Fixer-uppers and fishy deals

How tainted millions bankrolled renovations of the Ashland Springs Hotel and Lake of the Woods Resort

First of two parts
By GREG STILES
(Medford, OR) Mail Tribune
January 27, 2002
http://www.mailtribune.com/

ASHLAND - Reed Slatkin's name doesn't readily spill off tongues in the Rogue Valley. More likely it would produce blank stares.

But among the investment community and those who follow Wall Street activity, the name Slatkin has become synonymous with scam and fraud in what investigators call one of the biggest Ponzi schemes in history.

Slatkin's dealings have been well documented by the Securities and Exchange Commission as well as a Central California Bankruptcy Court trustee's report released in December. What he did with $593 million given to him by 800 investors over a 15-year period has been the subject of federal and private investigations. Investors have filed claims for more than $255 million, most of which the court-appointed trustee expects will never be recovered.

The mix of business associates, investors and victims includes Hollywood producers, directors and actors - many of whom were fellow members with Slatkin in the Church of Scientology.

It also includes Doug Neuman, an Ashland developer known for projects such as the Ashland Springs Hotel and the Lake of the Woods Resort. Bankruptcy records show that Slatkin invested $11.5 million in those and other Southern Oregon projects or properties, virtually all managed by Neuman, and all currently under the jurisdiction of the bankruptcy court.

Friends and partners

Slatkin, now 53, met Neuman while taking Scientology instruction at the Dianetics Center in Los Angeles in 1975. The two became friends, tennis partners and, eventually, business partners.

Neuman first came to prominence in Southern Oregon when he purchased the financially troubled Mark Antony Hotel in Ashland, poured millions into it and reopened it as the Ashland Springs Hotel in 2000. At about the same time, he purchased the Lake of the Woods Resort and again embarked on a lavish renovation.

The bankruptcy documents reveal he was financially able to do that because Slatkin, who lives in Santa Barbara, was providing the bulk of the money - up to 95 percent - for the Neuman-run company that purchased and managed the properties.

Nothing among the 2 million pieces of paper and thousands of gigabytes of computer documents pored over by investigators suggests that Neuman was part of any illegal activity, said John Reitman, an attorney for Los Angeles bankruptcy trustee R. Todd Neilson.

Neuman founded a limited liability company, Mountain Park Development, LLC, in 1994 after Slatkin - considered a financial whiz at the time - suggested he wanted to invest in Neuman's relatively modest success in Southern Oregon.

"It's Reed Slatkin that stole the money, not the people he invested with in Oregon," said Richard Wynne, a Los Angeles attorney representing investors - now creditors - in Slatkin's bankruptcy. "It's his act, unless somebody colluded with him, and there's no evidence I know of to that."

Neuman's apparently clean slate has set him up for a remarkable recovery in the midst of the scandal: Barring any late changes, he will buy the 20 Oregon properties from the bankruptcy trustee for about 45 cents on the dollar.

Hotel's $6 million loss

Slatkin, who worked and lived in Santa Barbara, threw money in many directions, often without thorough research, according to investigators. His involvement in the renovation of the Mark Antony Hotel exemplified that, producing, in the trustee's estimation, a loss of up to $6 million.

Meanwhile, Slatkin's computers cranked out quarterly statements exaggerating gains from investments often never made. Investors, including Neuman, paid capital gains taxes on profits they never pocketed. His operation ultimately proved to be a Ponzi scheme, in which early investors are repaid not by profits, but instead by money collected from later investors.

But as the scheme grew, few questioned Slatkin's credibility or methods.

His reputation seems to have been primarily based on three factors, according to the trustee's report: (1) substantial returns (albeit completely fabricated) as reported on the investor monthly statements provided by Slatkin; (2) the investors' ability, at least until the latter stages, to withdraw money without difficulty from their accounts; (3) Slatkin's appearance of expertise based on his opportune investment in the startup of Earthlink, a nationwide Internet service provider whose value skyrocketed in the '90s.

Slatkin invested $75,000 in the startup of Earthlink in 1994. By 2000, his portion of the company was valued at $122 million.

The trustee's report noted: "With the notable exception of his Earthlink investment, for the most part Slatkin's investments achieved far from stellar results. The Trustee has come to the sad, but inescapable conclusion that tens of millions of dollars, supposedly wisely invested in seasoned and liquid assets capable of providing a meaningful return, were in fact invested in highly speculative and illiquid ventures and that much of the invested funds have been lost as a result of those imprudent investments."

"By the end of 2000, the actual funds required to maintain Slatkin's hypothetical investment structure approximated $130 million annually," the trustee reported. "This was an unattainable sum because Slatkin had dissipated many millions of dollars that had been entrusted to him and he did not possess the funds required to generate this large return."

The scheme unravels

The scheme began to unravel last February, when retired venture capitalist John Poitras, who lived outside of San Jose, Calif., transferred $10 million to Slatkin for investment.

