Investments Called Longtime Scheme

The investment empire run by EarthLink Inc. co-founder Reed Slatkin was a scam virtually from its inception in the mid-1980s, according to a report filed Friday by a U.S. Bankruptcy Court trustee and Slatkin’s creditors.

The report, which is the first detailed look at the inner workings of one of the largest alleged Ponzi schemes in history, said Slatkin reported about $700 million in bogus profits to investors from 1986 to 2001.

“Slatkin’s fraudulent scheme was not a recent development precipitated by the current financial slowdown or the collapse of the dot-com or high-tech bubble,” the report said. “Rather, it was a carefully orchestrated charade extending as far back as 1986.”

Slatkin’s attorney, Brian Sun, said Friday that he could not comment on the report’s allegations. Slatkin filed for Chapter 11 bankruptcy protection May 1 after he was sued by investors and his investment operation began to unravel. He is under criminal investigation for alleged investment fraud.

The report, co-written by trustee R. Todd Neilson and the bankruptcy case’s creditors committee, alleges that Slatkin took in $593 million from more than 800 investors over 15 years. Although he distributed hundreds of millions in purported stock market profits to investors, the report alleges, he made only about $65 million in actual gains. Most of the payments were actually money taken in from other investors--a classic Ponzi scheme.

After accounting for all the payments Slatkin made to investors and the overhead costs he incurred, Slatkin owes his investors about $255 million, said Richard Wynne, attorney for the creditors committee.

A “select few” of Slatkin’s investors profited from the scheme, the report alleges. Seventy-five investors received $151 million more than they originally invested, according to the report. One Slatkin associate, convicted felon Ron Rakow, got back $2 million more than he paid in and his family members were paid $6 million more than they invested, the report alleges.

Rakow’s attorney, Robert Sanger, said his client was unaware Slatkin’s investments were bogus.

Slatkin “didn’t let anybody know what was going on,” Sanger said. “Rakow was in the same position as everybody else.”

The trustee and creditors committee examined nearly 2 million documents, including records from dozens of bank and brokerage accounts, to piece together what happened to investors’ money, said Richard Wynne, attorney for the creditors committee. Wynne said many of Slatkin’s investors lost their life savings, retirement accounts, college funds and inheritances to the Santa Barbara-based investment manager.

Slatkin’s investors believed their accounts had grown to $778 million by Dec. 31, 2000, thanks to Slatkin’s stock-picking prowess, the report said. In reality, Slatkin’s brokerage accounts and other assets identified so far total about $30 million, Wynne said.

The report said an “experienced financial investment counselor” described Slatkin’s stock portfolio as the worst he had ever seen. Slatkin’s holdings included numerous worthless dot-com stocks.

The report claims Slatkin went to some lengths to deceive investors. Among other moves, Slatkin allegedly doctored brokerage statements to report phony earnings and set up a Swiss phone line--complete with a “genuine European ring”--that forwarded calls back to one of his Santa Barbara numbers as a way of convincing investors that their money was safely ensconced in Swiss bank accounts, the report said. Investigators have found no evidence that the accounts exist.

“The statements sent to investors were, by and large, completely fraudulent,” the report said. “Virtually none of the [reported] trades had been made, and the securities which supposedly were held in the investors’ accounts had never been purchased or had been purchased in far smaller quantities than Slatkin reported.”

The few legitimate investments Slatkin did make were largely “financial disasters,” the report said. Slatkin’s profitable investment in EarthLink “was an aberration,” the report said. Most of the $65 million in profits Slatkin made came from his EarthLink stock.

Slatkin began his investment business with money from fellow Scientologists in 1985, according to testimony he made two years ago. His roster of clients eventually included actors, Hollywood producer Armyan Bernstein, CNN commentator Greta Van Susteren and Internet mogul Sky Dayton.

Some of Slatkin’s investors have contended that he never intended to defraud them and that it was the recent collapse of the stock market that led to the crumbling of his investment operation.