http://www.siliconvalley.com/docs/news/depth/slatk091001.htm

SiliconValley, Reuters - 10 september 2001 -
BY PATRICK MAY
Mercury News

pmay@sjmercury.com

Investment counselor's legal troubles pose PR problem for Scientology

SANTA BARBARA -- His assets have been frozen, from valuable artwork and software company stock down to a single share of Krispy Kreme doughnuts. And Reed Eliot Slatkin, co-founder of EarthLink and a millionaire investment counselor, sits holed up in his estate, under the icy glare of federal authorities.

Investigators suspect Slatkin was running a huge international investment fraud, bilking what now appears to be as many as 850 creditors out of about $600 million.

But Slatkin's troubles are also presenting a public relations challenge to the Church of Scientology, a lightning rod for controversy since it was founded in the 1950s. His longtime connections to the church have some critics and investors wondering: Was the church a beneficiary of Slatkin's? A victim? Or both?

Starting in the mid-1980s, Slatkin began investing for Scientologists so they could devote themselves to church work instead of worrying about making ends meet. He told investors he would pool their money to buy stocks, according to the Securities and Exchange Commission. Some church members profited; others lost their investments.

His most successful bet, a $75,000 stake in Internet service provider EarthLink, made Slatkin rich. And by 1999, Slatkin was managing at least $230 million for hundreds of investors, including non-Scientologists, dot-com kings and celebrities.

But this spring, after one investor unaffiliated with the church tried to get his $15 million out, things went sour. The SEC sued the Santa Barbara socialite for fraud, saying he was acting as an unregistered investment adviser. He filed for bankruptcy protection. The Department of Justice launched a criminal investigation, with federal agents searching homes and offices of Slatkin and associates.

Three non-church investors sued. One charged in court documents that Slatkin parked funds in a Swiss account that could not be located.

While there is no evidence that Slatkin took investors' money and gave it directly to the church, some non-Scientologists are asking whether their life savings went to Scientologists who did make money -- and ultimately to the church itself.

Church leadership has tried to distance itself, insisting Slatkin wasn't the fervent Scientologist he claimed.

"This really hasn't had an impact on the church,'' said Scientology spokesman Aron Mason. Alleging a church role here is "like saying 'Michael Milken was a Jew who used his relationship within his religious community to develop a financial operation and people got hurt.'

"But you can't hold the church accountable for the actions of an individual member,'' said Mason. "That's outrageous. I wish I knew where all that money went, but it certainly did not go to the Church of Scientology.''

A darker side

Critics of the church, many of them former members who say they have been pestered for years for questioning Scientology policies, see something more sinister. Many of the church investors who entrusted their money to Slatkin were high-profile people in their fields. The church must have profited, critics say, if only from huge charitable contributions from investors.

"Slatkin has been a big donor to the church and so are a lot of the people who invested with him,'' said Arnaldo Lerma, a former Scientologist and longtime critic outside Washington, D.C.

Authorities are trying to determine if Slatkin's business was a classic Ponzi scheme, in which returns are paid to earlier investors out of money paid by newer investors.

If investigators can show the church somehow reaped rewards, Scientology might have to give some of that money back. There is precedent: After an Arizona businessman was indicted last year for defrauding investors in an operation similar to, but smaller than, Slatkin's, authorities discovered he had contributed $1.8 million to Scientology.

"We found $50,000 a crack going to the church, $200,000 another time,'' said the court-appointed receiver in that case, Phoenix CPA Larry Warfield. After a lawsuit, "they've paid us back $1.3 million and have promised to pay us back another $150,000 in 60 days. They've been very honorable.''

Both sides agree the church had no prior knowledge of the source of the money.

In the Slatkin case, if Scientology has to give money back, Lerma said "that's money they won't have anymore to hire lawyers to sue us.''

With Slatkin, some worry about an awkward religious divide between money makers and losers. "If Reed lost church members' money, that's interesting,'' said Patrick Siefe, a non-Scientologist and former Slatkin associate who helped design his trading software. "And if he didn't, that's even more interesting.''

Indeed, while not all the Scientologists profited, at least two high-profile members did. Anti-tobacco litigator John Coale told the Wall Street Journal that he and his wife, CNN legal commentator Greta Van Susteren, made money from their investments with Slatkin.

But Dr. Larry Wheeler, a Scientologist and Tucson dentist, feels betrayed.

"Everybody thought he was god. Now everyone's in disbelief,'' said Wheeler. "The church is a victim in this because a lot of these investors were heavy donors, and now their money's gone.''

