Millions 'lost in a financial black hole'
Santa Barbara News-Press
3/31/02
By SCOTT HADLY
http://news.newspress.com/toplocal/033102slatday1.htm

A full year before his investors first learned there was something rotten in Santa Barbara, Reed Slatkin was already feeling the heat. Securities and Exchange Commission investigators brought the friendly and smooth-talking 53-year-old to Los Angeles for questioning in January and February of 2000. They wanted to know more about the investment deals Mr. Slatkin spun from the suburban Goleta home he had converted into offices from which he operated his "investment club."

But instead of confessing to any financial sins, the EarthLink co-founder and former ordained minister of the Church of Scientology began to proselytize about the teachings of the late science fiction writer and Scientology founder L. Ron Hubbard. "It's important to me, and it's been the basis of almost everything I've done in life," he told them. Mr. Slatkin then pulled out his copy of Mr. Hubbard's book "What is Scientology Doing in the World?" and started reading: "The aims of Scientology are civilization without insanity, without criminals and without war, where the able can prosper and honest beings can have rights, and where man is free to rise to greater heights."

Mr. Slatkin rose to great heights -- an estate in Hope Ranch, a jet at his command, a half dozen vehicles, properties in Oregon and the Santa Ynez Valley, and personal wealth that was once pegged at $200 million. Now comes the fall.

In a 33-page plea agreement with federal authorities Tuesday, Mr. Slatkin, now bankrupt, admitted he is guilty of 15 counts of fraud, money laundering and conspiracy.

The former Hope Ranch resident and private investor now faces up to 105 years in federal prison, but will likely only serve between 12 to 15 years if he cooperates, authorities said.

Mr. Slatkin is taking responsibility for operating one of the largest Ponzi schemes in history, fleecing at least $254 million from more than 800 investors since 1986. He has agreed to pay restitution, to the extent of his ability, and to completely divulge his assets.

He must follow through with the agreement and help investigators track down any co-conspirators and locate his investors' missing money.

The money came from Internet moguls, actors and big-time Hollywood producers, but Mr. Slatkin also acknowledges that he took in cash from dozens of his longtime friends and neighbors in Goleta, Hope Ranch and Montecito. But the full story -- what happened to the hundreds of millions of dollars Mr. Slatkin took in, and how it was either lost on bad investments or siphoned off for the benefit of his friends, family and associates -- has yet to be told.

Even federal prosecutors concede that Mr. Slatkin had an uncanny ability to make people feel at ease handing over their cash for his care, and a knack for slipping out of tight spots.

"Early on, he had everyone so snowed that they thought he just screwed up and lost some money on a dot-bomb, and they just hoped they would get most of their money back," said John Poitras, of Santa Ynez, who lost $15 million. "Now the most frequent question I get from creditors and the public is 'Why is he not in jail?' They all want him to go to jail now, like yesterday, and for a long time. They don't even ask me how much money they might get back. They want him gone."

HIGH ON A HILL

Mr. Slatkin, facing the prospect of spending much of the rest of his life behind bars, is waiting out the inevitable in a $4,000-a-month rental high above Hale Park in Montecito, with a view of the craggy peaks of the Channel Islands.

He's been living off borrowed money from family and friends and has paid his attorneys up front, according to sources. His creditors want to know more about where the money is coming from, and have filed requests with the court asking for an accounting. They want to make sure the money is not from cash he's hidden away somewhere that really belongs to his estate.

Investors who heard about how he's living or spotted him over the last few months -- noshing at the Paradise Cafe, pumping iron at Gold's Gym downtown, or swatting a tennis ball around the court at the Cathedral Oaks Country Club in Goleta -- want him put away as soon as possible.

"They should put him in jail and make him suffer like the people he hurt," said a frail 83-year-old widow and former neighbor, who contends she was made desperate in her golden years after she lost more than $113,000 from her life savings.

But friends and neighbors say Mr. Slatkin hasn't been living a life of luxury, oblivious to his fate and the consequences of what he has done.

He told investors this summer that he "isn't hiding," but since then, he has been silent. He has denied requests for interviews. And he won't even talk to friends who believe that he was "taken in by the wrong people."

Mr. Slatkin tells them he's "taking the Fifth," whenever asked about what happened, they say.

"He doesn't want to talk about what happened to me or explain it," said one associate, who did not want his name used because he, like other sources interviewed by the News-Press, may also face both criminal and civil liability. The only thing Mr. Slatkin tells his friends is this: His life isn't easy now, and it will soon get worse.

