Great frauds in history: Reed Slatkin’s Investment Club

Reed Slatkin was born in Detroit in 1941, and was converted to Scientology by his uncle as a teenager, studying with the religion’s founder L. Ron Hubbard and eventually becoming an ordained minister in 1975. He would later use his position within the Church to set up an unlicensed investment club, which ran from 1986 to 2001, with around 800 investors, including the actor Giovanni Ribisi (who ironically starred in the 2000 film Boiler Room about penny-stock fraud), contributing a total of $593m. Slatkin would also play an important role in co-founding the internet service provider Earthlink in 1994 with Sky Dayton.

What was the scam?

The Reed Slatkin Investment Club claimed that it was producing annual returns of around 24% a year (minus fees amounting to 10% of profits) through a combination of clever stock trades and investments in start-up companies. However, with the exception of Earthlink, investors’ money was either wasted on failed business ventures, such as a theme park that was never built, or siphoned off by Slatkin himself, who used the money to collect pictures, cars and aeroplanes. It was essentially a Ponzi scheme – investors were paid with money from new arrivals.

What happened next?

Slatkin’s refusal to register as an investment adviser led to an investigation by the US regulator. Although Slatkin agreed to get out of the investment-management industry, he continued to take in fresh funds. However, the bursting of the technology bubble led to a rash of client withdrawals that he couldn’t meet. The subsequent lawsuits by disgruntled investors prompted him to declare bankruptcy, sparking an investigation by the FBI and IRS. Slatkin was eventually convicted of several counts of fraud in 2003 and sentenced to 14 years in jail. He died in prison.

Lessons for investors

Of the $593m invested in Slatkin’s fund, only around half was returned to investors, mainly in the form of payments to early investors (though some of these were later clawed back). Slatkin’s scam is a classic example of affinity fraud, where social connections and a shared affinity (in this case to Scientology) help persuade people to invest in fraudulent schemes. The failure of Slatkin’s club highlights why you should make sure that any scheme or adviser you are considering investing with is properly registered with the authorities.