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Trustee: 'Reed did not do this alone'
The Slatkin Saga / The Investigation

4/2/02
By MARK VAN DE KAMP
NEWS-PRESS STAFF WRITER

The Reed Slatkin scandal is far from settled.

Already, the man who admits bilking hundreds of clients is naming names.

In the words of bankruptcy trustee R. Todd Neilson, "Reed did not do this alone" -- referring to defrauding investors of $254 million over 15 years.

Mr. Slatkin has strong incentive to cooperate with investigators. Failure to do so under the terms of his plea agreement with the U.S. Attorney's Office last week means prosecutors will be free to seek any sentence up to the maximum, which is 105 years in prison.

So far, no one else has been charged in the case, but a statement of facts that is part of his plea agreement mentions three alleged accomplices. Also, the bankruptcy trustee is seeking interviews and documents from dozens of individuals, banks and other institutions.

At least three former business associates, including his bookkeeper, were accomplices in his conspiracy to obstruct a federal investigation into his investment practices that began in 2000, Mr. Slatkin claims.

Jean Janu of Santa Fe, N. M. , who served as his bookkeeper for six years, and two others, consultants Dan Jacobs and Didier Waroquiers, are named as accomplices in his conspiracy to obstruct the Securities and Exchange Commission probe by preparing fake investor documents. Records claim that Ron Rakow of Hope Ranch, a convicted felon in a previous fraud scheme, solicited people to invest with Mr. Slatkin.

Also, a handful of other people Mr. Slatkin knew for many years and employed are already being questioned about the money trail.

They include convicted felon Christopher Mancuso, who set up a Swiss telephone line that forwarded calls to Mr. Slatkin's Goleta office in an apparent attempt to create the false image that Mr. Slatkin's Swiss bank accounts were real, according to the bankruptcy trustee's investigative report. Another former partner is Richard Levine, who co-owned several businesses with Mr. Slatkin and who knew by 1989 that Mr. Slatkin had been making fraudulent representations about his investment results, the report said.

Prying out the truth, settling accounts and determining whether others share culpability are all expected to drag on for years. None of these people has been accused, charged or indicted.

Mr. Slatkin has denied requests for interviews with the News-Press, but is scheduled to speak with federal investigators.

In coming months, the case will unfold in other ways:

Investors who received returns exceeding their deposits will be sued to return gains; banks and companies will be pressured to surrender Mr. Slatkin's holdings. Victims lost homes, retirement money, personal savings, and their kids' college money and will try to repair that damage.

That's not all. The wide probe will consume perhaps as much as $15 million, eating deeper into the small sums scammed investors hope to recover. Only $30 million in assets have so far been found in Mr. Slatkin's estate.

Eleven months, thousands of hours of investigation and almost 3 million pages of seized documents into this scandal, and there's still a long way to go.

QUESTIONING CONNECTIONS

The probe is shifting from Mr. Slatkin to a circle of his former employees and associates.

Since last June through Monday, investigators have requested 81 special examinations of banks, companies, members of the Slatkin family and individuals who worked with him. The purpose is to obtain information and documents to trace the flow of money.

A key figure is Ms. Janu, the bookkeeper who made Mr. Slatkin her only client starting in 1996. Records show she was paid $1.13 million for her services. Ms. Janu served as his bookkeeper since 1990, working in New Mexico where she lived and on travels to Santa Barbara to meet with him.

According to the plea statement, Ms. Janu fabricated lists of liquidated investor accounts that she knew would be provided to the SEC.

Ms. Janu and her Albuquerque, N. M. , attorney, Clifford C. Gramer Jr., did not return phone calls seeking comment. Her other attorney, John D. Cline, said he would not comment.

Her attorneys are opposing an order filed by the bankruptcy trustee to compel her to produce documents on grounds that would violate her Fifth Amendment rights against self-incrimination.

But last week the trustee and the creditors committee responded that she cannot use that shield because the right against self-incrimination does not protect against the production of documents already known to exist.

The statement of facts also states that Mr. Jacobs and Mr. Waroquiers assisted Mr. Slatkin in "maintaining the fictions" that Mr. Slatkin had approximately $217 million secure in a Swiss bank account.

"Beginning in or about November 1999, and continuing until a date unknown... Slatkin, Jean Janu, Dan Jacobs, Didier Waroquiers, and others, knowingly conspired and agreed to obstruct the SEC proceedings," the statement says.

The News-Press was unable to locate Mr. Jacobs and Mr. Waroquiers for comment.

Mr. Jacobs provided consulting and advisory services to Mr. Slatkin since 1974, and by 2001 was charging Mr. Slatkin a $40,000-per-month retainer, records show. Also, Mr. Jacobs received a payment of $880,000 from Mr. Slatkin on Nov. 29, 1999, the statement of facts issued last week shows.

In about 1985, the trustee's report said, he met Mr. Mancuso and Mr. Rakow, who were each convicted of federal crimes arising from an $80 million marketing scam.

While Mr. Rakow and Mr. Mancuso were in prison, Mr. Slatkin helped invest money for them. According to the Kansas City-based bankruptcy trustee in that case, Chris Redmond, Mr. Slatkin invested $660,000 the pair had stashed in an offshore account.