He is borrowing money from his parents and in-laws to cover the rent, sources said. His wife is working again. To get around town, he drives his sons' Toyota Prius or Jeep Cherokee. His own cars will soon be auctioned off by the U.S. Bankruptcy Trustee.

His family may not be immune to scrutiny either.

To recover more money for creditors, the court is considering requests that his sons turn over their cars, that his wife hand over her engagement ring, an Ebel watch and a tourmaline broach.

One of his sons, who is struggling to get into the music business, recently petitioned to have his name changed from Justin Slatkin to Justin Michael, court records show.

Mr. Slatkin, who once estimated his net worth in the hundreds of millions, has been working part-time as a landscaper, sources said.

"He's not living a lavish lifestyle, far from that," his criminal defense attorney Brian Sun said. "He's living pretty much in isolation. Here's a guy who was respected, loved by hundreds of people a year or so ago, who is now a pariah, shunned by his church and his lifelong friends, whether it is deserved or not."

The Church of Scientology, where he first turned for help as a 14-year-old boy after his father committed suicide at their Detroit home, will no longer be a refuge. Earlier this month he was excommunicated for his deeds. Any hope of leniency from the court may hinge on his willingness to implicate others.

He promised to cooperate with federal prosecutors and bankruptcy investigators, said Mr. Sun, a former assistant U.S. Attorney who is now a partner in a Santa Monica law firm.

"He has been and continues to cooperate with the trustee," said Mr. Sun, who led the team that successfully defended Los Alamos National Laboratory nuclear scientist Wen Ho Lee against espionage charges. "Reed sincerely believes he can provide valuable assistance to maximizing the recovery for his creditors."

Last week, his defense team said, "Mr. Slatkin's agreement with the government is a reflection of his decision to accept full responsibility for his conduct and move forward by continued cooperation with both government authorities and his creditors."

However, some still have a hard time believing Mr. Slatkin's commitment.

In the plea agreement the U.S. Attorney's Office says as much: "The government currently questions the veracity of certain information provided by (Mr. Slatkin) regarding, among other things, the alleged transfer and the alleged legitimacy of transfers of certain assets including real estate, artwork, and gold, the existence of foreign assets, and the potential destruction of computer evidence."

The story of Mr. Slatkin doing manual labor as a landscaper is hard for some of his former investors to swallow.

"I'm at the point where if Reed told me that the sun rose in the east and set in the west, I'd have to go out and check that," said Michael Azeez, a New Jersey businessman who, along with his father, mother and sisters, lost all the $42 million they gave to Mr. Slatkin to invest.

'GREED SLATKIN'

Described by some as a cross between Gordon "Greed is Good" Gekko in the film "Wall Street" and the trustworthy Mr. Rogers from the PBS children's television show, Mr. Slatkin's standing as a stock market sage was pumped up by claims that he got his small group of investors out of the market just before the crash in 1987.

Then, in 1994, he turned a $75,000 investment of seed money in the nascent Internet-provider EarthLink into a $200 million share in the company. His reputation and personal wealth soared.

Despite dips and dives in the market over the years, the regular quarterly statements Mr. Slatkin sent to his investors never showed a loss.

He told his investors he kept it all in a Swiss account to ensure its safety.

He told the ones who wanted high returns that he would get them profits in excess of 25 percent. He told those who wanted to be more cautious that he was very conservative.

"He was a good listener," said Mr. Azeez. "He gave different people different stories or different solutions to their investment based on what they wanted to hear."

He told the Azeez family that most of their money was in T-bills. But it was all a sham, according to R. Todd Nielson, the U.S. Bankruptcy Trustee. In fact, most of the money he took never was invested, and much of the rest of it was "lost in a financial black hole," Mr. Nielson said in his December 2001 report on the case.

The plea agreement spells it out clearly: There was no Swiss account. The stunning returns in the quarterly statements were pure fiction. All of them.

Mr. Slatkin's scheme was "built upon the shifting sands of lies and misrepresentations," said Mr. Nielson.

Mr. Slatkin used "investor funds to operate a massive Ponzi scheme whereby he defrauded his investors by paying them returns largely with funds raised from other investors," states the plea agreement.

The bankruptcy investigation was paralleled by the work of the U.S. Attorney's Office, the IRS and the FBI.