"Instead of making investments for Poitras, Slatkin, as he had typically done, used the bulk of those funds to pay off other investors and to pay personal expenses," the trustee reported.

Later that month, Poitras - citing a gut instinct - requested the return of his money.

Slatkin stalled, and Poitras filed suit on April 11, serving writs of attachment to freeze Slatkin's assets. On May 1, Slatkin filed for Chapter 11 bankruptcy. Soon after, the FBI and the IRS conducted raids on Slatkin's homes and businesses.

"The Ponzi carousel finally ground to a halt," the bankruptcy trustee wrote.

The trustee's primary function is to track down Slatkin's assets, liquidate them and repay investors as much as possible. But Slatkin's investments ranged from bad to worse, leaving nothing to liquidate in many cases.

Neuman's Mountain Park Development company was one of 15 Slatkin investments shown to have remaining value. And it may prove to be one of the easiest to liquidate because Neuman has offered $5.25 million (subject to overbid) that will soon go before the bankruptcy judge in Santa Barbara.

In his report, Neilson said that he had personally inspected almost all of Slatkin's $11.5 million in Oregon real estate investments and that his professional appraisers had established approximate fair market values. Draft documents have been exchanged and once they are revised, finalized and signed, the sale will go before the bankruptcy judge.

"The real properties (except the Hotel and the Resort) included in the sale to Neuman will generate approximately their original purchase price," Neilson reported. "However, when factoring in the cost of the Hotel and the Resort, the Estate will suffer a loss of approximately $7 million due to this imprudent investment by Slatkin."

Prominent properties

The trustee reported 20 real estate holdings in Southern Oregon in which Slatkin invested (see chart). Neuman said much of the property is inventory for future developments. The most notable are the Mark Antony/Ashland Springs Hotel, Lake of the Woods resort and a $2 million property on Emigrant Creek Road, where Neuman now resides:

* The Mark Antony Historic Property, LLC (The Ashland Springs Hotel). Mountain Park is the sole member of Mark Antony Historic Property, LLC, formed in 1998 with Neuman as manager.

"The Ashland Springs Hotel (is) a recently remodeled 70-room hotel in downtown Ashland, which re-opened in December 2000," the trustee reported. "The total cost of the Hotel, including assumption of debt, is close to $9.8 million. That results in an average cost of almost $140,000 per room. The Hotel has been tastefully but sumptuously restored in order to maintain its Historic Property designation. There are financial benefits to doing so, but those benefits do not make the Hotel financially viable. Ashland is famous for its annual Shakespearean festival. Unfortunately, the festival lasts only approximately six months and the remainder of the year the Hotel will almost certainly suffer a severe drop in bookings.

"Even if the Hotel was booked year-round, it would not generate sufficient revenue to provide any return on the investment. Based on the professional input of hotel specialists engaged by the Trustee, the value of the Hotel may not even exceed its existing $3,855,000 debt, let alone its $9.8 million cost. Thus, the Estate will lose approximately $6 million due to Slatkin's lack of investment foresight."

* Lake of the Woods Resort, LLC: Mountain Park is also the sole member of Lake of the Woods Resort. Neuman is its manager. The resort's principal asset is a lake-front resort on land leased from the U.S. Forest Service in Klamath County. It occupies 18 acres and includes 16 cabins, a lodge with a restaurant and lounge, a 30-space campground, and a marina.

"The Resort is located in a pristine setting in the Cascades. The total cost of the resort - including refurbishing - was approximately $1.8 million. Not withstanding its beautiful setting," the trustee said, "the resort's existing revenues do not begin to justify the $1.8 million cost from a revenue perspective. As a result, in the proposed sale to Neuman, the Estate will suffer a loss of approximately $800,000.

* Topridge Oregon, LLC, a partnership between Neuman and Slatkin was formed in 1998.

"Slatkin capitalized Topridge Oregon at its inception by contributing approximately $1.8 million. Its principal asset is a 246-acre property and improvements located approximately two miles from Ashland at 953 Emigrant Creek Rd. The improvements on that property include, among others things, a 7,710-square-foot house built in 1995. Its present mortgage is $180,000."

* There's also a 6.13-acre parcel on Strawberry Lane, on a high ridge in northwest Ashland, acquired in 1991 for $185,000. It's the only Oregon property in which Slatkin's name is on the tax rolls. The land with panoramic views of Table Rocks, Grizzly Peak and Ashland is being held for development as a seven-parcel residential subdivision.

Once Judge Robin Riblit signs off on the sale of assets, federal bankruptcy laws prevent creditors from seeking reparations from successful bidders. Neuman's share of the properties is not included in the bankruptcy.

"Whoever buys the assets owns them free and clear of creditors,"' said Reitman. "Creditors don't have the right to attach a particular asset; their only recourse is through the bankruptcy court."

