JOHN P. REITMAN (State Bar No. 80579)                                  

ANDREW S. ROTTER (State Bar No. 86725)

GUMPORT, REITMAN & MONTGOMERY

550 South Hope Street, Suite 825

Los Angeles, California  90071

Telephone:     (213) 452-4900

Facsimile:      (213) 623-3302

 

Attorneys for R. Todd Neilson, Trustee of the

Chapter 11 Bankruptcy Estate of Reed E. Slatkin

 

 

RICHARD L. WYNNE (State Bar No. 120349)

JOLEE M. ADAMICH (State Bar No. 196351)

KIRKLAND & ELLIS

777 South Figueroa Street

Los Angeles, California  90017

Telephone:     (213) 680-8400

Facsimile:      (213) 680-8500

 

Attorneys for the Official Committee of

Unsecured Creditors

 

 

                                           UNITED STATES BANKRUPTCY COURT

 

                                            CENTRAL DISTRICT OF CALIFORNIA

 

                                                           NORTHERN DIVISION

 


In re

 

REED E. SLATKIN,

 

Debtor.

 

 

 

 

 

 

 

 

 

 

_____________________________________

 


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Bk. No. ND 01-11549-RR

 

Chapter 11

 

FIRST INTERIM REPORT OF THE  TRUSTEE AND THE CREDITORS COMMITTEE UNDER 11 U.S.C. §§ 1103, 1106(a)(3)-(4)

 

DATE:       December 17, 2001

TIME:       2:00 P.M.

PLACE:    Courtroom 201

        [Judge Riblet]

 

[Volumes 1 Through 4 Of Charts And Exhibits Concurrently Filed Under Separate Cover]


 

 

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I.          INTRODUCTION

R. Todd Neilson, the trustee (the “Trustee”) of the Chapter 11 Bankruptcy estate (the “Estate”) of debtor Reed Slatkin (“Slatkin”), submits this interim report under 11 U.S.C. § 1106 (a) (3)-(4) on the financial condition and business operations of Slatkin and his Estate.  Because the Official Committee of Unsecured Creditors (the “Committee”) has been very active in the investigation of these matters pursuant to its authority under 11 U.S.C. § 1103, this report is a joint report of the Trustee and the Committee and is based on their joint investigations.

The purpose of this report is to provide information concerning Slatkin’s assets, liabilities, and financial affairs.  In general, the Trustee does not have personal knowledge of the events described in this report, as he was appointed after many of the events transpired.  Thus, this report reflects the personal views of the Trustee, his professionals, and the Committee’s professionals based on their investigation to date and it is not intended to bind any person or entity and does not result from a trial or factual determinations on the merits.  There may be persons and entities that strongly disagree with the Trustee’s and the Committee’s assessment of the facts contained herein or of their respective rights and obligations.  Absent a Bankruptcy Court approved settlement of disputes, if any, between the Trustee and various persons and entities mentioned in this report regarding their respective rights and obligations, the Court will ultimately determine the facts and law.  The Trustee and the Committee reserve the right to amend and supplement this report in light of any additional information that they may receive.  The Trustee and the Committee intend to file additional and supplemental reports as may be appropriate or directed by the Court. 


Although the Trustee, the Committee, and their respective professionals (the Trustee’s counsel, the Trustee’s accountants and financial advisors, and the Committee’s counsel (collectively, the “Professionals”)) have reviewed voluminous documents and financial records, some documents in their possession have not yet been completely reviewed.  Moreover, the Professionals have conducted very few examinations of witnesses under oath to date, although informal interviews with certain witnesses have been conducted.  Because Slatkin has asserted his Fifth Amendment privilege against self-incrimination, counsel has not yet been able to examine Slatkin under oath, although he has been informally interviewed concerning selected subjects on several occasions by the Trustee, the Trustee's counsel, and the Committee’s counsel.

While numerous subpoenas to third-party witnesses have been authorized by the Bankruptcy Court for the production of documents and several for the examination of material witnesses pursuant to Bankruptcy Rule 2004, most of those examinations have not yet been conducted.  Accordingly, in the future, the Professionals expect to obtain substantial additional documents from third parties and conduct a substantial number of oral examinations.  Information obtained from that future investigation may support, amplify, modify, or even possibly contradict certain aspects of the conclusions outlined in this report.  In addition, the investigation into the acts and conduct giving rise to Slatkin’s bankruptcy and the identification and tracing of assets is an ongoing process.  As that investigation has not been concluded, this report intentionally omits any discussion of certain areas of ongoing investigation.  This report also highlights and discusses certain assets of the Estate, but does not list or discuss all assets, such as each stock holding and partnership interest.

II.        SUMMARY OF TRUSTEE'S CONCLUSIONS


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 multi-year 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.  Slatkin sought investors’ funds with the full knowledge that he would be incapable of providing those returns and that the invested funds would quickly disappear into the ever expanding vortex of his fraudulent Ponzi scheme.  “Generically, a Ponzi scheme is a phony investment plan in which monies paid by later investors are used to pay artificially high returns to the initial investors, with the goal of attracting more investors.”  In re Bonham, 299 F.3d 750, 750 n. 1 (9th Cir. 2000).

Slatkin’s fraudulent scheme was not a recent development precipitated by the current financial slowdown or the collapse of the dot.com or high-tech bubble.  Rather, it was a carefully orchestrated charade extending as far back as 1986.  Predictably, and inevitably, the Ponzi scheme grew geometrically in the later years requiring an ever increasing flow of cash from investors to maintain the illusion of Slatkin's unattainable financial promises.  Ultimately, Slatkin’s scheme collapsed amidst lawsuits from concerned investors, government inquiries, and criminal investigations.

While holding himself out to be a highly skilled investment counselor, Slatkin’s actual financial and investment skill ranged from unspectacular to dismal until he made a serendipitous investment as one of the founding investors in Earthlink.  Ex. 1[1] (Slatkin Depo., p. 146).  That single successful investment in Earthlink propelled Slatkin to a new level of theretofore unattainable credibility.  Slatkin used that credibility as a further inducement to investors and he was able to rapidly and aggressively expand the funds under his control, most of which were quickly dissipated.