The trustee alone amassed more than 3 million pages of financial documents and evidence, but there still are holes in what happened with the money and whether some of his associates share guilt.

So far, the bankruptcy investigation alone has cost his estate about $4 million, a bill that could climb to as much as $15 million before all is said and done. This is from an estate that right now only has about $30 million in assets. The trustee expects to recover tens of millions more by suing for the return of false profits and digging up any money that might be hidden someplace else.

Almost a year after the collapse, even long-time friends have been itching to see payback for the man they've nicknamed "Greed Slatkin."

"You couldn't have scripted a better movie," said investor Thomas Rook, a Santa Barbara chiropractor whose family and business lost more than $600,000, according to bankruptcy records. "Why it happened and what happened is an interesting story that makes good copy, but the bottom line is the money's gone."

Although the evidence against Mr. Slatkin is damning, Mr. Rook said he is reserving judgment.

"Only a very few people knew what went on here and they're not talking yet," he said. "I want to hear what they have to say."

DISAPPEARING IN THE PIT

Mr. Slatkin's scheme worked as long as he could find fresh investors willing to hand over their cash, according to the bankruptcy trustee and the U.S. Attorney's office. But the number of investors had to grow exponentially to keep it afloat.

In the last months, Mr. Slatkin cycled dozens of deposits through two accounts, all the while stringing along people trying to get their money back, according to dozens of investors.

Even as their suspicions grew, he continued to send out quarterly statements indicating profits from 24 percent to 100 percent a year, according to court documents.

To calm their fears, he sent out notes asking for investors' patience.

"Rest assured, your funds are safe and the delay has nothing to do with the current fluctuation in the market," he told investors as late as April 7, 2001.

Just a month before declaring bankruptcy, he was still taking in money. He accepted $400,000 from Kate Edelman Johnson, a Los Angeles widow who had already invested half-a-million dollars.

"He was eager to take my proffered investment and have it disappear into his bottomless pit," Mrs. Johnson said in a letter to the court.

Sorting through the paperwork to separate fact from financial fantasy has been hard work, so it's difficult to accurately peg the size of the bankruptcy.

The amount of money actually invested that has not been repaid amounts to about $254 million, according to the bankruptcy trustee.

But many investors filed claims based on how much they thought their accounts had grown. Those claims may exceed $890 million, according to estimates.

As of late last week, 527 individuals had filed claims totaling $817 million, and those numbers keep climbing.

"It isn't the biggest Ponzi scheme in U.S. history, but it's got to be in the top 10," said Richard Wynne, an attorney with the Los Angeles firm Kirkland & Ellis, which represents a committee of the creditors who lost the most money.

WHERE DID IT GO?

While most lost money to Mr. Slatkin, about 75 people thought they substantially benefited from their relationship with Mr. Slatkin, taking in $151 million more than they paid him, according to bankruptcy records.

Most of those individuals had no idea the profits were fiction. "All account statements sent to investors were fabricated," it states in the plea agreement signed by Mr. Slatkin. But other investors, including at least a half dozen locals who received $1 million to $5.8 million each, are now being singled out by bankruptcy attorneys and may attract the attention of criminal investigators.

"It's possible that certain investors knew, or should have known, of Slatkin's investment scheme," the trustee said in his December report. "What an investor knew or should have known is likely to depend on, among other things his or her specific relationship with Slatkin."

As part of the plea agreement, Mr. Slatkin has agreed to explain the relationships with individuals he says "knowingly conspired and agreed to obstruct the SEC proceedings."

"We think that he had various people that helped him facilitate this scheme," said Mr. Wynne. "I don't know how big the circle is."

The U.S. Attorney's Office specifically identifies three individuals in the statement of facts. Those include two men, Dan Jacobs in France and Didier Waroquiers in Germany, who were paid to help set up the bogus Swiss accounts, and Jean Janu, Mr. Slatkin's bookkeeper.

The U.S. Attorney also singles out Hope Ranch resident and former Grateful Dead road manager Ron Rakow as someone who helped attract new investors.

Over the next several weeks, many of those individuals -- as well as Mr. Slatkin's wife Mary Jo and sons Justin and Brett -- are scheduled to give sworn statements in the bankruptcy proceedings.

Ms. Janu's attorney would not comment for this story, and she has invoked her Fifth Amendment rights in court. Neither Mr. Jacobs nor Mr. Waroquiers could be located for comment.

