Scientology groups to pay back $3.5 million
They agree to return 'profits' from a Ponzi scheme run by financial
advisor Reed Slatkin.
By E. Scott Reckard
Times Staff Writer
November 8, 2006
Groups affiliated with the Church of Scientology have agreed to pay back
$3.5 million they received from former Santa Barbara money manager Reed
Slatkin and others who invested with him.
The settlement, approved Tuesday by a federal bankruptcy judge, is part
of final efforts to recover funds for the victims of Slatkin, who is
serving a 14-year sentence for fraud, conspiracy and money laundering.
Authorities say Slatkin led a long-running Ponzi scheme in which money
from some investors was used to pay off others.
The fraud raised about $593 million in all, with investor losses
estimated at about $240 million.
Slatkin, whose clients included actor Peter Coyote and television legal
commentator Greta Van Susteren, paid $1.7 million in ill-gotten gains
directly to Scientology organizations, bankruptcy trustee R. Todd
Neilson said in court filings.
Millions of dollars more in tainted funds were funneled through other
investors to Scientology-affiliated groups, including Narconon
International, the Church of Scientology Celebrity Centre International
and the Church of Scientology Western United States, the filings said.
The exact amount funneled through the investors was never determined,
said Alexander Pilmer, an attorney for Neilson. Pilmer and Scientology
attorney David Schindler said the $3.5-million settlement was a
Schindler said that the church had always wanted to return any
fraudulently obtained funds and that the only dispute was over what
amount was fair.
"The church and its hundreds of parishioners were as much victims of
Slatkin as anyone else," he said.
Slatkin, who was once an ordained Scientology minister, had maintained
that his actions were motivated in part by threats from other church
members. In sentencing him to 14 years in federal prison, however, U.S.
District Judge Margaret Morrow rejected his claim that he had acted
under "duress and diminished capacity" because fellow Scientologists
pressured him to continue paying them profits.
Slatkin gave some of the $593 million he collected back to investors as
"profits," which is why prosecutors place investor losses at about $240
By liquidating assets and suing investors who profited by receiving
tainted money, Pilmer said, the bankruptcy trustee will have repaid
victims 41 cents to 42 cents on the dollar ? about $100 million in all ?
by the end of this year.
In addition, the bankruptcy trustee is still seeking to recover $12.1
million from a dozen defendants who came out ahead on the scam. The
settlement with the Scientology groups removed a major impediment to
closing the case, Pilmer said.
"We are close to the final wrap-up phase," he said.
Slatkin, who lived on a four-acre estate and spent lavishly on art, cars
and airplanes, is serving his prison sentence in Taft, Calif., after
pleading guilty in 2002 to fraud, conspiracy and money laundering.
Slatkin started soliciting money from fellow Scientologists in the
mid-1980s. His reputation grew because of his role as a financer of
Internet service provider EarthLink Inc. in 1994, when he provided
$75,000 to EarthLink founder Sky Dayton.
Before long, he was taking in large sums from Internet executives,
Hollywood players and socialites from across the country.
In the end, Slatkin admitted that his investment empire had been a sham
since its inception in 1986, a scam he kept going for 15 years by
distributing the "profits" to some investors that were really just funds
from other investors ? a classic example of a Ponzi scheme.
Attorneys for the bankruptcy trustee sued or threatened to sue about 400
individuals and groups that emerged as "winners," having received more
money from Slatkin than they invested.
With Tuesday's endorsement of the Scientology settlement by U.S.
Bankruptcy Judge Robin Riblet in Santa Barbara, about $78 million has
been recovered in those so-called adversary proceedings, Pilmer said.
A separate lawsuit accusing Slatkin's former bankers of lending an air
of legitimacy to his enterprise was settled two years ago. Without
admitting wrongdoing, the defendants, including Union Bank of
California, agreed to pay $26.5 million. Most of that settlement ? $15.5
million ? was paid to a group of the largest investors and their lawyers
at Pilmer's firm, Kirkland & Ellis.
Copyright 2006 Los Angeles Times
> The exact amount funneled through the investors was never determined,
> said Alexander Pilmer, an attorney for Neilson. Pilmer and Scientology
> attorney David Schindler said the $3.5-million settlement was a
> negotiated compromise.
> Schindler said that the church had always wanted to return any
> fraudulently obtained funds and that the only dispute was over what
> amount was fair.
yes, it's fair to return some few millions (less than 10 at all?) for a
240 millions theft. That's a calculation by a crime cult. A sort of
I guess the U.S. Attorney's office never probed whether scientology
orchastrated the fraud in order to launder money into their own accounts.
