Scientology groups to pay back $3.5 million

Groups affiliated with the Church of Scientology have agreed to pay back $3.5 million they received from former Santa Barbara money manager Reed Slatkin and others who invested with him.

The settlement, approved Tuesday by a federal bankruptcy judge, is part of final efforts to recover funds for the victims of Slatkin, who is serving a 14-year sentence for fraud, conspiracy and money laundering. Authorities say Slatkin led a long-running Ponzi scheme in which money from some investors was used to pay off others.

The fraud raised about $593 million in all, with investor losses estimated at about $240 million.

Slatkin, whose clients included actor Peter Coyote and television legal commentator Greta Van Susteren, paid $1.7 million in ill-gotten gains directly to Scientology organizations, bankruptcy trustee R. Todd Neilson said in court filings.

Millions of dollars more in tainted funds were funneled through other investors to Scientology-affiliated groups, including Narconon International, the Church of Scientology Celebrity Centre International and the Church of Scientology Western United States, the filings said.

The exact amount funneled through the investors was never determined, said Alexander Pilmer, an attorney for Neilson. Pilmer and Scientology attorney David Schindler said the $3.5-million settlement was a negotiated compromise.

Schindler said that the church had always wanted to return any fraudulently obtained funds and that the only dispute was over what amount was fair.

“The church and its hundreds of parishioners were as much victims of Slatkin as anyone else,” he said.

Slatkin, who was once an ordained Scientology minister, had maintained that his actions were motivated in part by threats from other church members. In sentencing him to 14 years in federal prison, however, U.S. District Judge Margaret Morrow rejected his claim that he had acted under “duress and diminished capacity” because fellow Scientologists pressured him to continue paying them profits.

Slatkin gave some of the $593 million he collected back to investors as “profits,” which is why prosecutors place investor losses at about $240 million.

By liquidating assets and suing investors who profited by receiving tainted money, Pilmer said, the bankruptcy trustee will have repaid victims 41 cents to 42 cents on the dollar -- about $100 million in all -- by the end of this year.

In addition, the bankruptcy trustee is still seeking to recover $12.1 million from a dozen defendants who came out ahead on the scam. The settlement with the Scientology groups removed a major impediment to closing the case, Pilmer said.

“We are close to the final wrap-up phase,” he said.

Slatkin, who lived on a four-acre estate and spent lavishly on art, cars and airplanes, is serving his prison sentence in Taft, Calif., after pleading guilty in 2002 to fraud, conspiracy and money laundering.

Slatkin started soliciting money from fellow Scientologists in the mid-1980s. His reputation grew because of his role as a financer of Internet service provider EarthLink Inc. in 1994, when he provided $75,000 to EarthLink founder Sky Dayton.

Before long, he was taking in large sums from Internet executives, Hollywood players and socialites from across the country.

In the end, Slatkin admitted that his investment empire had been a sham since its inception in 1986, a scam he kept going for 15 years by distributing the “profits” to some investors that were really just funds from other investors -- a classic example of a Ponzi scheme.

Attorneys for the bankruptcy trustee sued or threatened to sue about 400 individuals and groups that emerged as “winners,” having received more money from Slatkin than they invested.

With Tuesday’s endorsement of the Scientology settlement by U.S. Bankruptcy Judge Robin Riblet in Santa Barbara, about $78 million has been recovered in those so-called adversary proceedings, Pilmer said.

A separate lawsuit accusing Slatkin’s former bankers of lending an air of legitimacy to his enterprise was settled two years ago. Without admitting wrongdoing, the defendants, including Union Bank of California, agreed to pay $26.5 million. Most of that settlement -- $15.5 million -- was paid to a group of the largest investors and their lawyers at Pilmer’s firm, Kirkland & Ellis.

scott.reckard@latimes.com