http://www.latimes.com/news/front/20010514/t000040531.html
Monday, May 14, 2001
Seeking Answers in Slatkin Puzzle
Investment guru Reed E. Slatkin's 50th birthday bash in early 1999 had
all the trappings of a gilt-edged, Southern California soiree.
The highlight of the party at the Santa Barbara Biltmore Hotel was a
short, star-studded video made just for the occasion. The ballroom
erupted in cheers as Kevin Costner, dressed in a baseball uniform,
praised Slatkin's athletic prowess, and Arnold Schwarzenegger jokingly
lauded the 180-pound money manager's weightlifting skills.
"It was incredible," says longtime friend and investor Doug Neuman, one
of more than 150 people who attended. Even though both stars say they
did not know Slatkin personally, many of those who attended say the
video seemed to be just one more example of the valuable connections
that helped Slatkin build his network of investors over the years.
Unfortunately for Slatkin and his investors, the cheering has stopped.
The Hollywood insiders, Internet entrepreneurs and just plain folks who
turned to Slatkin for help with their investments now are trying to find
out what happened to the hundreds of millions of dollars they entrusted
to a man who wasn't even a registered investment advisor.
And they're not alone. The 52-year-old Slatkin, a co-founder of Internet
provider EarthLink and a Santa Barbara socialite, is under investigation
by the Securities and Exchange Commission for investment fraud. He also
faces lawsuits by investors and filed for Chapter 11 bankruptcy two
weeks ago.
Federal investigators raided his office Friday, but have been able to
locate only a fraction of the money Slatkin controlled, and investors'
claims eventually could surpass $600 million, officials say.
Indeed, government investigators say the collapse of his investment
empire may be one of the largest Ponzi schemes they've ever encountered.
Slatkin's attorneys decline to comment about whether Slatkin was
running a Ponzi scheme, which is an investment fraud in which new
investors' money is used to pay bogus returns to earlier investors. They
will say only that he is "cooperating fully" with investigators.
Slatkin has not returned calls seeking comment. Longtime friends
say they still are reeling from the idea that Slatkin--a family man,
civic activist and spiritual leader--could have done anything wrong.
"This is not the Reed that I know," Neuman says.
These friends say Slatkin didn't start out to become an investment guru.
Instead, his first passion was the Church of Scientology.
In a deposition given to the SEC in January 2000, Slatkin traced his
interest in Scientology to his father's death when Slatkin was 14. An
uncle introduced Slatkin and his Detroit family to the religion's
tenets, and Slatkin's growing interest took him to England, where he
spent two summers during high school studying at Scientology founder L.
Ron Hubbard's institute in Sussex.
Slatkin came to Los Angeles in 1974 after graduating with honors from
the University of Michigan and studying Asian languages at UC Berkeley's
graduate program. He worked at Scientology's Celebrity Centre and became
an ordained minister of the church.
Long hours and low pay eventually took their toll, Slatkin told the SEC.
In 1983, he began learning from another Scientologist about how to make
money in the stock market. Slatkin moved his wife and two young
sons to a two-story, four-bedroom home in Goleta. He converted its
garage into a computer-lined "war room" for his investment practice.
By 1985, he was investing for a small group of fellow Scientologists,
describing his work as an extension of his "church-related efforts" to
help ensure others' financial stability.
Investors said they were told their money would be pooled with other
investor funds to buy stocks, according to SEC documents.
As their account statements showed steady growth, these early investors
say they gave Slatkin more and more money--retirement funds, their
children's college money--and encouraged their friends and family
members to invest as well.
"He never promised enough that it was unbelievable, just enough so that
[investors] didn't want to be left out," says Michael Stoller, an
attorney for an investor.
A Second Home in Santa Barbara In 1993, Slatkin and his family
moved to an estate in Santa Barbara's Hope Ranch area--where swans glide
on the golf course lake and horse trails wind through the oak-covered
hills. Slatkin kept the Goleta home as his office.
