Defrauded Investors Have Stories to Tell

Slatkin's victims, who thought he was a friend, want no leniency at his sentencing today.

Los Angeles Times

September 2, 2003

By E. Scott Reckard, Times Staff Writer

http://www.latimes.com/business/la-fi-slatkin2sep02,1,5610832.story

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During more than 15 years of fraud that cost his investors $240 million, Reed E. Slatkin seemed as much trusted friend as money manager. He schmoozed clients with tips on how to landscape their estates, attended funerals of their family members and all the while offered assurances that he would protect their college and retirement funds.

His victims have asked to tell some of those stories today at Slatkin's sentencing hearing in Los Angeles, hoping to persuade U.S. District Judge Margaret M. Morrow to throw the book at the former Santa Barbara financial advisor.

Slatkin, 54, has admitted he fabricated account statements that showed clients beating the stock market's heady returns of the late 1990s, while using their funds to pay for airplanes, luxury cars, real estate, artwork and gold for himself.

The long-running scam ended in his bankruptcy in 2001, followed by his guilty pleas last year to 15 counts of fraud, conspiracy and money laundering.

From the point of view of some victims, the story is one of double betrayal - once by the scam artist and again by the federal government.

They contend that the Securities and Exchange Commission botched an investigation of Slatkin that could have shut him down more than a year before he declared bankruptcy.

Critics of Leniency

The investors also criticize federal prosecutors for recommending what they regard as an overly lenient prison sentence of 11 years and three months.

"If the sentence is 11 years, you can wrap a fish in it," said John Poitras of Santa Ynez, Calif., a former venture capitalist who lost $15 million with Slatkin. "We're just going to walk away from it, because it stinks."

Poitras said he met Slatkin when they co-sponsored a theatrical production in Santa Barbara but that the investment advisor remained aloof until he learned Poitras had decided to part with his multi-acre Silicon Valley estate to move to the Santa Barbara area.

"When he heard I sold my house, he said he had to visit me and he flew up in his jet," Poitras said. He soon found himself discussing the finer points of plants and landscape architecture with Slatkin, who had a grand spread in Hope Ranch, a wealthy Santa Barbara suburb known for its polo field and private beaches.

Slatkin took millions from Poitras toward the end of his criminal career, at a time when Slatkin was stalling an SEC attempt to investigate him.

At about the same time, the family of cellular telephone entrepreneur Michael Azeez entrusted about $17 million to Slatkin, bringing their total investment with him to nearly $44 million.

"He's some type of psychopath," Azeez said in a telephone interview from his home in New Jersey. "I don't know how you go into people's parties, religious functions, like he did. He even went to my dad's funeral."

In a sentencing memorandum, prosecutors detailed the tremendous financial and emotional wreckage that Slatkin caused. But they also described how he voluntarily pleaded guilty and cooperated with prosecutors soon after his May 1, 2001, bankruptcy filing.

Slatkin, who has been in custody for 16 months, has repeatedly briefed investigators on his fraud and cover-up, helping pave the way to guilty pleas by three co-conspirators, with additional charges expected soon, the memo said.

Assistant U.S. Atty. Steven Olson said Slatkin would be facing a far more severe penalty had his crimes occurred after November 2001, when federal sentencing guidelines for financial fraud were made significantly tougher.

"We had to balance the enormous magnitude of the crime with the fact of his coming in early, accepting responsibility and cooperating," Olson said. "If we don't acknowledge that cooperation, the system collapses."

Slatkin had a number of high-profile clients, including actors Peter Coyote and Joe Pantoliano, model Cheryl Tiegs and legal commentator Greta Van Susteren. Those notables were among the relatively few Slatkin clients who were repaid more than they invested.

Their profits were bogus, however, as Slatkin admitted in his plea agreement: The payouts were part of a long-running Ponzi scheme that plundered some investors to pay others.

His 800 accounts included many people of modest means who, as the prosecutors' sentencing memorandum put it, have experienced such hardships as "having to sell their homes, having to delay or come out of retirement, and an inability to pay for critical medical needs."

The most vocal group of victims is made up of successful businesspeople such as Poitras and Azeez, many of whom encouraged family members and friends also to invest millions with the con artist, who persuaded them he was a family man with a strong work ethic and a flair for sniffing out profits in financial markets.

