21 May 2001
http://www.latimes.com/business/20010521/t000042592.html
Outlook Bleak for Slatkin Investors
Courts: With no deep-pocket source to target, recovering money given
to the EarthLink co-founder is daunting.
Investors who gave money to fallen investment manager Reed E.
Slatkin already are looking for ways to recoup their expected losses
through lawsuits--but they're finding few obvious targets, investor
attorneys said.
Among the possibilities: a handful of banks that acted as
custodians for individual retirement account and 401(k) funds invested
by Slatkin; financial professionals who introduced clients to Slatkin,
who wasn't registered as an investment advisor; and even fellow
investors who received principal and interest payments from Slatkin in
recent years.
"What's unusual about this is that you don't have the usual gang"
of deep-pocketed companies that might become the target of lawsuits,
said one investor attorney, who asked not to be named. "You don't seem
to have any investment bankers or any big accounting firms involved."
Slatkin, a Santa Barbara-based money manager who co-founded
Internet service provider EarthLink Inc., is under criminal
investigation for investor fraud. Among his more than 500 clients
nationwide were Internet executives, Hollywood celebrities, socialites
and fellow Scientologists.
Bankruptcy officials say investor claims in Slatkin's Chapter 11
bankruptcy filing could total $600 million. Slatkin reported in his
preliminary bankruptcy filing that he had assets of less than $100
million.
The SEC, which won a court order freezing Slatkin's assets May
11, said it has been unable to locate the Swiss bank accounts Slatkin
said he used to trade stocks, or the financial advisory firm Slatkin
said he used to facilitate the trades.
The SEC has found a number of brokerage accounts that totaled
about $30 million, most of it invested in EarthLink stock, according
to SEC documents. In addition, Slatkin's attorneys have said that
about $100 million of investors' funds were funneled into limited
partnerships and real estate deals, although the attorneys said they
don't know how much those investments are worth now.
These reports have led many investors to conclude that they have
little hope of recouping much of their money from Slatkin, investors'
attorneys said.
"No one's getting back 100 cents on the dollar, absent a
miracle," said Richard Wynne, attorney for the creditors' committee
that represents investors. "That's pretty clear."
Slatkin has not returned calls for comment and his attorneys
refuse to comment on whether Slatkin defrauded investors. The
attorneys say Slatkin is cooperating with investigators and trying to
help investors get their money back.
In a typical bankruptcy that involves a liquidation of
assets--which is the expected outcome of Slatkin's Chapter 11
filing--investors and creditors get back 15 cents to 17 cents on the
dollar, said Victoria Doran, bankruptcy manager for Neilson Elggren of
Los Angeles, the firm whose principal, R. Todd Neilson, has been named
as trustee for Slatkin's bankruptcy.
Neilson's firm has recovered "slightly more" than 17% of
investors' money in two other high-profile bankruptcy cases--those of
Bruce McNall, the former L.A. Kings owner who pleaded guilty to bank
fraud in 1994, and Property Mortgage Co., a Sherman Oaks-based Ponzi
scheme in which about 1,000 investors lost $100 million, Doran said.
In a Ponzi scheme, new investors' money is used to pay bogus
returns to prior investors. The SEC complaint alleges that Slatkin was
operating such a scheme.
If he was, that could provide one avenue for investors to recoup
money, investors' attorneys said. Some investors who received money
from Slatkin in the last four years--the legal limit for recouping
such payments--could be forced by the trustee to give back some or all
of the money, Wynne said.
"When he went insolvent is a critical issue," since payments made
after that point could be considered part of a Ponzi scheme, Wynne
said.
Investors aren't the only ones who could face legal action.
Investors' attorneys said they are reviewing the roles played by banks
that handled money for Slatkin.
Union Bank of California, which according to SEC documents
handled several of Slatkin's investment accounts, sent a letter last
week to more than 25 customers who had individual retirement accounts
at the bank that were managed by Slatkin, said bank spokeswoman Joanne
Curran. The letter advised the customers of the controversy and
suggested they contact an attorney "to protect their investments,"
Curran said.
Curran said Union Bank played no role in Slatkin's investments
but served only as custodian or trustee on the accounts.
Those who recommended Slatkin to others could be targeted for
lawsuits as well. Many investors who gave money to Slatkin said in
interviews that they met him through mutual friends who bragged about
the returns Slatkin was making for them. Some investor attorneys say
it's possible that those later investors will sue the earlier
investors, arguing the earlier investors duped them.
"Everybody's going to turn against each other," predicted one
investor attorney, who also asked to remain anonymous.
Some investors said they were introduced to Slatkin by financial
professionals, including trust officers and accountants. Investors'
attorneys said some of their Hollywood clients were introduced to
Slatkin by their business managers.
"There are a couple of heroes out there who forbade their
clients" to invest with Slatkin after discovering he wasn't registered
with the SEC or that he intended to invest their clients' money in his
own name, rather than in separately titled accounts, said one of the
investor attorneys. There are others who approved or even encouraged
the investments, the attorney said.
"I would assume those managers aren't sleeping well at night," he
said.
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By LIZ PULLIAM WESTON, Times Staff Writer
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