From his prison cell, Mr. Mancuso wrote, "I know we will do great things in the future together."

Years later, Mr. Rakow solicited investors to entrust money to Mr. Slatkin, according to court documents. And, after Mr. Slatkin told SEC investigators in early 2000 that his investors' money was safely being held in what turned out to be a nonexistent Swiss account, it was Mr. Mancuso who set up a phone line with a Swiss number that rang at Mr. Slatkin's Goleta office, documents show.

Describing it in a memo to Mr. Slatkin, he said: "When you dial the number the line has been conditioned to provide a truly genuine European ring (nice touch, huh?)."

The trustee also wants an explanation about why Mr. Slatkin paid Mr. Mancuso $3.7 million in 1999 for a property in Newport Beach that Mr. Slatkin was selling to Mr. Mancuso -- a deal alluded to in the trustee's report. Also, Mr. Mancuso made $2.4 million more than he invested with Mr. Slatkin.

Mr. Mancuso's attorney, Brian McCormack of Santa Ana, did not return repeated phone calls seeking comment.

A former road manager for the Grateful Dead, Mr. Rakow was imprisoned in 1987 on federal fraud charges related to his role in an $80Êmillion marketing scam. The Culture Farms scam took money from 28,000 investors who bought $40 milk cultures with the enticement that the company would buy back the active cultures at a higher price and use them to create beauty products.

In a 1991 deposition, Mr. Rakow said he was picked to work the scam because he was "amoral."

The U.S. Bankruptcy Trustee in that case then asked him, "Amoral being the opposite of moral?"

"I think immoral is the opposite of moral. I think amoral is completely devoid of morals," Mr. Rakow answered.

This time, Mr. Rakow said through his attorney, he is the victim.

"Ron was in fact like everybody else involved; he was taken in by Reed Slatkin," said his attorney, Robert Sanger of Santa Barbara. "Reed Slatkin went to extremes to convince people that he was legitimate. Ron Rakow is a victim just like many, many other people in this situation."

"There's nothing in that plea agreement that indicates that Mr. Rakow did anything illegal," Mr. Sanger said. "There is no doubt that (Mr.) Rakow makes an attractive target because of his prior contact with the law .... but that doesn't mean he did anything wrong with Mr. Slatkin."

Mr. Rakow and his companion, Denise Del Bianco, have been asked to meet with investigators to discuss their business relationship with Mr. Slatkin.

Mr. Rakow, his family and entities controlled by them received at least $6 million more than they invested with Mr. Slatkin, records show. When the couple's Hope Ranch home was raided last June as part of the Slatkin probe, FBI agents seized $388,000 cash from the home.

Mr. Levine is a Tarzana businessman who co-owned an insurance company with Mr. Slatkin and controlled accounts Mr. Slatkin held at several major investment banks. He is named in the bankruptcy trustee's December report as having at least some knowledge of what his partner was up to.

"The trustee and (creditors) committee have reliable evidence that by not later than 1989, Levine knew that Slatkin had been making fraudulent representations about his investment results," the report said.

After being associated with Mr. Slatkin in media reports, Mr. Levine, a fellow Scientologist, said he is humiliated.

"The notoriety and the presumption of guilt by association that is fostered by the articles and reports which link me to alleged fraudulent activities of Reed Slatkin by referencing selected portions of his deposition or the trustee's report, have undermined my business and my business relationships," Mr. Levine said in a declaration to the bankruptcy court.

Mr. Levine's Los Angeles-based attorneys, Neil Freedman and Donna Yamini, did not return repeated phone calls seeking comment.

Mr. Levine claims he lost many potentially profitable business opportunities, feels shunned by some Scientologists, and his children's friends no longer associate with them.

He wrote to the court asking for a protective order sealing the document from the media and public to shield him from embarrassment.

LIQUIDATION

It was only a matter of time before Mr. Slatkin's world came crashing down around him.

It will take time, however, for investigators to locate and sell his assets.

Many of his associates believe that in late 1998 or early 1999, when his EarthLink stock was worth its most -- about $200 million -- Mr. Slatkin could have dissolved his investment club and at the very least paid back all the money given to him to "make the estate whole."

But the stock market fell, erasing trillions of dollars of value from numerous stocks and funds.

Investigators who have done the accounting work said that even then, Mr. Slatkin would have been short more than $50 million. Also, he would not have been able to hand over the money investors thought they had, based on the fraudulent quarterly statements, sources said.

There were close calls, when he just missed being found out. In 1999, U.S. Securities and Exchange Commission officials foraged around but were convinced by Mr. Slatkin's pledges under oath that he was shutting down his club.

Instead, Mr. Slatkin took in another $100 million, then topped himself in 2000 by raking in $108 million, making the hole deeper.

"We're systematically reviewing each and every asset," bankruptcy trustee Neilson said. "... This will probably take years as well. We don't want to precipitously move assets. We don't want to have any fire sales here. We're taking our time."

The hunt for the missing millions is full of disappointment.

