May 17, 2001
Investment probe has a local look
Slatkin case goes to bankruptcy court
By MARK VAN DE KAMP
NEWS-PRESS STAFF WRITER
Creditors claim that more than 100 Santa Barbara County residents entrusted tens of millions of dollars to local investor Reed E. Slatkin, whose crumbling investment club of up to $600 million is under a widening federal criminal investigation.
Nervous investors packed a hearing room on Wednesday at the U.S. Bankruptcy Court in Santa Barbara, desperate to learn whether they will ever see their money again. Some, who said they were too embarrassed to give their names, told the News-Press that they have lost their children's college funds and their own life savings.
Judge Robin L. Riblet appointed a Century City-based trustee to gather Slatkin's financial records, but lawyers said it will take months to untangle reams of paper records and thousands of computer files.
Riblet also rejected Slatkin's motion to convert the case to Chapter 7 liquidation from Chapter 11 bankruptcy reorganization.
Slatkin, 52, is an eight-year resident of Hope Ranch. He is a co-founder of EarthLink, a major Internet service provider, but he resigned from its board of directors last month.
When he began his investment club in 1987, he collected money from fellow members of the Church of Scientology with promises of handsome profits, court records show, and over the years he added other investors. However, investigators say he lied to investors and now hundreds of millions of dollars are missing.
Slatkin did not appear at Wednesday's hearing. Creditors claim he is hiding behind the gates of his Hope Ranch estate.
After the hearing, creditors' committee lawyer Richard Wynne said that the incomplete court list of creditors shows 35 local investors, and he thinks there are more than 100.
Attorneys and investigators have been able to offer only estimates of approximately 500 victims nationwide, but the size and scope of the case continues to grow and make national headlines.
"$300 million to $600 million is missing," Wynne told Riblet.
"These are people who invested essentially hundreds of millions of dollars from their life savings," he added.
Hundreds of pages of new court documents reveal that federal investigators began questioning Slatkin about his investment role as far back as 1997, subpoenaed him in 1999 and questioned him under oath in January and February of last year. On Friday, federal agents raided his Goleta office and obtained a court order freezing his assets.
Slatkin told Security & Exchange Commission officials early last year that his Scientology religious convictions led him to begin helping friends invest. Over time, the list of clients grew into the hundreds.
In January 2000, Slatkin wrote letters to at least some local investors informing them that he had decided to end his endeavor. The investment club had grown too big, he said, and he was getting pressure from the SEC.
"For many years, as an outgrowth of my church-related efforts, I sought to assist my friends in enhancing their financial security," he wrote last year to a Santa Barbara couple who invested with him. "This has been a rewarding effort but, perhaps because of the success we have enjoyed, it has grown to involve far more time and responsibility than I anticipated. I never intended this to become a 'business' and, in fact, over the last couple of years, I have attempted to reduce the number of people I am working with.
"A question again has been raised by the SEC as to whether I am engaged in the 'business' of managing money for others and whether I should be registered as an investment adviser. It is incumbent upon me now to resolve this question. Therefore, in order to dispel the issues regarding this, I have decided to end this endeavor."
Yet, investors and regulators say, he continued to accept millions of dollars through February. In a lawsuit filed in April by John Poitras of Santa Ynez, Slatkin is accused of accepting $15 million of Poitras' money, with $5 million of that accepted as recently as Feb. 8.
Slatkin filed for bankruptcy on May 1 in Santa Barbara, listing debts exceeding $100 million. On Wednesday, he sought to convert his Chapter 11 reorganization filing to Chapter 7 liquidation, which angered Wynne and U.S. Trustee's Office officials, who believe such a change would confuse creditors.
"We frankly do not trust the debtor's motives," Wynne said.
The U.S. Trustee's Office told Riblet that under the circumstances a trustee must be appointed immediately.
"There is evidence that the debtor (Slatkin) created false performance statements for his investors, converted investor funds to personal uses, lied to government authorities, obstructed the investigation of government authorities, moved funds to foreign accounts and has lost the confidence of his investor (now creditor) body," U.S. Trustee Maureen Tighe wrote in a court motion.
Riblet then withdrew her decision to allow Slatkin to convert his bankruptcy status. Chapter 11 protection typically is used to reorganize a business under certain criteria while allowing the firm to continue operating. Chapter 7 primarily is used by individuals who wish to free themselves of debt and by businesses to liquidate and terminate their operation.
Slatkin's bankruptcy attorney, Richard Pachulski, accepted Ribletıs decision to leave the case in Chapter 11.
Riblet also appointed Todd Nielson of Century City as the trustee on the case. Nielsen, an experienced fraud investigator, will gather and examine Slatkin's financial records to determine the size of his assets. Nielson takes over from the Deloitte & Touche accounting firm, which so far has received 60 to 90 boxes of Slatkin's files.
New court documents show that Slatkin told SEC investigators last year that he wanted to help friends invest because of his religious beliefs. Both he and his wife, Mary Jo Slatkin, are ordained ministers in the Church of Scientology.
At age 17, Slatkin testified, he flew to England during his summer vacation and studied Scientology at the home of the movement's founder, the late L. Ron Hubbard.
The office at 890 Kellogg Ave. that was raided on Friday was a home that Slatkin bought in 1984 and kept as an office when he, his wife and their two sons moved to Hope Ranch in 1993, records show.