The Trustee and the Committee believe that an objective review of most of the investments remaining in the Estate compels the conclusion that Slatkin’s opportune investment in Earthlink was an aberration.  It is apparent that many millions of dollars that Slatkin told investors he had wisely invested in business ventures (for the most part allegedly in publically traded securities) capable of providing meaningful return have, in fact, been lost in a financial black hole.  When viewing Slatkin’s entire remaining portfolio of publicly traded securities, an experienced financial investment counselor with a national investment advisory firm described the remaining portfolio as “the worst I have ever seen in all of my years of experience.”

Many of the approximately 800 Slatkin investors have experienced extreme personal and family economic hardship due to the loss of their investments, as well as the fact that many investors have informed the Trustee or the Committee that they dutifully reported and paid taxes on the profits which Slatkin listed on their respective investor statements, profits that were completely illusory.

The single most commonly asked question in this case has been what happened to the money?  From 1986 to 2001, Slatkin received approximately $593 million from investors.  He distributed approximately $535 million to investors.  Of this $534 million, 75 investors received approximately $279 million, even though they had invested only $128 million, thereby realizing an excess return of approximately $151 million.

From his stock brokerage transfers, Slatkin realized a gain of approximately $65 million, the vast proportion of which resulted from sales of his Earthlink stock.  Slatkin expended at least $88 million on various assets and investments, many of which are illiquid or valueless, and spent approximately $47 million in “operating” expenses, including taxes.

The “select few,” approximately 75 persons in number, substantially profited from their financial arrangement with Slatkin.  The total amount paid to these investors from 1986 to 2001, above and beyond their original investments, is in excess of $151 million or $2 million per investor.  Slatkin paid these funds from commingled accounts, essentially using other investors’ money, and not profits actually earned on investments.  A small number of Slatkin associates were also able to experience a financial windfall by acting as his “consultants.”  Some of those “consultants” were paid millions of dollars for ill-defined services.  The Trustee is investigating the recovery of these funds, which represent the greatest single expectation for any meaningful financial dividend to the unfortunate bulk of investors who did not share in Slatkin’s largesse.  The Trustee has not initiated any litigation of any kind while he completes his investigation.


Estimates of creditors’ claims in this Estate have ranged from approximately $250 million to approximately $800 million.  The cause for this wide disparity finds its genesis in the very nature of the Slatkin Ponzi scheme.  Apparently, to persuade investors to retain their investments and often to invest additional funds, Slatkin completely fabricated monthly or quarterly statements for investors that reflected fictitious investments in securities and other assets and cash reserves, as well as a substantial appreciation from those investments.  That phantom appreciation or investment gains ranged from an average annual return of 24% to as high as 100%.  From 1986 to 2001, Slatkin reported approximately $700 million in bogus profits to investors, of which in excess of $600 million was falsely reported in the last seven years.

The Trustee believes that creditor claims (investments net of payments) are approximately $255 million.  Investors may have believed, however, based upon the statements they received from Slatkin, that their investor accounts had grown to approximately $778 million as of December 31, 2000.

On investor statements, the cumulative value of each year’s investment appreciation would be added to the principal and thus compounded.  Thus, an unsuspecting investor who invested $500,000 with Slatkin and received an average return, at least according to the fraudulent investor statements, of 28% over four years would have believed that the original investment had ballooned from $500,000 to a $1,340,000 “nest egg.”  In actuality, there was no such “nest egg,” because Slatkin had used the $500,000 investment to pay fictitious returns, to make unwise investments, and/or to pay his “consultants” and expenses.

By the end of 2000, the actual funds required to maintain Slatkin's hypothetical investment structure approximated $130 million annually.  This was an unattainable sum because Slatkin had dissipated many millions of dollars that had been entrusted to him and he did not possess the funds required to generate this large return.


On May 1, 2001, under a barrage of civil lawsuits and threats by investors (some of whom now sit on the Committee) to file an involuntary bankruptcy petition, Slatkin filed a voluntary petition under Chapter 11 of the Bankruptcy Code.  Shortly thereafter, the FBI and the IRS conducted raids authorized by search warrants on the homes and businesses of Slatkin, and the Ponzi carousel finally ground to a halt.

III.       SLATKIN’S BACKGROUND

A.        Background

Reed Slatkin was born in a suburb of Detroit, Michigan on January 22, 1949.  According to Slatkin's SEC deposition testimony, he graduated from the University of Michigan with a major in Asian languages in approximately 1971.  He did graduate work at both Stanford University and the University of California at Berkeley in languages and literature.  In 1975, he  married Mary Jo Slatkin.  They have two adult children.  Ex. 1 (Slatkin Depo., p. 12).

During Slatkin’s formative years, he became involved in Scientology, which had been founded by L. Ron Hubbard in the 1950s.  In 1975, Slatkin was ordained a minister in the Church of Scientology (the “Church” or “Scientology”).  From 1974 through approximately 1984, Slatkin and his wife did volunteer work for the Church on a full time basis.  Ex. 1 (Slatkin Depo., p. 39).  Their income during this period was insignificant.  Id.

While the underlying issues in the Slatkin bankruptcy case are primarily economic, not religious, it would be difficult to imagine a more dominant force in the life of Slatkin than Scientology.  It would be fair to say that Scientology permeated almost every aspect of his life.  It appears that most of Slatkin’s early, as well as present, business associations relate to his affiliation with Scientology, and a large number of the present investors came to Slatkin for advice because of their mutual involvement with Scientology.

B.        Slatkin’s Early Investment Experiences


In about 1979-1980, Slatkin met Robert F. Duggan (“Duggan”), a fellow Scientologist, who Slatkin describes as “a successful professional investor, primarily in the stock market.”  Ex. 1 (Slatkin Depo., p. 40).  Slatkin had no prior formal training in investments and money management, and it was Duggan who provided Slatkin with rudimentary investment training.  During this period, Duggan began to teach Slatkin about the stock market and the process of analyzing companies as potential investments.  Ex. 1 (Slatkin Depo., pp. 40-42, 173-74).

