Press Releases

EarthLink co-founder could face claims of $600 million or more

The Associated Press
Saturday May 12, 2001

SANTA BARBARA — A co-founder of EarthLink, one of the nation’s largest Internet service providers, could face claims of $600 million or more for alleged investment fraud that netted Internet moguls, Santa Barbara socialites, venture capitalists and Hollywood producers. 

Emotions ran high Thursday as 90 investors met with attorneys representing company co-founder Reed E. Slatkin at the Santa Barbara office of U.S. bankruptcy trustee Brian Fittipaldi, who said claims could range as high as $600 million. Some attorneys have estimated the amount could go higher. 

Slatkin filed for Chapter 11 bankruptcy protection from creditors last week and remains in control of all accounts and assets under U.S. bankruptcy code. Slatkin has less than $21 million, most of it invested in shares of EarthLink. 

“I thought he was a hero because he made all his money without hurting anyone, but he made his money by hurting everyone,” said investor Patrick Siefe, a Santa Barbara computer consultant. 

Slatkin was not present to answer allegations he mismanaged money given by 500 investors. His attorneys said they advised their client not to attend. 

Bankruptcy trustees called the meeting to organize a seven-member creditors’ committee to represent investors’ interests in court. The committee’s first move was to agree to file a motion Friday asking a bankruptcy judge to freeze all of Slatkin’s accounts and assets, a move that will go uncontested. 

“It’s a very serious, staggering amount of money that’s at stake, and I don’t believe personally we’re going to find (it) stashed overseas,” said attorney Richard Wynne, who represents the committee. 

Another group of investors on Thursday filed a motion asking that a trustee be appointed to wrest control of EarthLink’s assets from Slatkin, 52, who resigned last month from EarthLink’s board of directors. 

More than 1 million documents and three computer hard drives that Slatkin turned over to his attorneys and an independent auditor show about $100 million of investor funds have been funneled into limited partnerships and real estate transactions, said Slatkin attorney Richard Pachulski. 

“Some people have suggested that this was a Ponzi scheme,” where new investors’ money is illegally passed as payment to prior investors, Pachulski said. “We don’t know one way or another what it was.” 

Pachulski said more than $140 million was distributed to investors in the past two years and that one group of investors got $120 million more than they invested, while another group gave $240 million more than they got out. 

The Securities and Exchange Commission is investigating alleged investment fraud. Slatkin also is being sued by three investors who claim he pocketed more than $35 million. Slatkin owes the Internal Revenue Service about $6 million. 

For the past 18 months, Slatkin has fallen under SEC scrutiny for failing to register as an investment adviser as mandated by federal securities law.