Should Neuman gain full control over Mountain Park Development, Topridge Oregon, Mark Antony Historic Property and Lake of the Woods Resort LLCs as well as the Strawberry Lane parcel, he will be legally protected from suit by other creditors.

Partner's misdeeds stunning

Neuman still is somewhat shell-shocked at his partner's financial demise.

"When I found out about his bankruptcy and found out about all of these things, it was kind of surreal," he said. "I can't pass judgment, because I really don't know what happened. I'm sure some day I will."

Before the scandal bubbled to the surface, Neuman talked on the phone to Slatkin from time to time. Then things changed.

"Before, when I talked to him, he just said, there are some really difficult situations," Neuman recalled. " 'Doug, I can't talk to you, I'm just in the middle of an investigation,' and all of that."

From that point on, Neuman distanced himself from Slatkin.

"When this thing gets resolved, I'm sure I'll know what happened," Neuman said. "Without having the information, what do I do? As a person that knew him, I'm not judging him until I find out what happened."

Karen Darling, who sold Slatkin the Strawberry Lane land 11 years ago, has only vague memories of meeting the man known as the investor for Hollywood celebrities, who included actors Anne Archer and Giovanni Ribisi; director Armyan Bernstein ("Spy Game," "Air Force One"); and CNN/Fox commentator Greta Van Susteren.

"One time before, one of the Realtors here asked me if I remembered meeting him," Darling said. "He was up here with Doug and I met him for about 30 seconds."

Nancy Van Landingham, a former agent at Gateway Real Estate, lived in Ashland from 1979 to 1998 when she and her husband returned to Santa Barbara. She was the agent in the Strawberry Lane deal, but only recently has learned much about Reed Slatkin.

"There are people here that absolutely hate him," Van Landingham said.

That was mild compared to what was reported in the Los Angeles Times and Santa Barbara News-Press, where creditors were quoted calling him a "monster" and "financial predator."

Neilson has sold some of Slatkin's assets, including a wine collection - appraised at $35,000 - for $133,614.

Perhaps all along, Slatkin knew his financial rock would one day crumble.

Two copies of a 1988 hand-written note were among the millions of pages scoured by investigators. The note, known to Church of Scientology members as a "knowledge report" where Scientologists report ethical violations to their church, admitted: "Instead of working on stocks, I was working on fabricating statements."

On the Net: www.slatkinfraud.com & www.slatkin-investors.com

Monday: Reed Slatkin's longtime associate and friend Doug Neuman was a low-profile Ashland developer until Slatkin's investments helped propel him into local prominence.

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Sidebar: Slatkin, many investors were Scientologists

Hollywood stars are among those who trusted him with their money

In a 2000 Securities and Exchange Commission deposition, Reed Slatkin detailed how he embraced Scientology as a young man, how he had a supernatural experience and later become an ordained Scientology minister.

There are conflicting opinions as to whether the Church of Scientology profited from Slatkin's dealings. One thing is certain: Many of the Reed Slatkin Investment Club members were Scientologists.

Those members of both the investment club and the church include a list of celebrities, among them: "Fight Club" producer Art Linson; EarthLink Internet service provider chairman Sky Dayton, who graduated from Delphian High School in Sheridan, Ore., in 1988; Grammy-winning musician Mark Isham; actors Joe Pantoliano, Anne Archer and Giovanni Ribisi; director Armyan Bernstein ("Spy Game," "Air Force One"); and CNN/Fox commentator Greta Van Susteren.

While Scientology has been embraced by a wide variety of celebrities and professionals, it also has been labeled a cult by some. It has come under attack in Europe by government officials who say they don't like the organization's secrecy and have accused it of brainwashing members and recruiting people simply to make money.

The church, founded in the early 1950s by the late science-fiction writer L. Ron Hubbard, claims 8 million members worldwide. It has had legal status as a church in the United States since 1993. Hubbard's son, Arthur, is listed among the Slatkin investors.

Slatkin and his wife, Mary Jo, worked full-time for the church from the mid-'70s until 1984. In 1983, he began an investment apprenticeship under Scientologist Robert Duggan, as did Ashland developer Doug Neuman.

Among Scientology's tenets and goals, it:

* Aims to unleash the godlike potential of each person's immortal soul.

* Values both science and spirituality.

* Supports environmental causes and healthy living.

* Entrusts women, minorities, and young people with key leadership roles.

* Promises that members will accumulate power and position as they advance in training.

Scientologists do not believe in a personal God but rather in an Infinity or "The All-ness of All."

Neuman, the Ashland developer, said the religion has spurred him on in his endeavors.

"Scientology is my own personal philosophy," he said. "It gives me the tools to do a lot of the things I do. It's helped me do some very, very tough projects. It's something I've been involved in for a long time and I'm proud of that. But it doesn't have anything to do with my business."

On the Net: www.neuereligion.de/ENG/Flinn/