Athena Gold ex-backer Slatkin pleads guilty in massive Ponzi scheme
Thursday Mar 28 2002 Street Wire
by Brent Mudry
Controversial EarthLink co-founder Reed Slatkin, a prominent Scientologist minister and stock promoter, has pled guilty to 15 felony counts, including mail fraud, wire fraud, money laundering and conspiracy to obstruct justice during an investigation by the United States Securities and Exchange Commission. Mr. Slatkin, 53, of Santa Barbara, Calif., is expected to face 12 years to 15 years in jail under federal sentencing guidelines. Mr. Slatkin's $593-million Ponzi scheme, an unregistered investment management operation he ran since 1985, collapsed last spring. (All figures are in U.S. dollars.)
In a plea agreement filed Wednesday in U.S. District Court for the Central District of California, Mr. Slatkin agreed to surrender into federal custody at his arraignment next month. In what U.S. officials call one of the largest Ponzi schemes in history, Mr. Slatkin preyed on the rich and famous, luring and conning numerous Hollywood stars and producers, dot-com executives and high-society types.
(Mr. Slatkin got his start in disastrous investing on Howe Street, the centre of dealings on the former Vancouver Stock Exchange. He was a private-placement investor in Athena Gold Corp. in 1991, when the VSE company was being actively boosted by fellow Scientologists Michael Baybak and Kenneth Gerbino. Athena was subsequently acquired by Vancouver promoter Wally Berukoff's Miramar Mining Corp. in 1995.)
(U.S. officials make no allegations regarding Mr. Slatkin's dealings on the VSE; nor is any connection to Mr. Baybak, Mr. Gerbino or Mr. Berukoff suggested. Mr. Baybak filed a libel suit against Time magazine over an unflattering May 6, 1991, eight-page cover feature profiling the Church of Scientology, which included a sidebar story featuring the Athena Gold promotion of Mr. Baybak and Mr. Gerbino.)
Among Mr. Slatkin's 500-plus victims were actor Giovanni Ribisi, who starred as a sleazy broker in the film Boiler Room, and Hollywood producer Armyan Bernstein, who arranged for Arnold Schwarzenegger and Kevin Costner to star in a video for the master fraudster's 50th birthday celebration. Others did better. Fox News anchor Greta Van Susteren, who recently defected from CNN as a longtime anchor and legal commentator, was paid out $659,000 more than the $2.07-million she and her husband John Coale invested with Mr. Slatkin. Although Mr. Slatkin is the only target to date, court filings name several unindicted co-conspirators, including his long-time bookkeeper Jean Marie Janu, convicted felon, fellow Scientologist and former Grateful Dead manager Ronald Rakow, Dan Jacobs and Didier Waroquiers, alias Michel Axiall. In his agreed statement of facts, Mr. Slatkin confirms the four helped him deceive initially SEC investigators by papering over and covering up the massive fraud.
Burned investors have blamed the SEC, which began an informal investigation of Mr. Slatkin in 1997 and launched a formal investigation in 1999, for doing too little too late. In 2000, Mr. Slatkin lied to investigators under oath, telling them, "The process of liquidating accounts is now in full swing" and "I am not accepting any new accounts or any new money from existing accounts." In reality, this was his best year ever. Between Jan. 1, 2000, and May 1, 2001, the day he filed for bankruptcy, Mr. Slatkin took in $135-million from investors. Within days of the bankruptcy filing, FBI and Internal Revenue Service agents raided Mr. Slatkin's homes and businesses, and his Ponzi scheme ground to a halt.
The SEC belatedly moved in on May 11, 2001, launching a civil prosecution of Mr. Slatkin and winning a broad freeze on his worldwide assets. Last June, Mr. Slatkin agreed to refrain from future securities violations and in a consent settlement finalized on Jan. 2, he was banned from any association with any investment adviser. The SEC has not yet reached settlements on fines or disgorgement orders against Mr. Slatkin.
Mr. Slatkin's reputation as an investment guru was largely based on his only significant win, after EarthLink founder Kevin O'Donnell convinced him to invest as a major seed shareholder in 1994. Mr. Slatkin resigned from the board of EarthLink, the second largest Internet service provider in the U.S., on April 26, 2001, and the company has dissociated itself from him. The Scientologist's investment empire was little more than a massive Ponzi scheme. By the end of 2000, Mr. Slatkin would have required an estimated $130-million annually to keep his hypothetical investment structure from collapsing.
"Slatkin appears to have conceived and nurtured a perception or aura that he was a financial wunderkind who graciously bestowed his investment wisdom upon an exclusive and dutifully grateful constituency. In actuality, Slatkin conceived, executed and perpetrated a massive multiyear fraud on his investors, using funds from new investors to pay inflated and false returns to other and older investors, while wasting tens of millions of dollars on ill-conceived and disastrous investments and paying staggering sums to certain associates and consultants," states trustee Todd Neilson in a bankruptcy court filing.
Investigators trace Mr. Slatkin's entree into the investment world to about 1979, four years after he was ordained a minister of L. Ron Hubbard's Church of Scientology in 1975.
"In about 1979-1980, Slatkin met Robert F. Duggan, a fellow Scientologist, who Slatkin describes as 'a successful professional investor, primarily in the stock market,'" states Mr. Neilson in a recent trustee's report. Mr. Duggan provided rudimentary investment training to Mr. Slatkin, who had no prior formal training in either investments or money management. "During this period, Duggan began to teach Slatkin about the stock market and the process of analyzing companies as potential investments."