Then again, the scientology lawyer in this case was a U.S. Attorney,
involved in some controversial cases. Not only did Schindler work for
scientology; hacker Justin Tanner Petersen did also, through private
investigator Schlomi Michaels. Petersen was sent to Dallas, TX in 1991
to spy on dissaffected scientologists. The Aznarans were in Dallas
then, and were giving information to Richard Behar for his May 6, 1991
article: "Scientology Cult of Greed".
In a telephone interview a few years later with another hacker, Lewis
DePayne, Petersen admitted to a break-in in which he claimed he captured
the entire contents of a hard drive for the cult.
Here is an interesting article from that time, involving Petersen, the
FBI, and the soon-to-be scientology attorney, David Schindler --
Los Angeles Times
July 31, 1994, Sunday, Valley Edition
SECTION: METRO; PAGE: B-1
Hacker in Hiding; Digital Desperado Who Claims to Have Worked for
the FBI Is Now Being Sought by the Agency
BYLINE: JOHN JOHNSON; TIMES STAFF WRITER
First there was the Condor, then Dark Dante. The latest
computer hacker to hit the cyberspace most wanted list is Agent
Steal, a slender, good-looking rogue partial to Porsches and BMWs
who bragged that he worked undercover for the FBI catching other
Now Agent Steal, whose real name is Justin Tanner Petersen,
is on the run from the very agency he told friends was paying his
rent and flying him to computer conferences to spy on other
Petersen, 34, disappeared Oct. 18 after admitting to federal
prosecutors that he had been committing further crimes during the
time when he was apparently working with the government "in the
investigation of other persons," according to federal court
Ironically, by running he has consigned himself to the same
secretive life as Kevin Mitnick, the former North Hills man who
is one of the nation's most infamous hackers, and whom Petersen
allegedly bragged of helping to set up for an FBI bust. Mitnick,
who once took the name Condor in homage to a favorite movie
character, has been hiding for almost two years to avoid
prosecution for allegedly hacking into computers illegally and
posing as a law enforcement officer.
Authorities say Petersen's list of hacks includes breaking
into computers used by federal investigative agencies and tapping
into a credit card information bureau. Petersen, who once
promoted after-hours rock shows in the San Fernando Valley, also
was involved in the hacker underground's most sensational
scam--hijacking radio station phone lines to win contests with
prizes ranging from new cars to trips to Hawaii.
The mastermind of that scheme was Dark Dante, whose real name
is Kevin Poulsen. He is awaiting sentencing in connection with
that case, having already spent three years in custody, the
longest term in jail for any hacker in history.
Petersen's case reveals the close-knit and ruggedly
competitive world of computer hacking, where friends struggle to
outdo each other and then, when they are caught, sometimes turn
on each other. Petersen boasted of his alleged exploits trapping
his former colleagues.
Petersen gave an interview last year to an on-line
publication called Phrack in which he claimed to have tapped the
phone of a prostitute working for Heidi Fleiss. He also boasted
openly of working with the FBI to bust Mitnick.
"When I went to work for the bureau I contacted him,"
Petersen said in the interview conducted by Mike Bowen. "He was
still up to his old tricks, so we opened a case on him. . . .
What a loser. Everyone thinks he is some great hacker. I
outsmarted him and busted him."
How much of Petersen's story is true and how much is
chest-thumping is at issue, for he is a shadowy person who didn't
even use his own name during the years he spent on the fringes of
the Los Angeles rock scene. Tall, good-looking, with long hair
down the middle of his back, Eric Heinz, as he was known by
everyone, shattered the computer nerd pocket protector
stereotype. He frequented the Rainbow Bar and Grill on Sunset
Boulevard, often with different women on his arm, and handed out
cards identifying himself as a concert promoter and electronic
Riki Rachtman, an MTV "veejay," said Petersen had a
reputation for technical wizardry among the club crowd.
"Everybody knew, if you screwed (him) over, he had the power to
screw everything" with you, Rachtman said.
But was he really working as a government informant at the
same time to ensnare his hacker buddies for the bureau? The FBI
refused to talk about Petersen directly. But J. Michael Gibbons,
a bureau computer crime expert, expressed doubts. He advises
against such relationships.
"It's not safe. Across the board, hackers cannot be trusted
to work--they play both sides against the middle," he said. The
agents "could have had him in the office. They probably debriefed
him at length. Send him out to do things? I doubt it."
But Santa Monica attorney Richard Sherman, who is
representing a friend of Mitnick's in another hacker case, has
accused the FBI of not only actively using Petersen as an
informant, but also of turning a blind eye to Petersen's alleged
crimes during the time he was in their care. The crimes involve
alleged credit card fraud.