In about 1984, Slatkin made the transition from full-time ordained minister to that of professional self-employed investor.  At about the same time, Slatkin began making investments for “friends.”  Ex. 1 (Slatkin Depo., p. 180).  At first, Slatkin had a dozen or fewer “friends” who invested money with him.  Id.  Slatkin described these investor “friends” to the Securities and Exchange Commission (“SEC”) as “people who were spending their time working in the church, or working to help the church, or working to get themselves off this bridge . . . , or training themselves” in Scientology.  Id. p. 124.  According to Slatkin, he “wasn’t ever looking for anybody [to make investments for] except people that were associated with the church, who came to me.”  Id., p. 235.  Slatkin’s purported criterion was “someone who was associated with the church, who was working to help the church.”  Id.  His professed purpose in making investments for these “friends” was “to help the Scientologists who have their attention away from their money and they’re helping the church.”  Id., p. 238.

In connection with an audit of his 1983 and 1984 tax returns, Slatkin wrote a note stating that he “never intended and in fact did not ever receive money for doing this.”  Ex. 2.  Slatkin further explained that the individuals on whose behalf he was investing were his relatives or associates and the association was primarily designed to reduce brokerage fees through the joint buying of stocks. 

It was reportedly in about 1985 that an attorney named Dan Lang drafted a form letter for Slatkin’s “friends” to sign when they began to invest with Slatkin; the letter reads:  “Dear _____,  You have asked me to do you a favor and invest some of your money as a friend . . . .”  Ex. 1 (Slatkin Depo., p. 196); see Ex. 3 (Sample Investor Letter).  According to Slatkin, everyone who invested with him signed this letter (Ex. 1, Slatkin Depo., p. 197), and numerous persons who had no prior connection with Slatkin signed this letter so that Slatkin would make investments for them. 

 


C.        The Ponzi Years:  1986-2001

In 1985, Slatkin was in the process of becoming an established money manager.  At that time, Slatkin met Ronald Rakow (“Rakow”) and Chris Mancuso (“Mancuso”), and they invested money with Slatkin.  Ex. 3 (Rakow Depo., p. 190, 191, 315).  Rakow and Mancuso were involved in a company called Culture Farms.  In 1985, Culture Farms was the subject of a criminal investigation and was subsequently placed into receivership.  Rakow and Mancuso were convicted of criminal conduct arising out of their involvement with this company.  Ex. 3, p. 229.   

By late 1986, Slatkin estimates that he was managing about $7-8 million for his “friends.”  Ex. 1 (Slatkin Depo., p. 193).

In August 1987, Slatkin met Richard Levine (“Levine”), who was then a stockbroker at Prudential-Bache Securities.  Slatkin showed Levine the performance of his “investment pool” which boasted a 40%-50% return and demonstrated to Levine a computer program that he claimed automatically flagged stocks to buy and sell based on certain market developments and other criteria.  Levine, impressed by the software and the returns, decided to enter into a business arrangement with Slatkin.

In February 1988, Slatkin and Levine entered into a tentative transaction with John and Amy Jo Gottfurcht (“Gottfurcht”).  Ex. 5.  Gottfurcht had an existing money management company called Statistical Sciences Inc. (“SSI”), an investment advisory firm registered with the SEC, and he claimed to control over $100 million in client funds.  The SSI transaction called for Slatkin and Levine to acquire a 25% interest in SSI and for Slatkin to contribute the license to use his software to SSI.  Id.  As part of the proposed transaction, an independent audit was made of certain aspects of the business, including Slatkin’s trading results of 40%-50% returns.  The audit ultimately concluded that Slatkin’s statements and trading records were not correct and Slatkin admitted to falsifying those records.


Slatkin also had a business association with Patrick Gallagher (“Gallagher”) during 1986-1990.  Gallagher was a commodities trader licensed with the Chicago Board of Trade.    Slatkin and Gallagher came to an agreement whereby Slatkin would make funds available to Gallagher, who was properly licensed, to make the trades.  Ultimately, a bitter dispute arose between them relating to capital accounts and tax allocations.   In the final exchange Gallagher’s attorney intoned, “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 respect to the exchange rules and conduct, which, under closer scrutiny, may subject one to prosecution by various government agencies.”  Ex. 6 (¶ 7).

Over the years, Slatkin’s reputation grew, based upon the falsified returns of his portfolio, and people sought out his expertise in ever growing numbers and he had an increasing amount of money under his control.  In 1994, Kevin O’Donnell (“O’Donnell”) convinced Slatkin to invest in Earthlink.  Within three years, Earthlink became a dot-com success story and Slatkin’s Earthlink stock in the company was worth over $100 million; however, that stock was restricted and was not freely transferable.  Slatkin’s Earthlink investment enhanced his credibility with investors.

During the 1990s, Slatkin received hundreds of millions of dollars.  He and his family lived in a large estate in Santa Barbara and employed an estate manager to tend to the property.  They took vacations to Europe and Hawaii, belonged to an elite country club, and their social circle included some of Santa Barbara’s wealthiest and most influential people.  Reed Slatkin had “arrived.”

During this period Slatkin was investing in a wide array of real estate developments throughout the United States, film and production companies, investment partnerships, and securities in a variety of companies.  Most of these investments would prove to be financial disasters.

Unfortunately, for both Slatkin and his investors, with the exception of Earthlink, Slatkin’s financial castle was built upon the shifting sands of lies and misrepresentations.  The fissures started to be exposed in 1999.


As discussed in greater detail in the following section of this report, in late 1999, the SEC began a formal investigation into Slatkin’s activities to determine if he was as acting as a paid investment advisor who was required to be registered as such under federal law.  In an attempt to convince the SEC of his intention to remove himself from the area of money management, in January 2000 Slatkin told the SEC that $300 million of investor funds was in overseas accounts in Switzerland and that he was in the process of liquidating those accounts to pay off his investors, closing investors’ accounts, and referring investors to licensed money managers.  Ex. 1 (Slatkin Depo., p. 212).

To date, the Trustee and the Committee have found no evidence to confirm the existence of those foreign accounts or the transfer of substantial funds abroad.  Instead, it appears that Slatkin’s representations to the SEC were a further extension of the ruse in which he had been engaged since 1986.  Moreover, between January 2000 and April 2001, Slatkin had not stopped his investment activities but had taken in over $135 million in order to maintain the financial charade.