Slatkin, who turned down interview requests, has claimed he was just doing good old-fashioned church work, freeing time for the faithful to focus on the spiritual. But the church says it was never a party to Slatkin's investment efforts.

"This is all as much of a mystery to us as it is to investigators,'' said Mason. "We don't know anything about this Slatkin situation except what we've seen in the media.''

Long involvement with church

Slatkin's life has been sculpted by Scientology: From coping with his father's suicide when he was 14, to studying in England with church founder L. Ron Hubbard, to starting a Scientology club at the University of Michigan.

He told the SEC he helped put together the Sea Organization, Hubbard's elite religious order; the church's Mason said he was not aware of that, but did know Slatkin was never a member of that elite order. Slatkin said he was kicked out of England in 1968 when the government cracked down on Scientology. His fervor even determined where he did graduate work -- UC-Berkeley, both for its Asian language program and proximity to a good Scientology mission, and the woman he married and raised two sons with, Mary Jo, another longtime devotee.

Since embracing Scientology in 1963, he said, it has "been the basis of almost everything I've done in life.''

Church officials acknowledge Slatkin was a minister many years ago and may have been a donor, but say he has not been active recently. In contrast, Slatkin told the SEC in detail of working his way up the church's spiritual hierarchy -- something members call "moving up the bridge'' -- and remaining actively involved to this day. He testified that he continues to take religious pilgrimages to Clearwater, Fla., the church's spiritual headquarters.

In 1984, a fellow Scientologist taught Slatkin fundamentals of investing. Soon he was playing the market on behalf of hundreds of church members, according to his SEC deposition. Working in a converted garage, he used software he and a programmer designed. One condition: He would not accept "fees,'' which could have required an SEC license. Instead, he encouraged investor-friends to make "gifts.''

As he told the SEC: "They used the largess that I was able to help them with to, you know, donate things to the church.'' He added: "I can show you letters of those, that people say, thanks to your assistance, I've put X dollars over to the'' church.

One investor said he paid Slatkin $300,000 in "gifts.'' Terence Honikman, a retired mechanical engineer, said Slatkin encouraged investors to donate to him 10 percent of profits -- or least the profits shown on now-suspect annual statements.

Slatkin hit it big with EarthLink, where his stake ballooned to $122 million. He served on the company's board, as it merged last year with MindSpring Enterprises, but stepped down when the scandal erupted. An EarthLink spokesman said that while some company executives invested with Slatkin and have Scientology links, "EarthLink funds weren't involved'' with Slatkin's dealings and "Reed wasn't involved in the daily operation of'' EarthLink.

Well-known Scientologists present in the case

The ambiguities surrounding the Slatkin scandal are reflected in the presence of`two well-known Scientologists in the case -- one after it erupted, the other in the final days as Slatkin was scrambling to deal with panicked investors.

Jack Dirmann, a longtime Scientologist who has served in administrative posts, spent 10 days in March inside Slatkin's office, including time spent going through his computer.

But Mason said Dirmann hasn't worked for the church for 21 years. "Whatever he was allegedly doing in Reed's house,'' he said, ``was on his own.''

Dirmann, who commented via e-mail, said he was in the house, invited by Slatkin, simply as someone with money at stake, not as a church presentative. "I had invested with Reed and encouraged my 85-year-old father, among others, to do the same,'' he wrote. "Reed's repeated assurances that everything was OK were wearing thin.''

Bennetta Slaughter, a longtime church activist and donor, began contacting investors after the case became public, saying she was organizing creditors. If they would send her $250 each, she would hire legal counsel.

"Bennetta called me out of the blue,'' said one investor, a Sante Fe art dealer. "She didn't say she was with the church. But she was very articulate and seemed to have a real command of the issues.''

Some question her motives.

"Slaughter is the ultimate loyal volunteer and tireless worker in Clearwater for Scientology,'' said Kady O'Malley, a freelance journalist in Ottawa who writes about the church. Slaughter's involvement suggests to O'Malley that the church is trying "to somehow control the agenda.''

Slaughter disputes any suggestion that she was doing this work for the church. In a letter to the Mercury News, she said she was acting as a private investor. Regardless of how various proceedings are resolved, one thing is certain: Slatkin will likely become an outcast from the church that had meant so much in his life.

"These things are now before the courts and law enforcement,'' said Mason. "But if he's done the things alleged, he'll be excommunicated. You can't be involved in this sort of thing and remain a Scientologist.''