The Reed Slatkin Case: Did the SEC Drop the Ball?
The first inkling of trouble for many investors came with an invitation to a meeting at a Santa Monica (Calif.) law office on Apr. 30. As attorneys Richard M. Pachulski and Brian A. Sun explained it, the money manager they represented--one whom many of the attendees had trusted with their life's savings--was declaring bankruptcy. "There was substantial shock in the room," says one investor present at the meeting, who asked that his name not be used. "I remember thinking: `How the hell did we get to this point?"'
How indeed? The saga is still unfolding, but right now, money manager Reed E. Slatkin, a 52-year-old Internet millionaire with blue-chip connections in Silicon Valley and Hollywood, stands accused of defrauding more than 500 investors of hundreds of millions of dollars. On May 11, agents of the FBI and the Internal Revenue Service raided Slatkin's home office in the resort city of Santa Barbara, north of Los Angeles.
On the same day, the Securities & Exchange Commission obtained a court order freezing Slatkin's assets and filed a suit charging him with operating an unregistered investment business and lying to the government about accounts he said he held in Switzerland. The SEC said Slatkin was operating a Ponzi scheme--collecting funds from new investors to pay off earlier investors--to finance a lifestyle that afforded him two country club memberships, a private jet, and a reputation as a philanthropist.
SCIENTOLOGIST. Beyond the shock of Slatkin's bankruptcy, some investors were also surprised to find out that the SEC had been investigating Slatkin since as early as 1997. Yet it was private lawsuits that brought Slatkin's problems to public light. "A number of investors will be asking hard questions about whether the government did its job," says Richard S. Conn, a Los Angeles attorney representing a retired venture capitalist who claims to have lost $15 million through Slatkin. Says Kelly C. Bowers, the SEC's assistant regional manager in Los Angeles who supervised the case: "Slatkin repeatedly lied to the staff, produced false documents, and obstructed our investigation." Slatkin has not responded publicly to any of these charges, nor did he return phone calls from BusinessWeek. His attorney, Sun, says his client has no comment.
"The SEC had an ongoing investigation. I don't believe they were fully aware of everything until it started to become public," says Los Angeles attorney Richard L. Wynne, who represents Slatkin's creditors. "My clients would have preferred SEC action a long time ago, preferably before they invested. Everybody was thinking that somebody else did the due diligence."
By all accounts, Slatkin is an exceptionally persuasive individual. A native of Michigan, he became involved at a young age with the Church of Scientology, a religion based on the writings of the late L.Ron Hubbard. Slatkin and his wife, Mary Jo, made a living in the 1970s and early 1980s as ministers for the church, according to testimony Slatkin gave the SEC last year. In the mid-1980s, Slatkin said, he began investing money in the stock market both for his own account and as a favor to friends, many of whom were Scientologists. Nobody knows how much, but some believe that because of Slatkin's connections, the investments by the Scientologists may have accounted for the bulk of the money he was managing.
Slatkin hit the big time in the late 1990s after investing $75,000 to co-found EarthLink Inc., now the second-largest Internet access provider in the U.S. A director of the company until his resignation in late April, Slatkin held a stake that at its high point in 1999 was worth more than $100 million. That big position in a publicly traded company enhanced Slatkin's credibility, many investors say. "The EarthLink position was legitimate and publicly verifiable," says Stuart W. Stedman, a wealthy Texan whose family invested $34 million with Slatkin. EarthLink Chairman Sky D. Dayton and CEO Charles G. Betty personally invested funds with Slatkin. Both declined to comment.
TINSELTOWN, TOO. Slatkin also gained entree into the inner circles of Hollywood. As first reported by the Los Angeles Times, actor Giovanni Ribisi, who played an ethically challenged stockbroker in the film Boiler Room, was an investor. So was Air Force One producer Armyan Bernstein, who got Arnold Schwarzenegger and Kevin Costner to appear in a video for Slatkin's 50th birthday. Bernstein says neither Schwarzenegger nor Costner knows Slatkin and that a friend and fellow investor asked him to make the video.
Slatkin's defense, in rambling and often contradictory depositions, is that he was managing money for "friends." He claims to have turned his own negative net worth in 1983 into a $25 million personal fortune five years later via newly acquired investing skills. "My purpose is to help the Scientologists who have their attention away from money," Slatkin told the SEC. "It was never intended to be a business." He told the SEC that he wasn't getting paid fees but that some clients had contracts with him giving him discretion to invest where he "deemed appropriate."
Three lawsuits and a petition in federal bankruptcy court from investors tell a different story. Former clients say he expected compensation of 5% to 20% of the profits. In one suit, investor Arthur Berke says he signed an agreement promising Slatkin 20% of his portfolio's profits. In 1996, Berke met Slatkin through his son-in-law, an accountant who worked with Slatkin. Slatkin told Berke to expect short-term returns of 22%. Although he received three checks written by Slatkin, all of them bounced in mid-March. Berke's lawsuit says he has lost more than $1 million.
The SEC's investigation heated up in December, 1999, when the agency subpoenaed documents from Slatkin. The following January and February, the agency took more than 500 pages of depositions from Slatkin and his bookkeeper. At issue: whether Slatkin violated federal securities law by accepting fees for managing money without registering as an investment adviser. For more than a year, Slatkin maintained that he did not accept fees and that he was liquidating the accounts of all of his "friends." Some investors did get money back. The SEC reports that a net $46.1 million was returned to clients, but that represents only 20% of the $230 million that Slatkin admits he had under management. According to the lawsuits, however, Slatkin continued to raise tens of millions of dollars throughout this time. Lawyers and investors say that he was accepting new money as recently as March.
SEC CONNECTION. It's likely that Slatkin's credibility before the SEC was enhanced by his choice of counsel. Through much of the SEC's investigation, Slatkin was represented by Gerald E. Boltz, a partner in the prestigious St. Louis-based law firm of Bryan Cave LLP. Boltz is also a former manager of the SEC's Los Angeles office. The SEC's Bowers wouldn't comment on Boltz's connection. Says Boltz: "We reported the information that was reported to us, which we believed to be accurate."
Slatkin is believed to be staying at his Santa Barbara estate with his wife and two sons. Slatkin's bankruptcy filing lists debts in excess of $100 million and assets of less than half that. Slatkin lawyer Sun says his client is negotiating a settlement with the SEC, but that would still leave a bankruptcy filing, three investor lawsuits, and an FBI investigation for him to contend with.
One thing is clear: When it comes to investing your money, don't take anybody's word as gospel.
By Christopher Palmeri in Los Angeles, with Christopher Schmidtt in Washington