Between 1986 and 2001, Slatkin had approximately 800 investor “friends” who had given him as much as $593 million to invest for them.  Periodically, Slatkin provided his investors with statements that purported to show the securities that Slatkin held for their benefit.  Ex. 1 (Slatkin Depo., pp. 187-88).  Those statements showed glowing results - - that Slatkin regularly and uninterruptedly made money for the investors both in good and bad economic conditions.  Although Slatkin purchased some of the securities reflected on those statements, the vast majority of those purported holdings did not exist and the gains reported on those statements were illusory.  Slatkin regularly “doctored” real brokerage account statements in an apparent effort to support the existence of fictitious investments and profits.  The unfortunate reality is that Slatkin operated a Ponzi scheme cloaked as legitimate and highly profitable investment advice.

IV.       PROCEDURAL BACKGROUND

A.        The Securities and Exchange Commission Investigation of SlatkinA.  The Securities and Exchange Commission Litigation Against Slatkin

In 1997, the SEC began an informal investigation of Slatkin’s investment activities.  Ex. 1 (Slatkin Depo., pp. 122-23).  The SEC launched its formal investigation of Slatkin in 1999.


In his examination by the SEC in 2000, Slatkin falsely testified under oath that he was discontinuing his investment operations:  “This process of liquidating accounts is now in full swing.”  Ex. 1 (Slatkin Depo., p. 125).  “I am not accepting any new accounts or any money from existing accounts.  And I plan to transition to close or liquidate all accounts over the next few months.”  Id., p. 131.  In fact, while Slatkin was paying certain of his investors their purported account balances, at the same time, he was continuing to take in millions of dollars from other “friends.”  As noted above, during 2000 until he filed bankruptcy, Slatkin took in some $135 million from investors.

Slatkin also represented to the SEC and to certain of his investors that he had hundreds of millions of dollars of investor money in Switzerland.  According to Slatkin’s testimony before the SEC, in 1987, he began moving his “friends” money to a company called NAA Financial (“NAA”) in Switzerland.  Ex. 1 (Slatkin Depo., p. 195).  All of this money purportedly was in Slatkin’s name in two accounts, one for Slatkin and one for his “friends.”  Id., pp. 210-12.

In early 2000, Slatkin also testified that, in approximately 1990-91, he deposited $12-15 million into his own account at NAA.  Ex. 1 (Slatkin Depo., p. 221).  In addition, he testified that he had not made deposits into either of the NAA accounts in the last 12 years (i.e., since 1988).  Id., pp. 231-32.  Finally, Slatkin represented that, in 2000, there was $300 million in his personal account with NAA.  Id., p. 212. 

Based upon the Trustee’s investigation to date and investigations conducted by certain of Slatkin’s investors, Slatkin’s story was a complete fabrication.  It also appears that NAA does not exist.  At the very least, investigators have not been able to identify any such company.  Investigators also determined that Slatkin’s purported NAA accounts with Union Bank of Switzerland do not exist.  Although Slatkin hired Ernst & Young to audit NAA’s books in Switzerland, apparently there is no such audit report.


There also is currently no evidence that Slatkin directly transferred any large sums of money to Switzerland in 1987-1989.  Moreover, it is clear that Slatkin was attempting to create the false image of Swiss accounts to mislead the SEC and to delay or derail its investigation.  In the midst of his SEC investigation, Slatkin used International Telecommunications Consulting, LLC (“ITC”) to set up a telephone line that forwarded calls made to a Swiss telephone number to Santa Barbara, where they were answered.  In February 2000, Chris Mancuso, who apparently owned ITC, wrote to Slatkin concerning the telephone line:  “when you dial the number the line has been conditioned to provide a truly genuine European ring (nice touch, huh?).”  Ex. 7.

On May 11, 2001, ten days after Slatkin filed bankruptcy, the SEC commenced a formal action entitled Securities and Exchange Commission v. Reed E. Slatkin, Case No. 01-4283 RSWL (MANx), in the United States District Court for the Central District of California, Western Division (the “SEC Enforcement Action”).  In its complaint, the SEC alleged that Slatkin was unlawfully operating as an unregistered investment advisor and that he had and was engaged in transactions, acts, practices, and courses of business in violation of federal securities laws.

On May 18, 2001 the United States District Court entered a Preliminary Injunction against Slatkin and froze his assets.  Ex. 8.  In substance, ¶ 6 of the Preliminary Injunction enjoined Slatkin from transferring “any funds, assets, securities, claims, or other property, owned by Slatkin, including such funds, assets, claims or other property that he controls or has possession of or custody of.”  In support of the Preliminary Injunction, the District Court entered Findings of Fact and Conclusions of Law (“SEC Findings”).  Ex. 9.


On May 29, 2001, Slatkin signed a Consent of Defendant Reed E. Slatkin to Entry of Judgment of Permanent Injunction and Other Relief (the “Consent”).  Ex. 10.  In executing the Consent, Slatkin agreed that he would not deny any allegation in the SEC’s complaint or create the impression that the complaint was without factual basis.  Id., ¶ 8.  Based thereon, on June 7, 2001, the District Court entered its Judgment of Permanent Injunction and Other Relief Against Defendant Reed E. Slatkin (the “Judgment”).  Ex. 10.  The Judgment permanently enjoined Slatkin from further violating the federal securities laws as alleged in the SEC’s Complaint.  It also permanently froze, among other assets, all monies and assets held in the name of or for the benefit of Slatkin or any of his affiliates.   Id., ¶ VII.  At the Trustee’s suggestion, the Judgment subsequently was modified to make clear that third parties holding assets subject to the Judgment were required to cooperate with the Trustee.  Ex. 11.

Although the Judgment required that Slatkin give the SEC “a detailed and complete schedule of all of his assets, foreign or domestic, including the source of such assets” (Ex. 10, ¶ XI), to the best of the Trustee’s knowledge Slatkin still has not done so.

B0       Litigation Against Slatkin

In early 2001, before the SEC commenced litigation against Slatkin, certain of Slatkin’s investors became alarmed about their inability to obtain the return of money that Slatkin purportedly had invested for them.

1          1.         The Poitras Litigation:  In February 2001, an investor named John Poitras transferred $10 million to Slatkin for investment.  Instead of making investments for Poitras, Slatkin, as he had typically done, used the bulk of those funds to pay off other investors and to pay personal expenses.  Ex. 9 (SEC Findings ¶ 10-11).  Later that month, Poitras requested the return of his money.  After Slatkin stalled and was not able to repay Poitras, Poitras commenced litigation against Slatkin on April 11, 2001.  Ex. 12 (Poitras Dec.).  In that litigation, Mr. Poitras served writs of attachment to freeze Slatkin’s assets.  Ex. 13.