Though Mr. Slatkin handled at least $593 million from investors over 15 years, there's nowhere near that sum to be found. His pot of gold is now only worth about $30 million, the trustee said.

But more will found, Mr. Neilson said. Just give him time.

Several million dollars has been liquidated through the sale of some stock, partnerships, Mr. Slatkin's La Cumbre Country Club membership in Hope Ranch, his wine collection and the Goleta house that formerly was the headquarters of the Reed Slatkin Investment Club.

The house at 890 N. Kellogg Ave. fetched $762,000, the country club membership about $130,000. On March 19, a bankruptcy court judge in Santa Barbara approved the sale of a Solvang property for $1.72 million.

Prospective buyers are eyeing Mr. Slatkin's former homes in Hope Ranch, which could bring $4 million or more.

The trustee blocked two of Mr. Slatkin's aircraft purchase deals. Made two years ago, Mr. Slatkin deposited more than $250,000 for the purchase a $14 million Lear jet and another plane for $8.6 million. The trustee is getting the deposit returned to the estate.

Creditors hope the stock market surges because the trustee wants to sell about a million shares of Mr. Slatkin's EarthLink stock. The share price has recently dropped to about $10, well off its 52-week high of $18.92. The trustee has already sold 200,000 shares for more than $3 million. At a peak in January 1999, Earthlink shares were worth $89.25.

Then there is the matter of recovering millions of dollars from investors, who the trustee contends received far more than they invested. The top 75 profited by $151 million; the range is $630,000 to a high of $5.86 million per person. The next 371 made $44.4 million.

Predictably, this alarms those who reaped profits. They've already paid taxes on those gains.

One local longtime investor said even though he is listed as a "profiteer" he looks at this as a loss. Coming out of retirement he is back working as an engineer. His investment with Mr. Slatkin was his 401(k). His so-called profit was the interest income he and his wife used to pay living expenses.

"We depended on that distribution," he said. "We depended on that cash flow."

Now, he said, they have a son in college and a mortgage to meet, "We haven't been pushed to the point of selling the house, but that's still a possibility," he said. "What concerns me most is the possibility that we'll be sued for what they want to recover and what has already been spent. That will wipe us out."

These stories do not dissuade Mr. Nielson. He intends to begin filing the first lawsuits to recover funds within a matter of months, following "demand letters" that will be sent out within several weeks.

MILLIONS INVESTED LOCALLY

Mr. Slatkin invested approximately $7 million into five Santa Barbara-area businesses, according to court documents. There could be more. Remaining assets could be seized and sold by the trustee.

His connections to local companies dates back to his earliest days as an investor in 1983 and 1984 when Robert Duggan, now president of Computer Motion, taught him how to pick stocks.

Those early years were good, Mr. Slatkin said.

"We probably had a couple of two-or-three-hundred-percent years," he told SEC investigators back in February 2000.

Although he stopped investing with Mr. Duggan, Mr. Slatkin ultimately bought about 74,000 shares of Computer Motion, the Goleta-based medical device firm run by his old friend.

Today those shares are worth approximately $300,000. Because the company has nearly 17 million shares outstanding, it's unlikely to be affected if and when Mr. Slatkin's shares are sold.

He also remains one of the top 10 investors on a percentage basis in privately-held Santa Barbara Connected Systems Corp., which turns 6 years old this July.

He owned 790,778 shares in the firm as of last June, according to documents obtained by the trustee. He has not invested with the company since April 1998, said Dwight Buck, president and chief executive officer, and the company has issued two more series of stock, diluting the significance of Mr. Slatkin's holdings.

So far, the company has not been contacted by the trustee about the assets, Mr. Buck said.

"He was a major investor, going back to initial common stock," Mr. Buck said. "I spent quite a bit of time face-to-face with Reed and an analyst to review our business plan in-depth. Reed was a very bright guy. He was one of the smartest investors I'd ever met. Reed had a good sense of business metrics, areas of technology."

Mr. Slatkin was "all business, never taking more time than he needed to," Mr. Buck said.

But he never said hello to another local company in which he invested $1.5 million. Alliance Manufacturing Software, based in Santa Barbara, made a Windows product for computers.

"He lived in Hope Ranch and the company was in Santa Barbara, but I never met the man," said William Urschel, who founded the firm. "He never bothered to look at the company. No contact at all. That's kind of bizarre....it shows, I think, how irresponsible he was."

A NEW LIFE

His days of freedom are numbered for Mr. Slatkin, now 53. When he surrenders to authorities in federal court in Los Angeles this month, he will be taken into custody and go to prison.

The 15 charges carry a maximum sentence of 105 years in federal prison but sentencing guidelines will most likely bring that down to the range of eight to 15 years. He also faces fines up to $3.75 million.

Mr. Slatkin also has agreed to pay full restitution, which is at least $254 million -- but that hardly appears realistic.

Other conditions include Mr. Slatkin forfeiting his right to repatriate and to waive any attorney-client privileges he held during the duration of his scheme, with the exception of legal representation after he declared bankruptcy.

As Richard Wynne, attorney for the creditors, 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."