Ruling Gives Boost to Slatkin Investors’ Suit

Investors who saw more than $225 million evaporate when Earthlink Inc. co-founder Reed E. Slatkin’s long-running fraud collapsed won a court round Friday in their efforts to recover funds from the relatively few Slatkin investors who profited -- a group including celebrities such as actor Peter Coyote and former supermodel Cheryl Tiegs.

A bankruptcy judge in Santa Barbara ruled that Slatkin’s written agreement last year to plead guilty to fraud, conspiracy and money laundering establishes clearly that his investment empire was a scam from its beginning in 1986. That will make it easier to reclaim what the bankruptcy trustee contends were “bogus profits,” funds paid to some investors at the expense of others to disguise 15 years of deception.

“It really helps narrow what’s at issue,” said R. Alexander Pilmer, an attorney for the trustee. “We’re now not arguing if this was a Ponzi scheme, or if Reed Slatkin had the intent to defraud anyone, but simply how much money did people get.”

Slatkin’s scheme took in more than $550 million during the 15 years it operated. Pilmer said the bogus profits totaled more than $180 million, with the top 75 investors coming out ahead by $151 million. Trustee R. Todd Neilson isn’t seeking the return of any principal but wants to reclaim the profits and distribute them to the investors who lost money, Pilmer said.

The investors who came out ahead contended that they also had been taken in by Slatkin and argued that his investments were profitable, at least early on.

Coyote, who is being sued for $943,000, couldn’t be reached for comment. He has said his profits were far less than that amount and that he was relying on the money for retirement. Tiegs, who is being sued for $440,000, “invested like lots of people years ago, assuming this was legitimate,” said her attorney, Joseph Eisenberg.

It will be many months before losing investors are likely to see any funds, Pilmer said. Among other things, the court must determine whether Slatkin was acting as a stockbroker under the narrow definition of bankruptcy law. If he was, attorneys said, only payments from the last year of the fraud, instead of the last seven years, must be repaid.

The ruling applies only to Slatkin’s pooled investments, not his many side business dealings, which also have come under legal attack, said Robert Sanger, attorney for Ron Rakow, a Slatkin associate and former road manager for rock band the Grateful Dead.

Rakow’s family made millions on their investments with Slatkin, but “Mr. Rakow was not a member of the investor pool,” Sanger said. “It’s possible that the ruling today will have little or no effect on him.”

U.S. Bankruptcy Judge Robin Riblet said her ruling is valid only if Slatkin doesn’t try to retract his plea agreement and is sentenced as anticipated.

Sentencing is scheduled for April 21. Slatkin faces up to 15 years in prison.

Another defendant in the suits seeking repayment is John Coale, an anti-tobacco litigator who is the husband of CNN legal commentator Greta Van Susteren. The suit seeks $939,000 from Coale, who said he was finalizing an agreement to repay the funds over time, adding that others were working on similar settlements. However, Coale questioned the wisdom of the judge’s ruling Friday, saying it relies on the word of Slatkin.

In separate lawsuits in Los Angeles, the bankruptcy trustee and private investors have accused UnionBanCal Corp. and other banks of conspiring to conceal Slatkin’s fraud. The banks have denied wrongdoing, but a federal judge ruled recently that the suits may proceed.