2          Arthur and Lois Berke Litigation:  Between 1996 and 1999, Arthur Berke invested about $700,000 with Slatkin; he later invested another $2 million.  Ex. 14 (Berke Decl., ¶¶ 3-14).  In April, 2001, Arthur and Lois Berke filed suit in the Los Angeles Superior Court alleging causes of action against Slatkin for fraud and breach of contract.  Ex. 15.

3          The Wesley West Litigation:  On April 19, 2001, Wesley West Flexible Partnership and others (all affiliates of the Stedman family) commenced litigation entitled Wesley West Flexible Partnership [et. al.] v. Slatkin, Case No. 01-03628 RSWl (MANx) in the United States District Court for the Central District of California.  Ex. 16.  The Wesley-West group also sought to obtain writs of attachment against Slatkin.


Counsel for Poitras and Stuart Stedman, among others, participated in meetings with Slatkin's representatives during the last week of April, 2001, and participated in an informal group of creditors that successfully negotiated for Slatkin to file this bankruptcy case, to turn over voluminous documentation to Deloitte & Touche (which was to safeguard the documents and have them imaged), and to turn over his passport to Slatkin's counsel.   Poitras and Stedman are now members of the Committee.  Wesley West's counsel has now become Committee counsel.

C0       Slatkin’s May 1, 2001 Voluntary Petition for Relief; Appointment of the Trustee

On May 1, 2001, Slatkin commenced this bankruptcy case by filing a voluntary petition for relief.  Slatkin filed his petition only after (1) the SEC had been formally investigating him for a year and a half; (2) he had been sued by Poitras, the Berkes, and the Wesley West group who had invested tens of millions of dollars with him; and (3) certain of his creditors had threatened to file an involuntary bankruptcy petition if Slatkin did not voluntarily file bankruptcy.

In a chapter 11 bankruptcy case, generally the debtor remains in possession of his assets and may continue to operate his business with a view toward reorganizing the business.  However, in certain circumstances defined in 11 U.S.C.  1104(a), the Bankruptcy Court may order the appointment of an independent chapter 11 trustee to administer the debtor’s assets and operate his business.  The circumstances in which the appointment of a chapter 11 trustee is appropriate include fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor either before or after the commencement of the bankruptcy case.

On May 10, 2001, certain of Slatkin’s creditors filed a motion in the Bankruptcy Court for the appointment of an independent chapter 11 trustee; and on May 14, 2001, the United States Trustee filed her own motion for the same relief.  The latter motion was set for hearing on an expedited basis on May 16, 2001.


Immediately prior to the May 16 hearing, Slatkin sought to convert his chapter 11 reorganization case to a chapter 7 liquidation case.  Three significant consequences of conversion from chapter 11 to chapter 7 are that (1) an independent trustee is automatically, and randomly, appointed to administer the debtor’s assets and pay creditors; (2) if a chapter 7 creditors committee is appointed, it cannot retain counsel at the expense of the bankruptcy estate; and (3) distributions to creditors from a chapter 7 bankruptcy estate generally takes years.  Accordingly, if the Bankruptcy Court had permitted Slatkin to convert his case to chapter 7, the Committee would have been without a viable means of employing counsel or continuing its investigation, and the creditors would not have the opportunity to file a chapter 11 liquidating plan, in order to begin earlier distributions.

At the May 16 hearing, the Bankruptcy Court determined not to permit Slatkin to convert his case to chapter 7.  The Court then ordered the appointment of a chapter 11 trustee and the U.S. Trustee made the appointment of R. Todd Neilson as the chapter 11 trustee.

D0       The Official Committee of Unsecured Creditors

The Bankruptcy Code also provides for the appointment of a committee of creditors holding unsecured claims and for counsel for that committee in a chapter 11 case.  11 U.S.C. § 1102.  The retention of such counsel is subject to Bankruptcy Court approval, and their fees and expenses are payable by the bankruptcy estate after notice and hearing and upon order of the Bankruptcy Court. 

In this case, the Committee has been appointed and it has retained counsel pursuant to Bankruptcy Court order entered on or about May 10, 2001.   The Committee has six members who, along with their affiliates and associates, collectively hold claims against the Estate in the approximate amount of $115 million for funds they invested with Slatkin, net of any payments received.

V         HIGHLIGHTS OF THE FORENSIC INVESTIGATION

A0       Introduction


Ronald Rakow, a close business associate of Slatkin, advised Slatkin in a memo, “Remember you live and thrive in a world of adulation & respect.  In a brutally frank critique and examination you will be found to be a Human . . . .”  Ex. 17.  The primary source of this “adulation and respect” was Slatkin’s supposedly “proven” prowess as a financial advisor who consistently provided double-digit annual returns on investments tendered to his care.  Through their analysis of millions of documents and transactions, the Trustee and his professionals have made the “brutally frank critique and examination” of which Rakow warned.  In essence, “the truth is in the numbers.”[2]

In order to make the required analysis of Slatkin’s financial affairs, NE first had to secure the records of Slatkin and related entities. That task was accomplished through coordination with the FBI, the IRS Criminal Division, Justice Department lawyers, and legal counsel for both the Trustee and the Committee.  The Trustee obtained more than 300 boxes of records which are maintained in a centralized document center.  In addition, voluminous data was downloaded from Slatkin’s computers; and the Trustee and his counsel obtained substantial additional records from third parties such as banks, brokerage firms, and other businesses, both through the issuance of Rule 2004 subpoenas and informal document productions.


Once the records were available for review, NE commenced its analysis.  To date, NE has examined the approximately $1.5 billion which flowed between 63 bank accounts and 318 brokerage accounts (see Exs. 18 and 19); and under the direct supervision of Mr. Judd, 9 people have spent over 6000 hours analyzing and dissecting Slatkin’s financial dealings over a 15-year period.  In all, NE has reviewed literally millions of pages and related financial documents.  The financial investigation is ongoing and will continue during the pendency of this bankruptcy case.  However, a significant amount of the financial information that has been gleaned illuminates, both for the Court and other interested parties, Slatkin’s scheme.

