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
Friday, May 4, 2001
By LIZ PULLIAM WESTON, Times Staff Writer
http://www.latimes.com/business/20010504/t000037550.html

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.