Earthlink Co-Founder Charged by U.S. for Ponzi Scheme Role
Tue Mar 26, 7:27 PM ET

By: Pat Maio

Dow Jones Newswires

LOS ANGELES -- As part of a plea bargain, EarthLink Inc. (NasdaqNM: ELNK - news) (ELNK) co -founder Reed Slatkin on Tuesday admitted that he defrauded investors in a $593 million Ponzi scheme, according to the U.S. Attorney's Office in Los Angeles .

A spokesman with the U.S. Attorney's Office said that Mr. Slatkin, 53 years old, agreed to plead guilty to 15 felony charges, including five counts of mail fraud, three counts of wire fraud, six counts of money laundering and one count of conspiracy to obstruct justice during an investigation being conducted by the U.S. Securities and Exchange Commission (news - web sites).

He also acknowledged that he is responsible for at least $254 million in losses.

The charges carry a maximum of 105 years in prison and fines of up to $3.75 million, the spokesman said.

In a statement of facts in a plea agreement filed with the U.S. District Court in Los Angeles on Tuesday, Mr. Slatkin admits that he portrayed himself as a successful financial adviser and provided investors with account statements which purported to show that investors were achieving above-market returns on their investments. However, Mr. Slatkin generally did not buy securities as he told investors. Instead, Mr. Slatkin provided victims with false account statements that showed fabricated returns.

Mr. Slatkin used the bulk of investor funds to operate a Ponzi scheme in which he operated a fraud by paying investors returns that were largely made up of funds raised from other investors, according to a statement issued by the U.S. Attorney's Office.

When the SEC began investigating Mr. Slatkin's activities, Mr. Slatkin conspired to obstruct the investigation by giving the SEC false testimony and documentation to conceal the fact that his investment program was a giant Ponzi scheme and that his investor account statements were complete fabrications designed to "lull and deceive investors," the statement said.

As part of the conspiracy, Mr. Slatkin, with the assistance of others, fabricated correspondence and account statements to make it appear that a nonexistent, purportedly legitimate Swiss brokerage company held a significant amount of investor funds.

Mr. Slatkin will be arraigned on the charges in the U.S. District Court in Los Angeles next month. Mr. Slatkin has agreed to surrender to federal custody at that time.

In 1994, Sky Dayton and partner Mr. Slatkin created EarthLink using just 10 modems. A year later, they had revolutionized the Internet Service Provider business by offering the first flat-rate Internet service for $19.95 and were providing access in nearly 100 U.S. cities.

Mr. Slatkin later became an investment manager. The SEC accused Mr. Slatkin of operating the Ponzi scheme shortly after he filed for bankruptcy in May 2001 .

Mr. Dayton has remained chairman of EarthLink, which reported $1.2 billion in sales last year after merging with Atlanta -based MindSpring Enterprises in 2000.

-By Pat Maio, Dow Jones Newswires; 323-658-3776;
patrick.maio@dowjones.com