sums on behalf of others. As a result, Slatkin said, he had decided "to end this endeavor" and give investors back their money.

By last December, Slatkin was still actively soliciting funds from new investors, according to lawsuits filed by investors.

One of Slatkin's attorneys, Gerald Boltz, confirmed Thursday that Slatkin was under SEC investigation in January 2000. The SEC has declined to say how long Slatkin has been under investigation.

Slatkin is being sued by three investors accusing him of fraud for allegedly failing to return $35 million of their money. Investor attorneys say Slatkin was managing at least $300 million on behalf of more than 100 friends, business partners and fellow members of the Church of Scientology.

Slatkin's attorneys have said he is cooperating with the SEC investigation, but they have not commented on the lawsuits against their client.

Slatkin filed for Chapter 11 bankruptcy protection Tuesday, listing debts of more than $100 million.

According to court filings and investor interviews, Slatkin told investors he was managing their money "as a friend," but he accepted -- and expected -- fees for his services. Federal securities law requires money managers who accept compensation to register as an investment adviser, which Slatkin never did, according to SEC officials.

Not all of Slatkin's investors received the Jan. 7 letter saying he planned to wind down his investment business. Some of those who didn't get the letter said they wish they'd known about the SEC probe sooner.

Texan Stuart W. Stedman, who invested a total of $18.4 million with Slatkin, sent $750,000 to Slatkin in June 2000, six months after other investors received the letter.

"I didn't receive a letter like that. I would liked to have seen that," said Stedman.

Some of the investors who did receive the letter, however, were more worried at the time about losing Slatkin as an investment adviser than they were about the SEC probe.

"We were so frightened. We thought, "That's it, he's not going to (invest for us) anymore,' " said Daniel Sadeh, 29, a Los Angeles furniture restorer who said he had invested $400,000 with Slatkin since 1997.

Sadeh said he met Slatkin through friends who had invested with the Santa Barbara millionaire. Sadeh said Slatkin provided statements showing Sadeh's money had grown to "more than $500,000."

Sadeh said he initially was relieved when Slatkin failed to follow through on his letter by returning Sadeh's money. Now, Sadeh said he wishes Slatkin had. Given Slatkin's bankruptcy filing and the fraud accusations against him, Sadeh said he's concerned he will never see any of his money again.

"If he had promised 60 percent returns, I never would have invested with him," Sadeh said. "He said 15 percent to 25 percent, and that seemed about right."

By December 2000, Slatkin was promising much larger returns to induce investors to give him money, according to court documents. Retired venture capitalist John K. Poitras of Woodside, Calif., said in a lawsuit against Slatkin that Slatkin told him about a computerized day-trading program he had developed that could generate 50 percent to 60 percent annual returns.

Poitras invested $5 million with Slatkin last December and an additional $10 million in February, according to the lawsuit. When Poitras changed his mind about the second investment, however, Slatkin didn't return the money, according to Poitras' lawsuit.

Poitras' attorney, Richard S. Conn, said it appeared Slatkin was using money collected from recent investors to pay returns to earlier investors -- an investment fraud commonly known as a Ponzi scheme.