How adviser to the stars kept SEC in the dark
The Wall Street Journal
JENNIFER ORDONEZ
Wednesday, May 30, 2001
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/05/30/financial1245EDT0117.DTL

In 1997, the Securities and Exchange Commission made early inquiries into the activities of Reed E. Slatkin, a money manager better known as an Internet entrepreneur who co-founded EarthLink Inc.

Four years and tens of millions of dollars of new investments later, the SEC filed suit in federal court in Los Angeles on May 11 accusing him of defrauding Hollywood celebrities and other investors through "Ponzi-like" schemes in which he used money from new investors to pay off older ones.

Now, many investors are wondering, what took so long?

They note that the SEC acted only after a handful of investors in April filed lawsuits accusing Mr. Slatkin of fraud or mismanagement of money. "The SEC had all this information in front of them and they took no action whatsoever. ... His story made no sense," says John Poitras, who invested $15 million with Mr. Slatkin from December 2000 to February of this year.

If the allegations against Mr. Slatkin are true, the problem appears to be a combination of a lack of follow-through by the SEC and the gullibility of investors.

The SEC's lawsuit paints an amazing and at times amusing picture of how easy it was to hold the agency at bay. Its early requests for an accounting of investments made by Mr. Slatkin -- who the SEC suit says was entrusted with at least $230 million by about 500 people -- were met with promises to provide the information. But the promises were followed by excuses that it was hard to get the data, ranging from trouble identifying numbered bank accounts in Europe to problems verifying assets at some banks because of time differences, court documents say.

"Mr. Slatkin's lies and obstruction of our investigation, all the while giving the appearance of cooperation, greatly impeded our investigation," explains Kelly Bowers, an SEC attorney working on the case. While there were things about the situation that didn't seem quite right, "suspicion is obviously quite different from evidence," says Valerie Caproni, regional director of the SEC's Pacific region office in Los Angeles.

Efforts to reach Mr. Slatkin through his lawyers were unsuccessful. His lawyers decline to comment on the accusations, except to say that Mr. Slatkin is cooperating with government investigators. Brian Sun, a Santa Monica, Calif., attorney, says his client wants to maximize the value of his assets so that he can address all the claims of his various creditors.

The SEC says that it never received any complaints about Mr. Slatkin, a 52-year-old who lives in Santa Barbara, Calif. "We never got any phone calls. Not one," Mr. Bowers notes.

Indeed, investors -- many of them well-heeled friends and acquaintances -- placed an unusual amount of faith in Mr. Slatkin. In exchange for promises of lucrative returns, they handed over millions of dollars to a man who wasn't registered as an investment adviser. He appeared to deliver, for years sending them quarterly statements detailing fat profits that may never have existed.

One reason that investors trusted Mr. Slatkin is that he appeared to be a paragon of success who was above reproach, with the trappings of wealth and ties to an established Internet company, say people familiar with the case. Few of the people who gave him money -- including the celebrities, as well as Internet executives and people Mr. Slatkin met through the Church of Scientology -- suspected anything was amiss until they read about his financial problems.

Mr. Slatkin's downfall accelerated on April 11, when the private lawsuit was filed. On May 1, Mr. Slatkin filed for protection under Chapter 11 of the United States Bankruptcy Code. Then, on May 11, the SEC froze Mr. Slatkin's assets. That same day the Federal Bureau of Investigation and the Internal Revenue Service searched his office, removing boxes of paperwork, computer hard drives and other records.

Mr. Slatkin rose to prominence in the mid-1990s after investing $75,000 to help start EarthLink, soon to be one of the biggest Internet-service providers. A devout follower since his teenage years of Scientology, a controversial religious group founded by science-fiction writer L. Ron Hubbard, Mr. Slatkin had long invested for church members. With his stake in EarthLink at its height valued at more than $100 million and a growing reputation as a money manager, he soon was investing for hundreds of people.