 

B0       Investment Procedure and Income Reporting

After an investor opened an account with Slatkin, Slatkin typically provided quarterly “statements,” which he carefully crafted in order to create the impression that Slatkin had made highly profitable investments and stock trades, generally averaging annual returns of from 25% to 50%.  See Ex. 20.  Obviously pleased, investors often transferred additional funds to Slatkin or simply did not withdraw funds from their accounts as they watched their wealth grow geometrically year after year (at least according to Slatkin’s quarterly statements).  Many of Slatkin’s investors had a sense of financial well-being that was finally jarred from its moorings by his bankruptcy.[3]

NE’s analysis confirms that the statements sent to investors were, by and large, completely fraudulent.  The returns reflected in those statements were inflated or non-existent.  Virtually none of the reported trades had been made, and the securities which supposedly were held in the investors’ accounts had never been purchased or had been purchased in far smaller quantities than Slatkin reported.  Similarly, Slatkin’s other oral and written representations concerning his investment returns were utterly false and fraudulent.

As an example, the following Schedule compares the profits reported to investors with those actually reported on Slatkin personal tax returns for the calendar year 1995. 


 

REED E. SLATKIN

 

All Investors ‑ All Accounts

 

Summary of Activity for the Year Ended December 31, 1995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts

 

 

 

Activity as Reported to Investors

 

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1994

 

 

 

$          133,663,272

 

 

 

 

 

       (383 Investor Accounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

32,058,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

            (23,421,246)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profits Reported to Investors

 

           

 

          67,819,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1995

 

 

 

 

 

 

 

 

 

       (484 Investor Accounts)

 

 

 

$          210,120,038

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Income/Profit as Reported on Tax Returns (note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

           

 

$                465,079

 

 

 

 

 

Dividend Income

 

           

 

                 152,265

 

 

 

 

 

Income (losses) from k‑1's

 

           

 

                (793,139)

 

 

 

 

 

Consulting Business Expenses (note 3)

 

           

 

              (1,298,459)

 

 

 

 

 

Short‑term/Long‑term Gains (losses)

 

 

 

               1,943,162

 

 

 

 

 

Miscellaneous

 

 

 

                  (51,675)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Income/Profit as Reported

 

 

 

$             417,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 1:  The amounts as reported on Reed E. Slatkin's personal tax return for the year materially agree to activity from actual cash receipt and disbursement detail, brokerage accounts and partnership k‑1's.  These amounts are representative of actual results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 2:  Includes both Reed E. Slatkin's personal return and Slatkin Investment Club.

 

 

 

 

 

Note 3:  Reed Slatkin's personal tax return includes consulting income from investors.  These payments which are classified as income for tax purposes are classified as ordinary investment receipts from investors and reported as such to the investor.  Accordingly, they are not included as income for purposes of this analysis.

 

 

 

 

 

Source:  Books and records of the Debtor

 

 

 

 

 

 

 

 

 

 

 

 


As the above Schedule reveals, Slatkin began 1995 with 383 investor accounts and ended the year with 484 accounts (a net increase of 101 accounts).  During that period he reported to investors that they had made profits of approximately $68 million, i.e., a purported annual return of 49.15%.  In fact, Slatkin overstated the profits by $67.5 million, having gained only approximately $400,000 on funds still in his care.

The Schedule below reflects the annual rate of return, as reported by Slatkin, from 1994 through 2000.  Those returns ranged from 19.68% to 49.15%.  The Trustee believes that those returns were, by and large, imaginary -- the result of Slatkin’s systematic fraudulent reporting of non-existent gains and income.  In fact, Slatkin did not generate gains on his entire investment portfolio; he generated massive losses.  Moreover, all of the funds which Slatkin received from investors were commingled and used for whatever purpose he determined at the time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/ / /

/ / /

/ / /


 

REED E. SLATKIN

 

All Investors ‑ All Accounts

 

Summary of Activity for the Years 1994 through 2000

 

 

 

 

 

 

 

 

 

 

 

Amounts

 

 

 

Number of Accounts

 

Estimated Annual

Rate of Return

 

Activity as Reported to Investors

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1993

 

$  91,848,540

 

 

 

297

 

 

 

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

26,236,410

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(18,147,333)

 

 

 

 

 

 

 

 

 

 

 

1994 Profits Reported to Investors

 

 

 

33,725,656

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1994

 

133,663,272

 

 

 

383

 

35.05%

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

32,058,091

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(23,421,246)

 

 

 

 

 

 

 

 

 

 

 

1995 Profits Reported to Investors

 

 

 

67,819,920

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1995

 

210,120,038

 

 

 

484

 

49.15%

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

42,290,351

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(38,476,105)

 

 

 

 

 

 

 

 

 

 

 

1996 Profits Reported to Investors

 

 

 

62,671,772

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1996

 

 

 

276,606,056

 

 

 

623

 

29.56%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

66,588,599

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(42,295,853)

 

 

 

 

 

 

 

 

 

 

 

1997 Profits Reported to Investors

 

 

 

86,935,289

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1997

 

 

 

387,834,092

 

 

 

757

 

30.11%

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

100,113,775

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(76,279,109)

 

 

 

 

 

 

 

 

 

 

 

1998 Profits Reported to Investors

 

 

 

109,740,117

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1998

 

 

 

521,408,875

 

 

 

762

 

27.45%

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

97,614,364

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(101,817,431)

 

 

 

 

 

 

 

 

 

 

 

1999 Profits Reported to Investors

 

 

 

138,970,796

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 1999

 

 

 

656,176,604

 

 

 

774

 

26.76%

 

 

 

 

 

 

Add:  Investor Cash Receipts

 

 

 

102,620,503

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Investor Cash Disbursements

 

 

 

(109,074,273)

 

 

 

 

 

 

 

 

 

 

 

2000 Profits Reported to Investors

 

 

 

128,522,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Account Balances ‑ December 31, 2000

 

 

 

778,245,372

 

 

 

734

 

19.68%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


C0       Reed Slatkin Investment Club:  1998

In 1990, Slatkin registered the Reed Slatkin Investment Club as a dba in Los Angeles County.  On March 3rd of that year, he also formed a limited partnership called the Reed Slatkin Investment Club, LP (“RSIC”), of which Slatkin was the sole general partner.  Ex. 21.  Most of the RSIC accounts were in the name of various retirement plans; and it appears that Slatkin formed RSIC for retirement funds that were being invested for the long-term, so that he could expect that, in any given year, only a small percentage of the funds would be withdrawn.

