Co-Founder of EarthLink Faces Claims of $600 Million

http://www.latimes.com/business/updates/lat_bk010511.htm
Friday, May 11, 2001

Co-Founder of EarthLink Faces Claims of $600 Million
By LIZ PULLIAM WESTON, Times Staff Writer

Reed Slatkin failed to appear at a creditors' meeting in Santa Barbara. He had received threats, his lawyer said.

SANTA BARBARA--Few who knew EarthLink co-founder Reed E. Slatkin would have believed he would come to this. But on Thursday, federal regulators, attorneys and government investigators said his crumbling financial empire faces claims of more than half a billion dollars in what is one of the largest potential Ponzi schemes ever probed.

Slatkin took in hundreds of millions of dollars from a nationwide network of investors, which included Internet moguls, fellow Scientologists, venture capitalists, Santa Barbara socialites and Hollywood producers.

They thought he was using their money to trade a wide variety of stocks and purchase other investments, court filings and investors' attorneys allege. Most of the money is unaccounted for. Slatkin apparently had traded some stocks, "but we don't know the extent of it," his attorney Richard Pachulski said Thursday at a creditors' meeting in the office of the U.S. bankruptcy trustee here.

Slatkin has less than $21 million in various brokerage accounts, most of it invested in EarthLink stock, Pachulski said. About $100 million in investors' funds was funneled by Slatkin into limited partnerships and real estate deals, but attorneys said they don't know how much those investments are worth now.

Slatkin, 52, resigned last month from the board of directors of EarthLink, one of the nation's largest Internet service providers. Slatkin was supposed to appear at the creditors' meeting, his first public appearance to address allegations that he mishandled the savings of more than 500 investors, but he didn't show up. His attorneys changed their mind about bringing him "because of certain threats that were made and confrontations that have been happening," Pachulski said. He declined to elaborate.

Slatkin had been besieged by e-mails, phone messages and letters from desperate, often angry investors, said Brian Sun, another attorney of Slatkin's.

Tensions were high in the cramped hearing room as investors challenged Slatkin's attorneys, argued with one another and despaired of ever seeing their money again. "Some people have suggested that this was a Ponzi scheme," where new investors' money is illegally passed on as payments to prior investors, Pachulski said. At this point, "we don't know one way or another what it was."

The Securities and Exchange Commission is investigating Slatkin for alleged investment fraud, and he has been sued by three investors who claim he failed to return more than $35 million. Slatkin filed for Chapter 11 bankruptcy protection last week. In addition, Slatkin owes about $6 million to the Internal Revenue Service, Pachulski said.

Patrick Siefe, one of the investors at Thursday's meeting, said he was more hurt than angry. "I thought he was a hero because he made all his money without hurting anyone, but he made his money by hurting everyone," said Siefe, a Santa Barbara computer consultant.

U.S. trustees called the meeting to organize investors into a seven-member creditors' committee that would represent their interests in court. As they compared notes, investors and their attorneys began getting a clear idea of how much money may be at stake.

U.S. Trustee Brian Fittipaldi said no one is sure how much money was invested with Slatkin, but claims could range as high as $600 million. Some attorneys say they believe the amounts could be higher.

"It's a very serious, staggering amount of money that's at stake," said Richard Wynne, an attorney for the creditors' committee of investors. "And I don't believe personally we're going to find [the money] stashed overseas."

Slatkin remains in control of all the accounts and assets, which is allowed under Chapter 11 bankruptcy rules, attorneys and government officials said. But a group of investors filed a motion Thursday asking that a trustee be appointed to take control of the assets.

Slatkin's attorneys argued passionately against such a move, telling the 90 investors and their attorneys at the meeting that Slatkin was cooperating with regulators and attempting to help investors get their money back. Appointing a trustee would slow the process and ensure that lawyers, not investors, get most of the money, Sun said.

Wynne said creditors were going to file a motion today asking the bankruptcy judge to freeze all of Slatkin's accounts and assets, and Slatkin's attorneys agreed not to contest the move.

Records that Slatkin turned over to his attorneys and to an independent auditor--more than a million documents in 170 boxes, plus three computer hard drives--show about $100 million of investor funds had been funneled into various limited partnerships and complicated real estate transactions, Pachulski said.

Pachulski said he wasn't sure whether the $100 million included Slatkin's personal real estate holdings, which include a four-acre estate in Santa Barbara's upscale Hope Ranch, a $2-million Santa Monica condominium and property in the exclusive Newport Coast area of Orange County.

Slatkin has been under SEC scrutiny for more than 18 months for failing to register as an investment advisor as required by federal securities law.

In January 2000, Slatkin sent a letter to some investors, saying he was liquidating his investment management practice because of the SEC probe, and Pachulski said Thursday that more than $140 million was distributed to investors in the last two years.

Some investors, in fact, got out more money than they put in, Slatkin's attorneys said. The attorneys have identified one group of investors who received $120 million more than they invested.

Another group of investors contributed $240 million more than they got out, the attorneys said.