Outlook Bleak for Slatkin Investors

Investors who gave money to fallen investment manager Reed E. Slatkin already are looking for ways to recoup their expected losses through lawsuits--but they’re finding few obvious targets, investor attorneys said.

Among the possibilities: a handful of banks that acted as custodians for individual retirement account and 401(k) funds invested by Slatkin; financial professionals who introduced clients to Slatkin, who wasn’t registered as an investment advisor; and even fellow investors who received principal and interest payments from Slatkin in recent years.

“What’s unusual about this is that you don’t have the usual gang” of deep-pocketed companies that might become the target of lawsuits, said one investor attorney, who asked not to be named. “You don’t seem to have any investment bankers or any big accounting firms involved.”

Slatkin, a Santa Barbara-based money manager who co-founded Internet service provider EarthLink Inc., is under criminal investigation for investor fraud. Among his more than 500 clients nationwide were Internet executives, Hollywood celebrities, socialites and fellow Scientologists.

Bankruptcy officials say investor claims in Slatkin’s Chapter 11 bankruptcy filing could total $600 million. Slatkin reported in his preliminary bankruptcy filing that he had assets of less than $100 million.

The SEC, which won a court order freezing Slatkin’s assets May 11, said it has been unable to locate the Swiss bank accounts Slatkin said he used to trade stocks, or the financial advisory firm Slatkin said he used to facilitate the trades.

The SEC has found a number of brokerage accounts that totaled about $30 million, most of it invested in EarthLink stock, according to SEC documents. In addition, Slatkin’s attorneys have said that about $100 million of investors’ funds were funneled into limited partnerships and real estate deals, although the attorneys said they don’t know how much those investments are worth now.

These reports have led many investors to conclude that they have little hope of recouping much of their money from Slatkin, investors’ attorneys said.

“No one’s getting back 100 cents on the dollar, absent a miracle,” said Richard Wynne, attorney for the creditors’ committee that represents investors. “That’s pretty clear.”

Slatkin has not returned calls for comment and his attorneys refuse to comment on whether Slatkin defrauded investors. The attorneys say Slatkin is cooperating with investigators and trying to help investors get their money back.

In a typical bankruptcy that involves a liquidation of assets--which is the expected outcome of Slatkin’s Chapter 11 filing--investors and creditors get back 15 cents to 17 cents on the dollar, said Victoria Doran, bankruptcy manager for Neilson Elggren of Los Angeles, the firm whose principal, R. Todd Neilson, has been named as trustee for Slatkin’s bankruptcy.

Neilson’s firm has recovered “slightly more” than 17% of investors’ money in two other high-profile bankruptcy cases--those of Bruce McNall, the former L.A. Kings owner who pleaded guilty to bank fraud in 1994, and Property Mortgage Co., a Sherman Oaks-based Ponzi scheme in which about 1,000 investors lost $100 million, Doran said.

In a Ponzi scheme, new investors’ money is used to pay bogus returns to prior investors. The SEC complaint alleges that Slatkin was operating such a scheme.

If he was, that could provide one avenue for investors to recoup money, investors’ attorneys said. Some investors who received money from Slatkin in the last four years--the legal limit for recouping such payments--could be forced by the trustee to give back some or all of the money, Wynne said.

“When he went insolvent is a critical issue,” since payments made after that point could be considered part of a Ponzi scheme, Wynne said.

Investors aren’t the only ones who could face legal action. Investors’ attorneys said they are reviewing the roles played by banks that handled money for Slatkin.

Union Bank of California, which according to SEC documents handled several of Slatkin’s investment accounts, sent a letter last week to more than 25 customers who had individual retirement accounts at the bank that were managed by Slatkin, said bank spokeswoman Joanne Curran. The letter advised the customers of the controversy and suggested they contact an attorney “to protect their investments,” Curran said.

Curran said Union Bank played no role in Slatkin’s investments but served only as custodian or trustee on the accounts.

Those who recommended Slatkin to others could be targeted for lawsuits as well. Many investors who gave money to Slatkin said in interviews that they met him through mutual friends who bragged about the returns Slatkin was making for them. Some investor attorneys say it’s possible that those later investors will sue the earlier investors, arguing the earlier investors duped them.

“Everybody’s going to turn against each other,” predicted one investor attorney, who also asked to remain anonymous.

Some investors said they were introduced to Slatkin by financial professionals, including trust officers and accountants. Investors’ attorneys said some of their Hollywood clients were introduced to Slatkin by their business managers.

“There are a couple of heroes out there who forbade their clients” to invest with Slatkin after discovering he wasn’t registered with the SEC or that he intended to invest their clients’ money in his own name, rather than in separately titled accounts, said one of the investor attorneys. There are others who approved or even encouraged the investments, the attorney said.

“I would assume those managers aren’t sleeping well at night,” he said.