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
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.
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3.5.2001
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