Slatkin Hinted in Early 2000 of Trouble With SEC
Courts: But the EarthLink co-founder, suspected of running a Ponzi scheme,
continued to solicit funds, lawsuits allege.
Los Angeles Times
EarthLink Inc. co-founder Reed E. Slatkin, under investigation for running
an alleged Ponzi scheme, told some of his clients in January 2000 that he
was getting out of the money-management business, but instead continued to
accept new investments until early this year.
Slatkin, a Santa Barbara 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 advisor"--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 would give investors back their money.
According to lawsuits filed by investors, Slatkin was still actively
soliciting funds from new investors in December, and was accepting new
investments as recently as this February.
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 advisor,
which Slatkin never did, according to SEC officials.
Not all of Slatkin's investors received the Jan. 7, 2000, letter saying he
planned to wind down his investment business. Some of those who didn't get
the letter said they wish they had known sooner about the SEC probe. 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,"
Stedman said.
Some of the investors who did receive the letter, however, were more
worried about losing Slatkin as an investment advisor 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 Tarzana furniture restorer
who said he had invested $400,000 with Slatkin beginning in 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 is concerned he will never see any of his
money.
"If he had promised 60% returns, I never would have invested with him,"
Sadeh said. "He said 15% to 25%, 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% to 60% annual
returns.
Poitras invested $5 million with Slatkin in December and an additional $10
million in February, according to the lawsuit. When Poitras changed his
mind about the second investment, Slatkin did not return the money,
according to Poitras' suit.
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.
Slatkin resigned from the EarthLink board of directors last month.
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Friday, May 4, 2001
By LIZ PULLIAM WESTON, Times Staff Writer
http://www.latimes.com/business/20010504/t000037550.html
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