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Scientology's Reed Slatkin

California Investment Manager Could Lose Home, Assets in Probe
Source: Santa Barbara News-Press
Publication date: 2001-06-22

Jun. 22--Bankrupt investment manager Reed E. Slatkin could lose his Hope Ranch estate and other property, more than $1 million in artwork and collectibles, and even his La Cumbre Country Club membership as a bankruptcy trustee's team continues to track and seize his assets.

Digging deeper into Mr. Slatkin's records, the team led by court-appointed trustee R. Todd Neilson of Los Angeles is aggressively trying to piece together an accurate picture of his financial affairs by July 23 and take title of his assets, which would eventually be sold to reimburse creditors.

Federal regulators allege that Mr. Slatkin defrauded hundreds of people of at least $230 million through his unregistered investment advisory business. Attorneys this week revised upward the number of creditors to as many as 850 from an earlier figure of 500, and they maintain that claims could reach $600 million.

Approximately 75 of the creditors live in Santa Barbara County, according to a News-Press review of newly filed court records.

As a prelude to possible sale, the trustee inspected Mr. Slatkin's Hope Ranch home Wednesday afternoon to evaluate how well the buildings and property are being maintained. That property at 4480 and 4484 Via Esperanza is assessed at $3.4 million, but properties typically sell for much more than their assessed values.

A 100-acre undeveloped property owned by Mr. Slatkin in the Santa Ynez Valley also has been inspected.

The trustee's team is also reviewing procedures for selling Mr. Slatkin's membership at La Cumbre Country Club in Hope Ranch. . A club official said regular memberships, when sold, typically command more than $100,000.

The trustee's team has learned that Mr. Slatkin owns numerous valuable collectibles, including art by painters Albert Bierstadt and Thomas Hart Benton. In a letter to Mr. Slatkin's attorneys, the trustee demands those pieces and other works be turned over to him immediately.

Mr. Slatkin voluntarily declared Chapter 11 bankruptcy on May 1, listing debts in excess of $100 million. Creditors, attorneys and the court-appointed trustee have expressed frustration that he has not met court requirements to provide a complete list of his assets, expenses and financial affairs in the seven weeks since then.

Now the trustee's team is busy gathering that information. In addition to the property inspections, it is reviewing approximately 320 boxes of Mr. Slatkin's documents that were turned over by federal agents and an accounting firm.

Chapter 11 allows a debtor to remain in possession of his assets, at least temporarily, while he attempts to reorganize.

As of this week, Mr. Neilson has identified an "extensive list of securities, mortgages and promissory notes" that apparently are not in brokerage accounts and has demanded they be turned over. He also has ordered 39 brokerage firms and banks to freeze all of Slatkin's accounts and turn over all liquid assets, according to court filings.

Hundreds of creditors will be invited to a July 30 meeting in Santa Barbara, perhaps at a hotel or the U.S. Trustee's Office, to discuss the case. Many creditors, some of whom individually entrusted Mr. Slatkin with more than $1 million, are wondering how much they will recover; their attorney has warned them that it may be pennies on the dollar.

Mr. Slatkin is an eight-year Hope Ranch resident and a co-founder of EarthLink, a large Internet service provider. He resigned from its board of directors in April.

Mr. Slatkin, who is not registered as a financial adviser, has said that he was running an investment club for friends and acquaintances, not a business. He began his activities in 1985, collecting money from friends, business partners and fellow members of the Church of Scientology, according to court documents, attorneys and regulators.

Investors say he promised big returns -- as much as 60 percent per year -- but federal investigators suspect he merely repaid some people with money coming in from later investors, a type of fraud known as a Ponzi scheme.

RESTITUTION MAY COME SLOWLY FOR CREDITORS: Hundreds of creditors will have to wait at least six months before recovering any money entrusted to bankrupt investment manager Reed E. Slatkin -- and they may recover only a few pennies on the dollar.

It will take considerable time and effort to thoroughly investigate what happened with investors' funds, then to find and collect all of Mr. Slatkin's available assets, said Richard Wynne, a Los Angeles attorney leading the creditors committee.

As the tedious process begins in earnest, the man at the center of it is cooperating and could save investigators time, said Brian A. Sun, one of Mr. Slatkin's attorneys.

"We believe a substantial amount of expense and time can be avoided if the parties sit down and work together," Mr. Sun said Wednesday from his Los Angeles law firm. "We are cooperating."

For example, Mr. Slatkin informed the creditors committee of certain assets that need timely examination, Mr. Sun said. That included notification that a deadline is approaching for Mr. Slatkin to purchase approximately 25,000 shares of EarthLink stock at less than $4 per share.

Shares of EarthLink, the large Internet service provider that Mr. Slatkin co-founded, closed Wednesday at $12.63. At that price, 25,000 shares would be worth about $315,000 which, Mr. Sun explained, could be turned over with other assets to repay creditors.

"That's an indication of the kind of cooperation we're willing to provide," Mr. Sun said.

"He is cooperating," Mr. Wynne said, "but we want much more cooperation."

While Mr. Slatkin is helping on some fronts, many other requests made to his lawyers have gone unanswered, Mr. Wynne added. Lists of his vehicles, boats, artwork, copies of sale and escrow documents, the contents of his safe deposit boxes, and much more are being requested by the creditors.

Mr. Wynne said he and his team do not believe it is prudent to rely on Mr. Slatkin's records in any case, so they are attempting to build an independent database of investor records.

Thousands of hours already have been expended in the investigation, Mr. Wynne said in a June 14 letter to hundreds of creditors and other interested parties.

"Two six-person teams, one in New Mexico, where one of Mr. Slatkin's bookkeepers resides, and one in Los Angeles and Santa Barbara, have been working for the last several weeks" reviewing boxes of documents, Mr. Wynne's letter said.

The initial analysis is expected to take several months, and it will be at least six to nine months before distributions can be made to general unsecured creditors, he added.

A small group of investors who have no means of support other than the funds they entrusted to Mr. Slatkin may get a small return sooner. Those people, Mr. Wynne said, are in dire need of prescription drugs or other medical treatment, and he believes the creditors committee is morally obligated to try to obtain funds for them first.

The estimates of creditors' total claims range from $300 million to $600 million, but it is impossible so far to know how many claims there are, or the value of the assets, Mr. Wynne said.

In his letter to creditors, he claimed that there is slightly more than $30 million in stock and brokerage accounts and there appear to be records of about $100 million that Mr. Slatkin put into real estate limited partnerships and other investments, Mr. Wynne's letter said.

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(c) 2001, Santa Barbara News-Press, Calif. Distributed by Knight Ridder/Tribune Business News.

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