"His business relationships with these people raise a lot of questions," said one source close to Mr. Slatkin. "Some of them didn't know he was engaged in a fraud, but you have to ask yourself how some of them didn't know. It's clear that some people took advantage of their relationship with Reed and made millions from it."

The short list of business associates with active knowledge of his work includes a former Santa Barbara radiologist, a local couple who acted as advisers on tech stocks, and several others who provided advice on investments.

According to the trustee, at least one person, Richard Levine, a Tarzana businessman and Mr. Slatkin's partner in several investments, knew of the fraud. "The Trustee and Committee have reliable evidence that by no later than 1989, Levine knew that Slatkin had been making fraudulent representations about his investment results," the trustee's report states.

Mr. Levine could not be reached for comment, but in court papers, he said he is devastated by the implication.

"Mr. Levine and his family have been subjected to harassment and embarrassment as a result of the media and the public distortion of the facts and misuse of mere theories and allegations," Mr. Levine's attorney said in a letter to the court. The letter asked the judge to grant a protective order keeping Mr. Levine's testimony closed to the public and media.

While a few former associates, including Ms. Janu, have invoked their Fifth Amendment rights against self-incrimination, many others are stepping forward, according to papers filed with the court.

Richard McMullin, a former neighbor, started out working as a 19-year-old "gofer" for Mr. Slatkin and went on to become one of his full-time associates. Mr. McMullin and his mother received $3.7 million more than they invested.

"He has cooperated fully with the investigation and plans to be forthcoming in his deposition to the Trustee," said Bruce Glesby, Mr. McMullin's attorney.

"Richard is as big a victim, if not one of the biggest, as anyone in all of this," his attorney said. "When all is said and done, I'm 100 percent convinced that he will not be found guilty of any wrongdoing whatsoever."

'A GOD COMPLEX'

What will Mr. Slatkin say when he finally testifies under oath about the scheme?

Some of his friends have been trying to reconcile "the idea of Reed, this wonderful, wonderful guy and Reed the fraud-monger," one former associate said.

Mr. Wynne, the attorney working with the committee, called the plea a "smart deal" for Mr. Slatkin because if he had gone to trial to contest the charges, he would have been exposed to a life term. Because the plea compels Mr. Slatkin to cooperate with investigators, it may help creditors uncover any missing money, Mr. Wynne said.

"While some of his victims certainly might have preferred that Mr. Slatkin be drawn and quartered, his plea... is an appropriate resolution to his 15-year fraudulent scheme," he said. "Mr. Slatkin will have a long time to sit in jail and contemplate what he did to hundreds of his creditors and their families."

Another former investor, George Kriste, who claims to have lost more than $1.5 million, said the next phase of the investigation will be interesting.

"The hope is that he has every incentive to be forthcoming," Mr. Kriste said. "If he's forthcoming, there are more than enough rats on this ship that we can chase."

Another twist in the case includes some of Mr. Slatkin's former associates lashing out against the actions of the bankruptcy trustee and members of the creditors committee, made up of six businessman who in all lost more than $115 million, according to court records. A number of them say the losses reported by the Azeez family and businessman George Abbott do not reflect all the money they made with Mr. Slatkin.

It's a charge the bankruptcy trustee calls bunk, but associates say Mr. Abbott and the Azeez family were among a select few who were able to purchase founders stock in EarthLink. Michael Azeez and Mr. Abbott both say those are misstatements of the facts.

"It shows you how desperate some of these people are," said Mr. Abbott, who made his EarthLink investment through someone other than Mr. Slatkin.

As for the Azeez family, they say even though they were introduced to EarthLink through Mr. Slatkin, they took an investment risk on their own. In addition, the profits they made from EarthLink were nowhere near enough to offset their $42 million loss to Mr. Slatkin.

Others feel like they're being victimized a second time.

Mr. Poitras, who lost $15 million, boils over when people say Mr. Slatkin just "stole from the rich."

"Every dollar he stole I made with my bare hands -- painting, landscaping, every kind of improvement on a terrible house on a beautiful property," Mr. Poitras said. "Am I a little guy or a big guy? I think I am a working man who got lucky, but all my money is still gone."

But some buy the argument, even if they think Mr. Slatkin is guilty.

"There is a certain amount of credence to that whole Robin Hood idea," said one former associate. "Yeah, at least in later years, he was taking money from the rich. But to me Reed had a 'God Complex.' He decided who won and who lost.

"I don't know how he rationalized what he did, but he had to have known this day was coming."