As a further example of how Slatkin falsely reported gains to investors, NE analyzed RSIC’s investment structure, comparing its 1998 financial results, as reported by Slatkin, with its actual results.  As detailed in Exhibit A, as of January 1, 1998, there were 64 investors with a reported $45,110,218 in their retirement accounts.  Slatkin added seven new accounts during the year.  None were closed.  Therefore, at the end of the year, Slatkin controlled 71 accounts through RSIC.

During the year, RSIC reported profits to investors of $10,446,643, which he added to their individual account balances.  The records further reflect that he returned $4,319,228 to investors during the year.  Thus, according to the quarterly statements that investors received from either Union Bank of California or Santa Barbara Bank & Trust, the aggregate value of their accounts at the end of 1998 was $51,237,633.

A review of the purported $10,446,643 profit during the year reveals that it “consisted” almost entirely of fictitious interest from a Union Bank account, fabricated dividends, and bogus stock sales.  Slatkin attributed to investors’ accounts their share of interest on a purported $21,992,980 on deposit in a Union Bank account as of December 31, 1998.  However, the actual cash balance in that account on that date was only $9,950. 


 As reflected in the following Schedule, Slatkin overstated RSIC’s cash by $21,983,029, reporting that RSIC held $24,173,478 compared to the $2,190,449 it actually held.  According to Slatkin’s statements, the aggregate value of securities in RSIC accounts, listed at cost, was $24,508,272, but securities actually held by RSIC were worth only $834,801 — a net overstatement of $23,673,471.  Slatkin told his RSIC investors that unrealized gains on their holdings totaled $4,140,004, despite the fact that there was an actual unrealized loss on stocks of $431,525 – a net overstatement of $4,571,529.  Finally, the total amount of investor retirement accounts was purportedly $51,237,633, when it was actually only $2,593,724 – a net overstatement of $48,643,909.

 

REED E. SLATKIN

 

Slatkin Investment Club

 

Comparison of Actual to Reported ‑ Balance Sheet

 

As of December 31, 1998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances

 

Actual

 

 

 

 

 

 

 

 

 

As Reported

 

Balances

 

 

 

 

 

 

 

 

 

12/31/98

 

12/31/98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash ‑ Union Bank ‑ Highmark

 

 

 

$           21,992,980

 

$            9,950

 

 

 

 

 

Cash ‑ Santa Barbara Bank

 

 

 

515,846

 

515,846

 

 

 

 

 

Cash ‑ Imperial "Prin Cash"

 

 

 

13

 

13

 

 

 

 

 

Cash ‑ Imperial Bank

 

 

 

24,039

 

24,039

 

 

 

 

 

Cash ‑ Imperial ‑ Monarch Gov't Fund

 

 

 

1,640,600

 

1,640,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Cash

 

 

 

24,173,478

 

2,190,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities at Cost

 

 

 

24,508,272

 

834,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains ‑ Stocks

 

 

 

4,140,004

 

(431,525)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due From (to) Reed Slatkin

 

 

 

(1,584,120)

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

$           51,237,633

 

$     2,593,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Capital

 

 

 

 

 

 

 

 

 

 

 

Capital ‑ Partner Capital Accounts

 

$           51,237,633

 

$     2,593,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source:  Books and records of the Debtor

 

 

 

 

 

 


RSIC also reported $160,685 in dividends on stocks supposedly held in the accounts.  In actuality, RSIC received no dividends during the entire year.  Finally, RSIC reported stock sales of approximately $11.8 million, when they were actually no stock sales whatsoever during 1998.  In sum, instead of reported income of $10,446,645, RSIC actually had a net loss of $127,138.

 

REED E. SLATKIN

 

Slatkin Investment Club

 

Comparison of Actual to Reported Income Statement

 

For the Year Ended December 31, 1998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

as Reported

 

 

 

Actual Income

 

 

 

 

 

 

 

 

 

 

 

12/31/98

 

 

 

12/31/98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

$       160,685

 

 

 

$            0

 

 

 

 

 

 

 

Imperial bank ‑ Treasury Bill Interest

 

 

 

32,256

 

 

 

32,256

 

 

 

 

 

 

 

Imperial Bank ‑ Monarch Gov't Fund

 

 

 

24,171

 

 

 

24,171

 

 

 

 

 

 

 

Imperial Bank ‑ Interest

 

 

 

980

 

 

 

980

 

 

 

 

 

 

 

Santa Barbara Bank ‑ Interest

 

 

 

11,884

 

 

 

11,884

 

 

 

 

 

 

 

Union Bank ‑ Highmark Interest

 

 

 

1,066,344

 

 

 

532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized Gains:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Short‑term

 

 

 

7,650,676

 

 

 

0

 

 

 

 

 

 

 

    Long‑term

 

 

 

4,181,358

 

 

 

0

 

 

 

 

 

 

 

    Unrealized gain adjustment

 

 

 

(1,326,309)

 

 

 

(20,562)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Management Fees ‑ Reed Slatkin

 

 

 

(1,179,000)

 

 

 

0

 

 

 

 

 

 

 

    Trust fees ‑ Imperial Bank

 

 

 

(117,968)

 

 

 

(117,968)

 

 

 

 

 

 

 

    Trust fees ‑ Santa Barbara Bank

 

 

 

(46,853)

 

 

 

(46,853)

 

 

 

 

 

 

 

    Custodial fees ‑ Imperial Bank

 

 

 

(1,725)

 

 

 

(1,725)

 

 

 

 

 

 

 

    Custodial fees ‑ Bank of California

 

 

 

(2,500)

 

 

 

(2,500)

 

 

 

 

 

 

 

    Tax preparation fees

 

 

 

(7,330)

 

 

 

(7,330)

 

 

 

 

 

 

 

    Bank charges

 

 

 

(22)

 

 

 

(22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

$    10,446,645

 

 

 

$    (127,138)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source:  Books and records of the Debtor

 

 

 

 

 

 

 

 

 

 

 

 

Attached are Exhibits B, C, and D that reflect a similar pattern of misstatement for 1997.  The Schedule below is a recap of the RSIC balances as reported by Slatkin to investors for the year ended December 31, 1997 as compared to the actual balances as gleaned from the financial records of Slatkin for the same period.


