Santa Barbara News-Press May 2, 2001 Investors accuse area man of fraud EarthLink co-founder claims millions in debt By MARK VAN DE KAMP NEWS-PRESS STAFF WRITER Hope Ranch resident Reed E. Slatkin, a venture capitalist and co-founder of Internet giant EarthLink, filed for bankruptcy protection Tuesday in Santa Barbara, listing debts in excess of $100 million. Investors are alleging in court papers that Slatkin, 52, defrauded them of tens of millions of dollars through a phony investment operation funded by friends and associates who were promised big returns ‹ as much as 60 percent per year. There also are indications that Slatkin's investment company, FanFare LLC, did not exist beyond having a Goleta office, one plaintiff's attorney said. But he does own two adjacent properties in Hope Ranch, another in Solvang and one in Newport Beach. Slatkin is being investigated by the Securities and Exchange Commission for his financial dealings, according to one plaintiff's attorney and published news reports. Last week, Slatkin resigned from Atlanta-based EarthLink's board of directors. Tuesday, he filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court in Santa Barbara. One lawsuit filed in Santa Barbara claims Slatkin cheated a retired investor now living in Santa Ynez out of $15 million. John K. Poitras said that he invested most of his life savings after Slatkin told him in December about a computerized day-trading program that could generate annual returns of up to 60 percent. "We have no idea what Mr. Slatkin has done with our client's money," said one of Poitras' attorneys, Jim Bertero of the Santa Barbara office of Musick, Peeler & Garrett. Bertero said it appears Slatkin took money from recent investors to pay returns to earlier investors, a form of investment fraud commonly known as a Ponzi scheme. "It appears that Mr. Poitras was among the last of the investors to give Mr. Slatkin money to manage," Bertero said. "Mr. Slatkin was unable to get more people, to pay off the prior investors. As long as the people keep coming in with money, the Ponzi scheme lasts." Slatkin's bankruptcy attorneys and his criminal defense attorneys did not return calls seeking comment. Investors have filed at least three claims against Slatkin, with lawyers telling the Los Angeles Times that he collected more than $300 million from friends, business partners and fellow members of the Church of Scientology. Poitras sold his Bay Area home last fall and bought about 58 acres in the exclusive Woodstock Ranch in the oak-studded hills outside of Santa Ynez. He is now a resident of Santa Ynez, though the acreage remains undeveloped. Court papers filed in Santa Barbara reveal that Poitras' legal team is going after Slatkin, and Slatkin is resisting. On April 13, Poitras won a court order to freeze Slatkin's $11.9 million bank account and his Hope Ranch home, conservatively estimated at $4.83 million. Slatkin's defense team argued in court that he should be released from the court order, claiming the attachments were "excessive" and are "jeopardizing Mr. Slatkin's efforts to defend himself and to conduct his business." Slatkin's bankruptcy filing could keep assets away from creditors, at least for a while. Chapter 11 allows the debtor to remain in possession of his assets unless the court rules otherwise. Slatkin's voluntary filing was incomplete as of Wednesday afternoon and did not list all creditors or substantiate his claim to more than $100 million in debts. Poitras' lawsuit says his dealings with Slatkin went like this: The two men became acquainted socially in 1997. Last December, Slatkin solicited Poitras to become a member in Fanfare LLC, a company he was forming, with offices at 890 N. Kellogg Ave. in Goleta. Slatkin said he and two other investors had each committed $5 million. Poitras was told that if he joined, his investment would yield returns of up to 50 to 60 percent per year, plus a premium on funds invested near year-end. Poitras invested $5 million with Slatkin on Dec. 20. In January, Poitras was told by Slatkin that he could earn 25 to 30 basis points in excess of interest generally payable by money market funds by placing $10 million more with FanFare for investment in short-term cash instruments bearing virtually no risk. Slatkin said securities purchased with Poitras' funds would remain liquid and the funds could be made available to Poitras on 48 hours' notice. On Feb. 8, Poitras invested an additional $10 million with the company. Two weeks later, Poitras instructed Slatkin to liquidate his short-term investment position and to wire the proceeds to an institutional money market fund. Slatkin failed to comply, then "promised repeatedly" to take care of it no later than March 8, but did not, the lawsuit says. Since then, Poitras has demanded an accounting of his funds and Slatkin has refused.