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Trustee Seeks Broader Powers to Reclaim Money from California Investment Scam

N.B. Reed Slatkin is Scientology 'Minister' Reed Slatkin

The Knight Ridder Tribune Business News

By Mark Van De Kamp
November 13, 2002

Hundreds of people tangled up in EarthLink co-founder Reed Slatkin's investment scam are being pressured to return tens of millions of dollars in profits made on their investments.

Unless they settle, these people face being sued -- even having their homes and assets attached -- by Todd Neilson, the court- appointed trustee who's going after Mr. Slatkin and the missing millions.

Mr. Neilson already has sent demand letters to hundreds of investors, small and large, seeking return of the money. He contends they received funds in excess of the amount of their investments made with Mr. Slatkin's unregistered investment club, court papers show. More recently, he's filed 54 complaints to recover money and is prepared to file hundreds of additional, similar complaints between now and April.

Now the trustee is seeking broader, sweeping powers from U.S. Bankruptcy Court Judge Robin Riblet in Santa Barbara, court papers say. A hearing is scheduled for Nov. 21. If approved, Mr. Neilson would be granted authority to settle hundreds of claims each worth up to $2 million without further hearings or court approval.

He wants to eliminate the requirement that court approval be obtained on a settlement-by-settlement basis, claiming this would be cost-efficient for him and the court. There are more than 550 claims, ranging in value from $168 to more than $5.8 million, and tackling each one individually would require enormous expense. Nine claims worth more than $2 million each would still be handled in court.

The trustee contends that because Mr. Slatkin operated a Ponzi scheme, transfers received by investors in excess of their investments are fraudulent transfers and some were preferential transfers. Those are key terms, because Mr. Neilson believes that since Mr. Slatkin operated a Ponzi scheme, such transfers can be recovered by federal law. A Ponzi scheme is illegal because investors are not told that their money is simply being used to pay off earlier investors. Inevitably, the schemes collapse.

He also wants the creditor's committee to approve all settlements.

But his proposal worries many investors, including some victims from the Santa Barbara and Los Angeles areas who say his tactics are out of line. A handful have filed objections in court, saying the trustee's plan is "exceedingly broad," leaves the door open for secret settlements and hurts their abilities to defend themselves. They contend that Mr. Neilson is not sharing many of the documents seized from Mr. Slatkin.

They say the court should refuse the trustee's request to settle all claims up to $2 million and suggest a lower figure, perhaps $10,000 or $100,000, court papers say.

This group states that hundreds of people were already victimized by Mr. Slatkin and that they resent being targeted for litigation by Mr. Neilson. They say they have used much of the money received from Mr. Slatkin over the years to pay taxes on the investment income that Mr. Slatkin had them report to the IRS.

Mr. Neilson was away from his office Tuesday and could not be reached for comment, an aide said.

Further, these people charge that Mr. Slatkin perhaps did not operate a Ponzi scheme for the duration of his 15-year investment club. They suspect he made at least some legitimate investments and if so, that could shield them from repaying what the trustee thinks are profits.

These developments mark a new chapter in the Slatkin scam, which erupted 18 months ago. Mr. Slatkin pleaded guilty in March to 15 counts of fraud, money laundering and conspiracy and is in jail, awaiting his sentencing next February. The trustee said Mr. Slatkin operated one one of the largest Ponzi schemes in history, fleecing at least $254 million from more than 800 investors since 1986.

Mr. Slatkin's victims included Hollywood celebrities, Internet moguls and hundreds of individuals and families who entrusted him with their life savings, college tuition and retirement funds. His unregistered investment club was run from his Goleta office and Hope Ranch estate. It's a tale lined with Swiss bank accounts that never existed, false investment statements and valueless investments, that in the trustee's report was a "financial castle ... built upon the shifting sands of lies and misrepresentations."

Related Articles:
Reed Slatkin Associate Pleads Guilty, Reuters October 15, 2002
Assets and Timeline, March 31, 2002 Santa Barbara News-Press
Earthlink Co-founder pleads Guilty to fraud, Reuters, March 22,2002
FBI and IRS Raid Offices of Reed Slatkin, LA Times, May 12, 2001
Co-founder of Earthlink faces claims of $600 million. LA Times May 11, 2001

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