Co-Founder of EarthLink Is Accused of Investor Fraud

Investors are accusing Reed E. Slatkin, a co-founder of the giant Internet service provider EarthLink Inc., of operating a Ponzi scheme that may have resulted in the loss of least $35 million of their funds.

Slatkin--a Santa Barbara socialite and venture capitalist--also is under investigation by the Securities and Exchange Commission for his financial activities, which allegedly included a day-trading operation that promised annual returns of up to 60%.

Investors have filed at least three lawsuits accusing Slatkin of defrauding them of more than $35 million, and the size of the potential losses could grow. Attorneys say Slatkin invested more than $300 million for a nationwide network of more than 100 friends, business partners and members of the Church of Scientology, to which Slatkin belongs.

Slatkin, who is not registered with the SEC as an investment advisor, did not return calls for comment Tuesday. One of his attorneys, Los Angeles bankruptcy specialist Richard M. Pachulski, said Slatkin would file for Chapter 11 financial reorganization this week. Another of Slatkin’s attorneys, Santa Monica criminal lawyer Brian A. Sun, said his client was cooperating with SEC investigators.

“It is our intention . . . to cooperate with the investors and authorities in trying to locate and maximize the assets or the funds that are out there,” Sun said.

SEC officials declined to comment.

Slatkin resigned from EarthLink’s board of directors Thursday, the day a meeting of Slatkin’s East Coast creditors was held in Washington, lawyers for the investors said. EarthLink officials could not be reached for comment. Atlanta-based EarthLink provides Internet connections for about 4.8 million subscribers.

More than 80 investors attended a second creditors’ meeting Monday at the Santa Monica offices of Slatkin’s securities lawyer, Gerald E. Boltz. The meeting included representatives of a group of Scientologists who had invested more than $250 million with Slatkin, attorneys said.

A lawyer for the Scientology investors, Michael A. Sherman, said Tuesday that he had no comment about the case or whether his clients would sue Slatkin.

Boltz confirmed that Slatkin was a member of the Church of Scientology, a religion founded by science fiction writer L. Ron Hubbard and adhered to by a number of Hollywood celebrities.

Some of the investors at Monday’s creditors meeting defended Slatkin, saying they couldn’t believe the man they trusted with their money would do anything wrong, attorneys said.

“He’s become entwined in their lives. He holds second mortgages on some of their homes,” said investor attorney Mark J. McKeefry of Newport Beach.

But several investors had become disenchanted with Slatkin in recent months, according to two lawsuits filed in Los Angeles and one in Santa Barbara.

The plaintiff in the Santa Barbara suit, retired venture capitalist John K. Poitras, said he invested most of his life’s savings with Slatkin.

Poitras, who is not a Scientologist and who lives in the Northern California community of Woodside, said in court filings that he met Slatkin in 1997 at various society functions in Santa Barbara, where Poitras was planning to move. In December 2000, Poitras said, Slatkin told him about a computerized day-trading program he had developed that could generate 50% to 60% annual returns.

According to the lawsuit, Poitras invested $5 million with Slatkin, then an additional $10 million in February, which was to be invested in an account that Poitras was supposed to be able to tap with 48 hours’ notice.

When Poitras changed his mind about the second investment, however, Slatkin didn’t return the money, the lawsuit alleges.

Poitras’ attorney, Richard S. Conn, said it appeared Slatkin was using money collected from recent investors to pay returns to earlier investors--an investment fraud commonly known as a Ponzi scheme.

On April 13, Poitras won a court order to freeze Slatkin’s brokerage accounts and other assets, including his Hope Ranch home in Santa Barbara.

A group of Texas investors filed their lawsuit against Slatkin in U.S. District Court in Los Angeles a week later. One of the plaintiffs, Stuart W. Stedman, who handled money for several family partnerships, said he began investing with Slatkin in 1997 and eventually entrusted the EarthLink founder with $18.4 million.

Stedman said in court filings that Slatkin gave him statements showing the money had grown to more than $34 million by the end of last year. But when Stedman tried to withdraw $2 million in December, Slatkin at first questioned whether Stedman needed the money, then stalled and refused to return phone calls, the lawsuit alleges.

On March 29, Slatkin told Stedman he had more than $380 million in investors’ funds in Swiss bank accounts. But Slatkin said the money had been frozen because of a money-laundering investigation, the court filings say.

An investigation by Stedman’s attorneys, however, found that the Union Bank of Switzerland account numbers Slatkin provided were incomplete and could not be matched with any valid account. Slatkin gave an incorrect phone number for the bank branch and included a letter signed by a “Jacques Lejeune,” when no such person worked for the bank, according to the lawsuit.