FBI and IRS Raid Offices of Slatkin
Federal regulators pounced on EarthLink co-founder Reed E. Slatkin on Friday, raiding his offices and persuading a federal judge to freeze his bank and brokerage accounts to prevent Slatkin from hiding investors’ money or destroying documents.
The actions turn what had been a civil matter--with investors accusing Slatkin of running a 16-year Ponzi scheme--into a criminal investigation.
Moreover, documents filed Friday revealed several Hollywood names on Slatkin’s list of investors.
At 8 a.m., agents from the FBI and Internal Revenue Service began hauling boxes of documents from the converted garage of Slatkin’s former home in the Santa Barbara suburb of Goleta, which since the early 1990s has housed his stock-trading and money management businesses. Regulators also took documents from the Santa Fe, N.M., office of Slatkin’s bookkeeper.
At the same time, the Securities and Exchange Commission asked a U.S. district judge for the Central District of California to freeze Slatkin’s assets, claiming that he had been operating a fraudulent investment scheme since 1986. The request was granted.
The SEC complaint alleges that Slatkin, 52, lied to investigators, concealed investor accounts and set up partnerships and businesses that would allow him to transfer assets secretly.
“The defendant has demonstrated that he cannot be trusted,” the complaint says. “Thus, an asset freeze is necessary to prevent the defendant from spending or secreting funds.”
Slatkin’s attorney, Brian Sun, said his client was “fully cooperating” with the investigations. Slatkin, through his attorneys, provided computer passwords and a computer hard drive to investigators at the scene, Sun said.
“I’m not going to confirm or deny anything about him having committed a fraud,” Sun said.
He said the SEC’s asset freeze was unnecessary because Slatkin had agreed to a similar freeze in the U.S. Bankruptcy Court that is handling Slatkin’s Chapter 11 filing. The freeze prevents Slatkin, any of his associates or family members from accessing any of his assets.
The SEC complaint claims that Slatkin accepted a total of at least $320 million from more than 500 investors across the country, including Internet moguls, Hollywood executives, Santa Barbara socialites and fellow members of the Church of Scientology, of which Slatkin is an ordained minister.
The SEC filing also included Hollywood names among Slatkin’s investors, including husband-and-wife actors Giovanni Ribisi and Mariah O’Brien-Ribisi. Giovanni Ribisi played a conflicted broker in the investment-scam movie “Boiler Room.”
Also on the list are Art Linson, who produced the 1998 remake of “Great Expectations,” and actor Jeffrey Tambor, who played the mayor of Whoville in “Dr. Seuss’ How the Grinch Stole Christmas.” Attorney John Coale, a noted tobacco lawsuit litigator, also was an investor, according to the SEC document.
SEC Says Swiss Bank Accounts Don’t Exist
According to the SEC, Slatkin told the agency that the money had been invested through Swiss bank accounts into various publicly traded stocks and other investments, and that the money had grown to more than $585 million as of December 1999, the documents allege.
The SEC said Slatkin provided investigators with investor account statements and year-end summaries showing he had invested in a wide variety of large- and small-company stocks, from tiny biotech firms to Colgate-Palmolive Co. and Bell Atlantic Corp.
But the SEC said the Swiss bank accounts and the Swiss company Slatkin said he was using to manage the funds apparently don’t exist. The SEC said that the company, NAA Financial, didn’t have offices at the building listed on Slatkin’s account statements, and that the Union Bank of Switzerland account into which the funds were supposedly transferred “does not currently exist.”
Even after Slatkin was subpoenaed by the SEC, he failed to produce any records showing deposits or withdrawals from accounts at any Swiss banks, the documents say.
Slatkin’s attorneys have said he did trade some stocks, but they weren’t sure of the extent of his trading activities.
The SEC said its investigation of Slatkin’s bank and brokerage records showed Slatkin used part of a $10-million deposit made Feb. 20 by one investor, John K. Poitras of Woodside, Calif., to make payments to other investors “in a Ponzi-like fashion and to pay his personal expenses.” In a Ponzi scheme, money collected from new investors is used to pay bogus investment returns to previous investors.
Slatkin used $7 million of Poitras’ deposit to pay principal and interest to other clients and spent $24,000 to pay his personal expenses, including credit card debts, utility bills, pool maintenance fees and fees at two country clubs, the documents allege.
The SEC also said Slatkin had been under its scrutiny since 1997 for being an unregistered investment advisor. Slatkin promised regulators at that time that he would liquidate his investment management business, the SEC said, and made the promise again to regulators in 1999. Slatkin also sent a Jan. 7, 2000, letter to some of his investors saying he would liquidate the accounts.
But the SEC alleges that Slatkin repaid only a small portion of his clients’ money and continued taking deposits. Between Oct. 1, 1999, and Sept. 29, 2000, Slatkin distributed $110 million to clients but took in $63.9 million in deposits, the documents allege.
Slatkin Allegedly Lied About Amount He Took
The SEC charged that Slatkin repeatedly lied to agency investigators about how much money he was managing and provided incomplete client lists to investigators. In September 1999, for example, Slatkin said he had taken in $230 million from investors, but after interviews with investors, the SEC believes Slatkin took in at least $90 million more, the documents say.
In addition, many clients whose accounts Slatkin said he had liquidated said they had not been repaid “and believe that they have substantial balances with Slatkin,” the SEC documents say. Several of the investors listed in SEC documents as having zero balances with Slatkin attended a creditors’ meeting in Santa Barbara on Thursday, insisting he owed them tens of millions of dollars.
At that meeting, Slatkin’s attorneys told investors that he had less than $21 million in various bank and brokerage accounts. The SEC put the figure at $29.4 million. The SEC declined to comment on the discrepancy.
Slatkin resigned last month from the board of directors of EarthLink, one of the nation’s largest Internet service providers.
