WSJ: 1988 'Knowledge Report' of Scientology Slatkin swindle
17 Dec 2001
December 17, 2001
Money & Investing
EarthLink's Co-Founder Slatkin Admits
Fabricating Fund Statements in 1988 Note
By MAUREEN TKACIK
Staff Reporter of THE WALL STREET JOURNAL
For 16 years, EarthLink Inc. co-founder Reed Slatkin ran an investment fund that eventually took in $593 million from around 800 people, including many Hollywood celebrities. Every quarter, clients received statements showing big returns in such blue chips as Colgate-Palmolive Co. and Schering-Plough Corp.
But back in 1988, Mr. Slatkin made a startling admission in a handwritten note: "Instead of working on stocks, I was working on fabricating statements."
This acknowledgment was discovered by lawyers for Mr. Slatkin's clients who are looking into his rise and sudden fall. Revelations about what went wrong are contained in a 2,024-page interim report that was filed Friday in Santa Barbara, Calif., bankruptcy court after being compiled by court-appointed trustee R. Todd Nielson and lawyers at Kirkland & Ellis, a firm representing creditors, who are trying to unravel the case and help investors recoup their losses.
Mr. Slatkin filed for Chapter 11 bankruptcy-court protection in May after being sued by investors and the Securities and Exchange Commission for allegedly defrauding his clients. He also is the subject of a probe by the Federal Bureau of Investigation, which has searched his offices.
The report concludes that a relatively small number of Mr. Slatkin's early investors -- including some longtime business associates -- received substantial profits. But the vast majority of his clients lost large sums because his real investment performance "ranged from unspectacular to dismal." So far, according to the report, Mr. Nielson has been able to locate an array of mostly illiquid assets valued at only about $30 million, far less than the $255 million still owed investors.
The report, which will be presented to creditors at a bankruptcy-court hearing Monday, cautions that the conclusions it draws don't "result from a trial or factual determination on the merits."
Two copies of Mr. Slatkin's handwritten admission of "fabricating statements" were among some two million pages of documents provided by Mr. Slatkin to the trustee. Attorneys who have seen the written statement say it fits the form of a "knowledge report," a document used to report one's ethical violations in the Church of Scientology, of which Mr. Slatkin is an ordained minister. It is unclear, however, whether anyone other than Mr. Slatkin ever saw it.
"It just proves that this was a deliberate, fraudulent pyramid scheme from the beginning that he spent the next 13 years perfecting," said Richard Wynne, a Kirkland & Ellis attorney who helped to prepare the report, in an interview.
Mr. Slatkin's attorney Brian Sun declined to respond to allegations in the report that Mr. Slatkin was defrauding investors "as far back as 1986." He said Mr. Slatkin had various business partners who profited from his operations and that Mr. Slatkin is "vigorously supporting" any efforts authorities make to recover funds from those people.
The interim report says that Mr. Slatkin's "serendipitous" 1996 seed investment of his own money -- not his clients -- in Internet-service provider EarthLink helped perpetuate the scheme. That investment was valued at more than $200 million at its 1999 peak. EarthLink wasn't involved in Mr. Slatkin's money-management business and isn't alleged to have done anything wrong.
The report notes that the soaring fortunes of EarthLink played a role in helping Mr. Slatkin attract more investors. In recent years, he picked up such high-profile clients as CNN commentator Greta Van Susteren, actors Anne Archer and Giovanni Ribisi, Pennsylvania's prominent Walton family and "Spy Game" producer Armyan Bernstein. The report concludes: "That single successful investment propelled him to a new level of theretofore unattainable credibility."
The report names 75 investors who reaped the bulk of the $197 million in gains generated by Mr. Slatkin's operation. About a dozen of these investors also served as "highly paid consultants" to Mr. Slatkin, the report says.
Richard Levine, a former stockbroker and fellow Scientologist who had custodianship of several of Mr. Slatkin's bank accounts and who made a $4 million profit, is the only person that the report claims had prior knowledge that Mr. Slatkin wasn't generating the investment returns he said he was. Mr. Levine couldn't be reached to comment.
The report devotes several pages to Chris Mancuso and Ron Rakow, whose house was raided by the FBI in June in conjunction with Mr. Slaktin's criminal probe. The families of Messrs. Rakow and Mancuso received a total of about $12.8 million in profits from their investments over the years, and both received additional unspecified millions of dollars in "consulting fees" and partnership arrangements, according to the report.
Mr. Mancuso couldn't be located. Mr. Rakow's attorney, Robert Sanger, says his client is a "victim" of Mr. Slatkin who had been repeatedly lied to.
Mr. Slatkin began managing money for Messrs. Mancuso and Rakow in 1985, shortly before they were convicted on mail fraud charges and sentenced to a year each in federal prison for their role in a complex pyramid scheme known as "Culture Farms," which bilked 28,000 investors of $80 million in an alleged Ponzi scheme, according to documents from the case in federal court in Topeka, Kan. (In a Ponzi scheme, early investors are paid off with funds collected from later investors, who often are left with large losses.)
1Slatkin Trustee Warns Investors Their Recovery Chances Are Slim (July 31)
Prior to, and during, their prison stay, Mr. Slatkin received $660,000 from bank accounts the duo had set up on Britain's Isle of Man, invested it on their behalf and disbursed it among a number of holding companies both in the U.S. and abroad, according to records in a separate bankruptcy-court case in Kansas City, Kan., involving Culture Farms.
In a letter from the Lompoc, Calif., federal prison camp dated July 14, 1987, Mr. Mancuso writes Mr. Slatkin from "another day at Club Fed" to thank him for "taking care of my stuff," according to Mr. Nielson's report. "I know we will do great things in the future together," the letter closes.
Indeed, Mr. Slatkin funded many of Mr. Mancuso's and Mr. Rakow's ventures when they were released from prison, according to Mr. Nielson's report. In 1988, Mr. Slatkin told the court-appointed receiver in the Culture Farms case that he had used investor money to back Mr. Mancuso in a venture called Viral Research Technologies Inc. that was researching a herpes drug, according to that bankruptcy case.
In 1989, according to Mr. Nielson's report, Mr. Slatkin and Mr. Rakow made the first of what would be nearly $1 million in investments in National Telephone Communications, an Irvine, Calif., multilevel marketer of long-distance telephone services started by Donald Rackemann, who later hired Mr. Mancuso.
Mr. Rackemann also invested with Mr. Slatkin, netting $3.4 million in profit, according to Mr. Nielson's report. In addition, Mr. Slatkin invested in two of Mr. Rackemann's more recent businesses, the now-shuttered Golf Star International and PriceNet USA. Like most of his venture investments, Mr. Slatkin's numerous deals with Messrs. Rackemann, Rakow and Mancuso yielded dismal returns, according to the trustee's report.
The report says, however, that Messrs. Mancuso and Rakow helped Mr. Slatkin in other ways. Prior to declaring bankruptcy, Mr. Slatkin told investors -- and the SEC, which was looking into his activities in 1999 -- that he had transferred their money into Swiss bank accounts that had been temporarily frozen in a money-laundering investigation. Mr. Slatkin promised clients he would retrieve the money, and even sent Mr. Rakow to Switzerland before it became apparent that the bank accounts didn't exist. Mr. Mancuso, meanwhile, outfitted Mr. Slatkin with a Swiss phone number that would automatically forward to Mr. Slatkin's Santa Barbara line.
"The line has been conditioned to provide a genuinely European ring (nice touch, huh?)" he wrote in a February 2000 fax to Mr. Slatkin, according to Mr. Nielson's report.
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