As shown, Slatkin reported Partner Capital accounts totaling $45,110,218 when the actual RSIC balance was $1,196,150 for an overstatement of $43,1914,068.

 

REED E. SLATKIN

 

Slatkin Investment Club

 

Comparison of Actual to Reported ‑ Balance Sheet

 

As of December 31, 1997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances As Reported

 

 

 

Actual Balances

 

 

 

 

 

 

 

 

 

12/31/97

 

 

 

12/31/97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash ‑ Union Bank ‑ Highmark

 

 

 

$                 14,082,266

 

 

 

$                         11,918

 

 

 

 

 

Cash ‑ Santa Barbara Bank

 

 

 

375,449

 

 

 

375,449

 

 

 

 

 

Cash ‑ Imperial "Prin Cash"

 

 

 

96

 

 

 

96

 

 

 

 

 

Cash ‑ Imperial Bank

 

 

 

36,050

 

 

 

36,050

 

 

 

 

 

Cash ‑ Imperial ‑ Monarch Gov't Fund

 

 

 

348,800

 

 

 

348,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Cash

 

 

 

14,842,661

 

 

 

772,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities at Cost

 

 

 

25,206,362

 

 

 

 

 

 

 

 

 

    Union Bank #27194107

 

 

 

 

 

 

 

554,134

 

 

 

 

 

    Imperial Bank #04647

 

 

 

 

 

 

 

280,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains ‑ Stocks

 

 

 

5,466,312

 

 

 

 

 

 

 

 

 

    Union Bank #27194107

 

 

 

 

 

 

 

(351,072)

 

 

 

 

 

    Imperial Bank #04647

 

 

 

 

 

 

 

(59,891)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due From (to) Reed Slatkin

 

 

 

(405,118)

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

$                 45,110,218

 

 

 

$                    1,196,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ‑ Partner Capital Accounts

 

 

 

$                 45,110,218

 

 

 

$                    1,196,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source:  Books and records of the Debtor

 

 

 

 

 

 

 

 

Exhibit B is a copy of the actual 12/31/97 Union Bank Statement, Exhibit C is a copy of the actual 12/31/97 Imperial Trust Statement, and Exhibit D is a copy of the altered balance statements as prepared by Slatkin for the same period.


As previously detailed, RSIC reported large and comforting gains to those investors who entrusted Slatkin with their retirement funds.  In actuality, Slatkin fabricated those gains.  Moreover, the cash supposedly sequestered in RSIC investor accounts was routinely transferred to Slatkin’s general operating accounts.  If Slatkin needed to fund withdrawal requests by RSIC investors, he simply transferred funds back to RSIC from his general operating accounts.  There was no segregation of the various funds or accounts.  Because RSIC held few assets and had minimal income, the only possible way for Slatkin to maintain its operations was to secure additional funds from new investors.

D.        NE’s Conclusions

As a result of their detailed analysis, both NE and the Trustee have come to the conclusion that Slatkin intentionally engaged in a Ponzi scheme.  The vast preponderance of funds received by Slatkin were never invested in the manner reported on the investor statements, but were either paid to investors as a continuation of the Ponzi scheme or used to make unwise and unprofitable investments. 

Exhibit E provides an overall recap of Slatkin’s investment receipts and disbursements, and the results of his investment activities.  As shown in that Exhibit, Slatkin needed a continual infusion of additional funds by investors to maintain this illusion of profitable trades.  That need grew in intensity until, during 2001, it would have required an annual expenditure of $130 million to maintain promised returns commensurate with past performance - a clearly unattainable sum.

E.        Total Claims and Net Overpayments

The following represents a recap of the total amount of money invested with Slatkin from January 1, 1986 through April 30, 2001 and the remaining claims.


 

REED E. SLATKIN

 

 All Investor Activity ‑ All Bank & Brokerage Accounts

 

For the Period January 1, 1986 through April 30, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investor Receipts (note 1)

 

 

 

$     593,189,536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investor Disbursements (note 1)

 

 

 

$   (534,073,577)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Overpayments (net debtors)

 

 

 

$   (195,481,276)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Net Investor Claims

 

 

 

$     254,597,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 1:  Receipts and disbursements include all investor activity including but not limited to investments, investment withdrawals, loans, loan repayments, wages, consulting fees, interest, expense reimbursements, stocks, gold etc.

 

 

 

 

 

 

 

 

 

 

 

 

Source:  Books and records of the Debtor

 

 

 

 

 

 

As the Schedule shows, the total amount invested with Slatkin during that 15-year period was $593 million.  During that time, he disbursed $534 million to investors.  The remaining net claims, representing actual cash invested but not returned, is approximately $255 million.

A number of the investors received varying amounts in excess of their original investment.  Between 1986 and 2001, that group collectively received in excess of $195 million more than they had deposited.  The following represents (in descending order), a list of 75 investors who profited handsomely from their long term association with Slatkin.  They received $151 million of the $195 million. (The remaining $44 million was paid to investors who received total overpayments of less than $630,000 each.)  The preponderance of these overpayments occurred within the past seven years.

 


 

REED E. SLATKIN

 

 

 

Schedule of 75 Largest Net‑Debtors

 

 

 

For the Period January 1, 1986 through April 30, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Receipt

 

 

 

Disbursement

 

 

 

Net

 

 

 

Investor Name

 

 

 

Amount

 

 

 

Amount

 

 

 

Overpayment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joel Kreiner & Stina Hans

 

 

 

$ 3,143,315

 

 

 

$ 9,009,898

 

 

 

$ (5,866,583)

 

 

 

William W. & Anne Hutchins

 

 

 

1,611,206

 

 

 

7,100,839

 

 

 

(5,489,632)

 

 

 

R.E. (Burt) Laing

 

 

 

423,465

 

 

 

5,779,597

 

 

 

(5,356,132)

 

 

 

Robert & Karen Rakow & Highlands Group

 

 

 

3,056,077

 

 

 

8,273,876

 

 

 

(5,217,798)

 

 

 

Jeffrey B. & Debra Schwartz

 

 

 

2,643,071

 

 

 

7,731,232

 

 

 

(5,088,161)