Earthlink Exec Faces Fraud Claims

SANTA BARBARA, Calif. — A co-founder of the giant Internet service provider EarthLink could face claims of up to $600 million for alleged fraud that duped Internet moguls, socialites, venture capitalists and Hollywood producers.

Ninety investors met on Thursday with attorneys for Reed E. Slatkin, who resigned from the company’s board last month and filed for Chapter 11 bankruptcy protection last week.

“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.

Bankruptcy trustee Brian Fittipaldi said it was unclear how much money was invested with Slatkin but that claims could reach $600 million. Some attorneys have estimated the amount could go higher.

A creditors’ committee agreed to ask a judge Friday to freeze Slatkin’s assets. His assets total less than $21 million, most of it in EarthLink stock.

Another group of investors filed a motion Thursday asking that a trustee be appointed to wrest control of EarthLink’s assets from Slatkin.

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 put 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, including a day-trading operation that promised annual returns of up to 60 percent.

Slatkin is also being sued by three investors who claim he pocketed more than $35 million, and he owes the Internal Revenue Service about $6 million.

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