Slatkin Takes the Fifth at Bankruptcy Hearing

At a bankruptcy hearing in Santa Barbara on Monday, Reed E. Slatkin faced his investors for the first time since they accused the fallen money manager of bilking them of hundreds of millions of dollars.

Slatkin invoked his 5th Amendment right against self-incrimination, refusing to answer questions from court-appointed bankruptcy trustee R. Todd Neilson.

Instead, he offered a short statement to the 100 investors, lawyers and onlookers.

“I just want to say that I’m here today, that I’m not hiding,� said Slatkin, dressed in a black T-shirt and khaki pants. “And I just wanted you to know that.�

In response, a groan rippled through the audience.

“Who cares?� one investor asked aloud.

Neilson then excused Slatkin from the hearing, which was held at a hotel conference room to accommodate Slatkin’s numerous creditors.

Slatkin, a co-founder of Internet company EarthLink Inc., managed money for about 800 investors, including Hollywood celebrities, Internet executives and socialites from around the country. He owes investors and other creditors perhaps $576 million, according to an ongoing analysis by Neilson, who so far has identified assets totaling less than $45 million.

On April 12, investors filed the first of three lawsuits accusing Slatkin of fraud for failing to return $35 million. Slatkin resigned from EarthLink’s board April 26 and filed for bankruptcy protection a few days later.

Investors at the hearing said they had hoped Slatkin would reveal what he had done with their money.

One investor, who declined to provide her name, said she was frustrated by “the confusion of not knowing what happened. . . . If we knew what happened--good, bad or indifferent--then we could move forward.�

Another investor, Ken Wright, said he hoped to recover at least some of the more than $500,000 he invested with Slatkin.

Some of that money, inherited from his father-in-law, was for his children’s college education, said Wright, an Ojai resident who produces infomercials. “This was money that my wife’s father worked his whole life for,� hesaid.

The FBI, which raided Slatkin’s home and offices in May, is investigating him for investment fraud. Slatkin is not registered as a money manager, according to the Securities and Exchange Commission.

Investigators say the collapse of Slatkin’s investment empire may be one of the largest Ponzi schemes they’ve encountered. In a Ponzi scheme, money collected from new investors is used to pay bogus returns to earlier investors.

Neilson, a forensic accountant and former FBI agent, asked creditors for patience while law enforcement officials look into Slatkin’s dealings.

Slatkin attorney Brian Sun said, “We are fully cooperating with the regulators and other investigating agencies that have questions about his business activities.�

In a court filing seeking to freeze Slatkin’s assets, the SEC alleged the money manager had been conducting a fraudulent investment operation since he began taking in money from investors in 1985.

Last month, the SEC settled with Slatkin, who neither admitted nor denied the allegations but agreed to obey securities laws in the future. The SEC reserved the right to levy a penalty against Slatkin and order him to repay money to investors.

Additionally, the Internal Revenue Service is seeking $11.8 million in unpaid taxes. This month, Slatkin’s clients asked the IRS to forgo its claim, saying the government’s demand would unfairly dilute the few assets available to pay investors.

The IRS’ claim would doubly penalize investors who for years paid capital gains and income taxes on what were likely phantom profits, according to Richard Wynne, attorney for the Bankruptcy Court creditors’ committee that represents investors.

Tax issues, as well as thesheer number of people involved in the case, could prolong any resolution indefinitely, Neilson said Monday.

“Based on prior experience, this bankruptcy case will last years and years,� he said.