Not all of Slatkin's investments took off. Slatkin says he tried several
times to launch fledgling businesses as a venture capitalist. In 1990,
for example, he acquired 20% of a company called Havenwood Ventures Inc.
that planned to build a theme park and theater in Sedona, Ariz., public
records show. The project, tentatively named the Sedona Spirit Theater,
was to feature live actors interacting with animatronic American
Indians. The theater apparently never was built.
Slatkin's big break as a venture capitalist came in 1994, when he was
approached by fellow Scientologist Kevin O'Donnell, whose son had gone
to school with a young man named Sky Dayton. Dayton, then 22, wanted to
start a business that would make it easier to get on the Internet.
"It was the last thing in the world that I thought was
going to work," Slatkin told the SEC, adding that he invested $75,000 in
the venture. The company they founded, EarthLink Networks, would
go on to become one of the nation's three largest Internet service
providers.
By February 2000, Slatkin's stake in the company would be worth more
than $122 million. The EarthLink investment also enhanced his
investment management practice, introducing him to a new crowd of
Internet players, Fortune 500 executives and wealthy investors, friends
say.
"There was no question he came across as a full-scale insider," says
Rohit Shukla, head of the Los Angeles Regional Technology Alliance, a
nonprofit networking group. "He was not just a fabulous investor, but
also close to a successful company. The combination of the two was
stellar."
Four top EarthLink directors and executives, including Dayton and Chief
Executive Charles Garry Betty, gave Slatkin money to invest. So
did Santa Barbara socialites who met Slatkin at various charity and
fund-raising events, investors' attorneys say.
Slatkin's reach extended into Hollywood, thanks to his Scientology
connections and to O'Donnell's investment in 1999 in Beacon
Communications, a film production company headed by Armyan Bernstein.
Beacon made the Harrison Ford thriller "Air Force One," as well as
Costner's "For Love of the Game" and the Schwarzenegger vehicle "End of
Days."
It was Bernstein who asked the two stars to appear in the
tongue-in-cheek video for Slatkin's birthday party. Spokesmen for
Costner and Schwarzenegger say the actors did not know Slatkin and had
no money invested with him.
Other actors and Hollywood players did, however. Among the investors
Slatkin named to the SEC were Jeffrey Tambor, who most recently
portrayed the mayor of Whoville in "Dr. Seuss' How the Grinch Stole
Christmas"; actor Giovanni Ribisi, whose movies include "Boiler Room"
and "Saving Private Ryan"; and several producers.
Slatkin's clients also included law firms, accountants, pension funds
and scores of smaller investors. Some invested less than $100,000, while
others put in $10 million or more each.
Encino resident Alice Wintz is one of the investors who fears the money
she gave Slatkin may be gone. Wintz, who was paralyzed in a 1993 auto
accident, said in an interview that she gave Slatkin her insurance
settlement and her children's college money--a total of $1.5 million.
"It was everything I have," says Wintz, who still uses a wheelchair
because of the accident. She attended a meeting of Slatkin's creditors
in bankruptcy court in Santa Barbara last week, but learned little about
the fate of her money.
By 1999, Slatkin was managing at least $230 million for more than 500
investors, according to an SEC complaint filed Friday in federal court.
Yet Slatkin still described his investment management practice as a
casual sideline to his personal investing and venture capital work, the
SEC documents say.
He told investors he would handle their money "as a favor," although
investors said they paid him a percentage of their profits, usually 10%,
according to the documents.
Federal securities law requires money managers who accept compensation
to register as an investment advisor, which Slatkin never did, according
to SEC officials.
The SEC first approached Slatkin about his investment practice in 1997,
and he promised that he would get out of the business of managing other
people's money, according to the SEC complaint.
He repeated the promise in 1999, and sent a letter to some of his
clients in January 2000 telling them of the SEC probe and his plans to
give them their money back.
Reassurances Accounts Were Being Liquidated Continues
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By LIZ PULLIAM WESTON,
Times Staff Writer
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