http://search.newspress.com//2002/04/02/040202slatkin.htm?now=42480&tref=1
Trustee: 'Reed did not do this alone'
4/2/02
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."
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The Slatkin Saga / The Investigation
By MARK VAN DE KAMP
NEWS-PRESS STAFF WRITER
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