Indeed, one of Slatkin's marketing pitches was that he was a co-founder of Internet firm EarthLink Inc. In the late 1990s, that was a tantalizing come-on.

"Three and a half months before the bankruptcy, my father - who had throat cancer - gave Reed $7 million. It was the last investment of his life,"

said Gregory Abbott of Aspen, Colo., who invested $7.3 million. In all, his family, owners of a private-label apparel company, invested $17.3 million.

"Reed was friends with a lot of us," Abbott said. "He preyed on the sick, the dying, the young, the innocent and the vulnerable. He's like a great white shark."

The prosecution sentencing memo estimates that the total amount of lost principal stands at $240 million. The bankruptcy trustee has estimated that Slatkin clients who lost money may get back 22 cents for every dollar invested.

Attorneys for the trustee and the creditors have sued to recover funds from Slatkin's bankers and from his clients who came out ahead. They also are negotiating with groups affiliated with the Church of Scientology that allegedly wound up with tens of millions of dollars in donations from Slatkin clients.

Many of the clients who came out winners already have settled the cases, but Alexander Pilmer, an attorney for the creditors and the trustee, estimated there still may be $100 million in such "bogus profits" to pursue for investors whose accounts were drained.

Then there are the contentions of embittered investors - at this point unsubstantiated - that Slatkin managed to hide tens of millions of dollars in foreign bank accounts and that he spirited away the best of his extensive art collection before the FBI raided his homes and offices.

Slatkin's plea agreement acknowledged that his financial career had been a fraud since 1986, when he was managing funds for fellow Scientologists. As years passed, he acquired many clients who did not belong to the group, whose belief system is based on the works of science fiction writer L. Ron Hubbard.

In all, his elaborate frauds raised $593 million, according to the prosecution sentencing memo. Of that total, investigators say, Slatkin took in $142.5 million from late 1999, when he learned the SEC was investigating him, through May 2001, when his empire collapsed, by engineering "an elaborate conspiracy" to obstruct the SEC probe.

Lawyers Bamboozled

The scheme included Slatkin's perjured testimony and numerous documents forged by associates, including a lie that large sums of investor funds were tied up at a purported Swiss brokerage called NAA Financial.

Much of the false material was relayed to the SEC by Gerald Boltz, a well-known lawyer whom Slatkin hired in December 1999 to represent him with the agency. Boltz, from the firm Bryan Cave, previously had headed the SEC's Pacific regional office in Los Angeles.

According to disclosure material filed to support the reorganization plan in Slatkin's bankruptcy case, neither Boltz's firm nor the SEC investigated enough to determine that NAA was fictitious. That came to light in April 2001, only after a brief investigation by a lawyer for a creditors' committee member determined that NAA did not exist at the address shown on its supposed stationery.

Boltz said his firm worked hard at checking Slatkin's claims, including hiring accounting firm Ernst & Young to verify the assets at NAA. But using lies, forgeries and repeated delays in providing access to detailed records from NAA, Slatkin bamboozled his own lawyers.

"We were deliberately misled," Boltz said.

Some investors blame the SEC for allowing Slatkin, through Boltz, to stall the agency. They note that the SEC made initial inquiries into Slatkin's business - which never had registered as an investment advisor - as early as 1997.

"If I could sue anybody it would be the SEC in L.A.," Azeez said. "They were derelict in their duties, what they were supposed to be doing as governmental agency."

Randall R. Lee, director of the Pacific regional office in L.A., responded in a statement that "while it may be easy to cast blame, I would emphasize that Reed Slatkin and two of his associates have now pleaded guilty to conspiracy to obstruct the SEC's investigation."

Lee declined to comment on Boltz "or on any specific allegations about investigative steps we did or did not take."

In a hint to what Slatkin's attorneys may argue before the judge today, Slatkin is asking for a lighter sentence than prosecutors' recommendation, citing duress from other Scientologists. His attorney, Brian Sun, declined to elaborate.

The crimes to which he pleaded guilty carry a maximum penalty of 15 1/2 years, according to federal sentencing guidelines.

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