According to Stockwatch records, Mr. Duggan arrived on Howe Street around the same time as fellow Scientologist Mr. Baybak, who remains an active player in the market. Both invested in a private placement financing of immigrant-investor-fund promoter Steven Funk's First Generation Resources Ltd. in August, 1985, along with budding penny stock promoter and former drug peddler Robert Friedland. (Earlier that year, in March, Mr. Baybak invested in Mr. Friedland's then flagship Galactic Resources Ltd., which later left U.S. taxpayers paying most of the tab for the massive cyanide pollution Superfund clean up at its disastrous Summitville mine in Colorado.)
Mr. Duggan and Mr. Baybak also concurrently invested in two other Howe Street promotions in 1986: Trian Equities Ltd. that February and Medallion Books Ltd. that December. Scientologist Mr. Duggan served a stint on Trian's board.
Mr. Friedland participated in the same Medallion financing, along with Vancouver businessman Grant Woodward "Woodie" MacLaren, who also joined the boards of Mr. Funk's First Generation and Medallion. (There is no suggestion that Mr. Funk, Mr. Friedland or Mr. MacLaren, the former chief executive of Woodward's Stores Ltd., the now defunct Western Canadian department store chain, had any dabblings in Scientology.)
After his introduction and training by Mr. Duggan, Mr. Slatkin soon became immersed in the market.
In 1984, Mr. Slatkin made the transition from working as a full-time ordained Scientologist minister to becoming a professional, although unregistered, self-employed investment manager. According to the trustee, Scientology had "permeated almost every aspect" of Mr. Slatkin's life, and his fellow Scientologists provided ripe prey from day one. Mr. Slatkin testified he made investments for these "friends," "to help Scientologists who have their attention away from their money and they're helping the church."
In 1985, in his fledgling year as an investment pro, Mr. Slatkin met Mr. Rakow and Chris Mancuso, who invested money with him. This was a fateful year for the pair. Mr. Rakow and Mr. Mancuso were promoters and key players in Culture Farms, an $80-million yoghurt culture Ponzi scheme, under criminal investigation. Later that year both Mr. Rakow and Mr. Mancuso were convicted and sent to jail. According to one published account from a former Slatkin associate, the Scientologist minister said he cried all the way when he drove Mr. Rakow to jail. (This sounds a bit odd, as corrections officials usually prefer to have men with badges, not friends, drive convicts to jail.)
By Mr. Slatkin's own estimate, he was managing about $7-million or $8-million by late 1986 for his "friends."
Red flags were soon apparent.
In February, 1988, Mr. Slatkin and Richard Levine, a Prudential-Bache broker, negotiated to buy a 25-per-cent stake in Statistical Sciences Inc., an investment advisory firm registered with the SEC. SSI's due diligence included an independent auditor's attempt to verify Mr. Slatkin's claims of trading results of 40 to 50 per cent. "The audit ultimately concluded that Slatkin's statements and trading records were not correct and Slatkin admitted to falsifying those records," states a trustee's report.
Mr. Slatkin also had a business relationship from 1986 to 1990 with Patrick Gallagher, a commodities broker licensed with the Chicago Board of Trade. The pair had an ugly falling out and Mr. Gallagher's attorney had ominous comments in legal correspondence. "We are fearful that a comprehensive review of certain trading and account activity may reveal unsavory characteristics of a scabrous nature involving, among other things, irregularities with regards to the exchange rules and conduct, which, under closer scrutiny, may subject one to prosecution by various government agencies."
A year later, in 1991, Mr. Slatkin made his first documented official foray on Howe Street. (He likely was involved in the Vancouver market earlier with Mr. Duggan.)
That year, Mr. Slatkin made a private placement investment in Athena Gold, a Vancouver gold promotion which attracted fellow Scientologists Mr. Baybak and Mr. Gerbino a few years earlier. (Mr. Baybak became a director of Athena in 1987 and Mr. Gerbino joined the board in 1988.) Mr. Slatkin's Athena investment came four months after Time magazine's unflattering cover feature on the Church of Scientology, which highlighted the promotion of Athena by Mr. Baybak and Mr. Gerbino.
Mr. Slatkin subsequently rose to prominence in the Scientology community, boosted by his lucky 1994 investment in EarthLink.
The rest of his portfolio was a disaster.
"The trustee has come to the sad, but inescapable conclusion that tens of millions of dollars, supposedly wisely invested in seasoned and liquid assets capable of providing a meaningful return, were in fact invested in highly speculative and illiquid ventures and that much of the invested funds have been lost as a result of those imprudent investments," states a court filing.
In one such example, Mr. Slatkin's unregistered fund lost its entire $1-million and $333,300 investments in PopMail.Com Inc. and Millionaire.com, respectively, which he purchased with the help of past felon Mr. Rakow through Co-Right Investments Inc., a Canadian holding company Mr. Slatkin formed in 1999.
Mr. Rakow and fellow Culture Farms convict Mr. Mancuso both came out winners, emerging with more than $2.4-million each more than they invested in Mr. Slatkin's Ponzi scheme.
The pair of convicts also proved quite helpful throwing off the scent for the SEC's dogs until the house of cards finally collapsed.
(c) Copyright 2002 Canjex Publishing Ltd. http://www.canada-stockwatch.com