EarthLink Co-Founder Files for Bankruptcy

The top two executives of Internet provider EarthLink Inc. invested their personal money with company co-founder Reed E. Slatkin, who is under federal investigation for allegedly running a Ponzi scheme.

Sky Dayton, EarthLink’s 29-year-old chairman and a key player in the ‘90s Internet boom, and Chief Executive Charles Garry Betty were among the people who invested money with Slatkin, according to a company spokesman.

Slatkin, a Santa Barbara venture capitalist and socialite, filed for Chapter 11 bankruptcy protection late Tuesday, listing debts of more than $100 million and assets of $50 million to $100 million. The Securities and Exchange Commission is investigating Slatkin’s financial affairs, and he has been sued by three investors for failing to return at least $35 million he managed for them.

Investors’ attorneys say Slatkin, 52, invested more than $300 million for a nationwide network of more than 100 friends, business partners and members of the Church of Scientology, to which Slatkin belonged. Although individual investors were not listed in Slatkin’s preliminary bankruptcy petition, the filing said he has 200 to 1,000 creditors.

Dan Greenfield, a spokesman for Atlanta-based EarthLink, said Wednesday that EarthLink has had no relationship with Slatkin’s money-management operations.

“There were no EarthLink funds involved,” Greenfield said. But he said Dayton and Betty “were among four officers or directors who invested personal finances with Reed.”

Greenfield declined to identify the other two or to comment further about their investments, including whether Dayton or the others are considering any claims against Slatkin. Calls to Dayton and Betty were directed back to Greenfield.

Greenfield also said Slatkin’s resignation from EarthLink’s board on April 26--the day Slatkin’s creditors held a meeting at the Washington offices of his attorneys--was Slatkin’s decision and not requested by the company’s other directors.

The other directors could not be reached for comment.

EarthLink, which has a major facility at the site of its former headquarters in Pasadena, moved to distance itself from Slatkin on Wednesday.

Although Slatkin is listed on EarthLink’s Web site and financial documents as a co-founder, Greenfield emphasized that Dayton was the main founder of the Internet service provider and that a group of investors including Slatkin provided an initial $100,000 to help launch the company in 1994. The investor group also provided an unspecified amount of cash in later years, but Slatkin “was not involved in the day-to-day operations” of EarthLink, Greenfield said.

EarthLink moved its headquarters to Georgia after merging with Atlanta-based MindSpring Enterprises, another Internet service provider, in a $4-billion deal a year ago. The company has about 4.8 million subscribers, making it one of the biggest U.S. Internet service providers.

Although Slatkin has sold more than 1.1 million shares of the company in the last year, he still owns 1.4 million shares, according to the company’s latest SEC filings. At Wednesday’s closing price of $13.20 a share, that stake is worth about $18 million.

Since the mid-1980s, Slatkin had managed money for friends and associates in exchange for fees, according to the lawsuits and interviews with investors. People who invest large sums of money for compensation typically are required to register with the SEC--something Slatkin had not done, regulators said.

A lawsuit filed by Texas investors said Slatkin was paid more than $900,000 to manage an $18.4-million investment, while another investor said he paid Slatkin 10% of all profits. In letters to investors, Slatkin said he was investing the money “as a friend,” court filings show, but investors said Slatkin expected to be paid.

“He was pretty insistent on getting it too,” said one investor, who requested anonymity. “Even though it was informal, it was pretty definitely known that you had to pay him.”

Slatkin told investors he was putting the money in a variety of publicly traded stocks, investors said. But in recent months, Slatkin began to stall when investors requested access to their money, court filings allege.

Last month, Slatkin told one investor, Stuart W. Stedman of Houston, that he had $380 million of investors’ funds in Swiss bank accounts, but that the money had been frozen because of a money-laundering investigation, according to court filings.

Investors’ attorneys say they believe that Slatkin had been using money collected from recent investors to pay returns to earlier investors--an investment fraud commonly known as a Ponzi scheme--but that Slatkin had run into trouble raising new funds.

On Wednesday, the iron gates were shut at Slatkin’s multimillion-dollar Hope Ranch estate in Santa Barbara and a groundskeeper said Slatkin was not at home. Slatkin did not return calls, and no one responded at the Santa Barbara house where Slatkin and his wife lived until the early 1990s and where he now runs his investment operations, according to neighbors.

Kellogg Avenue neighbors said the deserted home and driveway were unusual because Slatkin and other associates typically occupied the house from the time the stock market opened until at least 2 p.m. on weekdays.

“I thought he was a good guy,” said Lauren Carey, who lives with her plumber husband in a similar two-story home next door.

Times writer Myron Levin contributed to this report.