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Venture capitalist Reed E. Slatkin, a founding investor and former board member of EarthLink Inc., stands accused of bilking investors out of millions of dollars through a money management business which is now alleged to be a Ponzi scheme. At least three separate lawsuits have been filed in the last month in Southern California courts against Slatkin, who resigned his position on the board of Atlanta-based EarthLink last week, according to four lawyers representing clients in the cases. In the suits, investors claim that more than $35 million that Slatkin took from them can no longer be accounted for. And this could just be the beginning. Attorneys contacted involved with the different cases say Slatkin was managing more than $300 million taken in from friends, associates and members of the Church of Scientology, of which he is reportedly a member. “There seems to be a black hole where the money Reed had been raising has disappeared into,” said one attorney representing a group of investors, who declined to be identified. “Either Reed has been duped by people who took advantage of his lousy record-keeping, or he has cheated investors out of millions of dollars.” The Los Angeles Times first reported the allegations May 2. In court documents, investors say Slatkin used his reputation and a day-trading software program he had written to convince the group to invest their cash with him. But instead of investing the money, some of the plaintiffs now claim Slatkin apparently took cash from them to pay off earlier investors. Slatkin’s activities have also caught the attention of the U.S. Securities and Exchange Commission, according to attorneys involved in the cases. SEC officials would not confirm whether the commission is looking into his activities. Lawyers representing Slatkin did not return calls seeking comment, and their Santa Barbara, Calif.-based client could not be reached. Attorneys familiar with the case said Slatkin filed for Chapter 11 bankruptcy protection late Tuesday night, putting an automatic stay on the civil cases against him. While Slatkin used several different limited partnerships to solicit his funds, the story of Stuart W. Stedman typifies what most of his investors are now claiming. In a suit filed in U.S. District Court in Los Angeles, Stedman, a Houston-based money manager, accuses Slatkin of fraud and breach of fiduciary duty. Stedman said in the court documents that between 1997 and last year he invested more than $18 million with Slatkin. A statement received late in 2000 said the money had grown to $34 million under Slatkin’s care. But when Stedman tried to withdraw $2 million in December, Slatkin balked, requesting time to access the capital. Stedman granted Slatkin two months to recover the funds, but suddenly found Slatkin hard to reach. Slatkin eventually told Stedman and his associates, according to the suit, that approximately $380 million he had stored in two Union Bank of Switzerland accounts had been frozen by U.S. authorities who were monitoring all transactions in search of money laundering activities. Stedman claims Slatkin provided letters from the Swiss banks explaining the situation. His research, however, revealed that Slatkin’s bank accounts did not exist and that the person who signed the letter was not an employee of either bank. Soon after, Stedman sued. “With intent to deceive the plaintiffs, Slatkin made material misrepresentations and failed to disclose material facts,” the suit alleges. Another investor, Santa Barbara-based investor John K. Poitras, said in his suit he invested most of his life savings with Slatkin. Attorneys familiar with the different cases, some of whom have attended creditors meetings, say they have also heard that Slatkin took in more than $250 million from members of the Church of Scientology. Those investors, however, have apparently not sued to recover their funds. In an interview, Michael A. Sherman, an attorney with Alschuler Grossman Stein & Kahan in Los Angeles, who is said to be representing the Scientologist investors, declined to confirm the allegations or otherwise comment on the matter. A spokesman for EarthLink said Slatkin resigned from the company’s board of directors last week. He said the company does not expect the ongoing investigations to affect its operations. “We want to assure our shareholders that EarthLink funds were not involved and that Reed Slatkin was not involved in the day-to-day operations at EarthLink,” the spokesman said. “This is an issue between Reed Slatkin and his clients.” Attorneys involved in the civil cases said that their hands are tied until the SEC finishes its investigation and the bankruptcy court convenes a hearing. “Their [bankruptcy] filing was a preemptive move taken because more and more people are coming out of the woodwork,” one lawyer said. “This is only going to get uglier.” Copyright (c)2001 TDD, LLC. All rights reserved.

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