In a May 19 letter tS. Atty. Gen. Janet Reno, Sherman said
three agents in Los Angeles engaged "in a course of conduct which
is illegal and contrary to bureau policy" in handling Petersen.
Jo Ann Farrington, deputy chief of the public integrity
section, responded on July 18 that there were no grounds to begin
a criminal investigation. Because Sherman had called "into
question the ethical conduct of the named special agents," the
letter was referred to the Office of Professional Responsibility
"It is factually incorrect that we allowed Mr. Petersen to
commit crimes," said Assistant U. S. Atty. David Schindler.
Those who knew Petersen best described him as a bright,
verging-on-arrogant man who dressed well and sometimes walked
with a cane, a result of a motorcycle accident six years ago that
cost him a foot. He sometimes promoted after-hours clubs in the
Valley and in Hollywood, according to a partner, Phillip Lamond.
One night the two men were talking about Petersen's
adventures. "The difference between you and me," Lamond said
Petersen told him, "is I get a thrill from breaking the law."
In the Phrack interview, published on the Internet, an
international network of computer networks with millions of
users, Agent Steal bragged about breaking into Pacific Bell
headquarters with Poulsen to obtain information about the phone
company's investigation of his hacking.
He said they found "a lot of information regarding other
investigations and how they do wiretaps."
"Very dangerous in the wrong hands," replied Bowen, according
to a transcript of the interview.
"We are the wrong hands," Petersen said. Bowen said Petersen
still calls him from time to time.
Petersen was arrested in Texas in 1991, where he lived
briefly. Court records show that authorities searching his
apartment found computer equipment, Pacific Bell manuals and five
An FBI affidavit reveals fear that Petersen could have been
eavesdropping on law enforcement investigations. The affidavit
says Petersen admitted "conducting illegal telephone taps" and
breaking into Pacific Bell's COSMOS computer program, which
allows the user to check telephone numbers and determine the
location of telephone lines and circuits.
A grand jury in Texas returned an eight-count indictment
against Petersen, accusing him of assuming false names, accessing
a computer without authorization, possessing stolen mail and
fraudulently obtaining and using credit cards.
The case was later transferred to California and sealed, out
of concern for Petersen's safety, authorities said. The motion to
seal, obtained by Sherman, states that Petersen, "acting in an
undercover capacity, currently is cooperating with the United
States in the investigation of other persons in California."
Petersen eventually pleaded guilty to six counts, including
rigging a radio station contest with a $20,000 prize. He faced a
sentence of up to 40 years in jail and a $1.5-million fine, but
the sentencing was delayed several times while, Sherman believes,
Petersen continued working for the government. Lamond said
Petersen told him the FBI was paying him $600 a month "to help
them track down hackers."
Then on Oct. 18, 1993, 15 months after entering his first
guilty plea, Petersen was confronted outside federal court by
Schindler, who asked if he had been committing any crimes while
on bail. Petersen said he had, according to Schindler. Petersen
met briefly with his attorney, then took off.
"I've got a big problem and I'm splitting," a friend said he
told him the same day.
Attempts to reach Petersen were unsuccessful and his
attorney, Morton Boren, said he has "no knowledge of Justin
committing any crimes."
Sherman also scores the government for allegedly allowing
Petersen, while an informant, to utilize a Pacific Bell Telephone
Co. computer called Switched Access Services, or SAS. Sherman
said the computer allows operators to intercept telephone calls
and place other calls, making it appear the calls originated from
Rich Motta, executive director of applications, reliability
and support for Pacific Bell, said he would not "take a position
one way or the other" on Sherman's allegations.
While declining to discuss Petersen's actions, Schindler
acknowledged that in the Poulsen case, "we alleged and he pled
guilty to the fact of using the SAS system. Among other things,
they rigged radio station contests using SAS. It is a test
technology they managed to hijack and use for criminal purposes.
Once we became aware of it we took steps to correct it."
There are tantalizing hints at links between Mitnick and
Petersen, despite their obvious differences in style. Mitnick was
the classic computer jockey, overweight and shy, who asked his
eventual wife out on their first date by sending her a computer
message. Petersen, on the other hand, is flamboyant and
The California Department of Motor Vehicles has a file on
Petersen, but refused to divulge any information about him,
saying the file was being used in another case. "The indications
are that it's Mitnick," said Bill Madison, a spokesman for the
Friends say they think Petersen can survive well on the run.
"He's already got a lot of experience" living undercover, said
But Mitnick may be having a tougher time. Lewis De Payne
thinks his friend would like to find a way out of his
predicament. "It is my opinion he would like to surrender to some
type of news media that could provide legal counsel," he said.
In the Phrack interview, Petersen makes no apologies for his
choices in life.
While discussing Petersen's role as an informant, Mike Bowen
says, "I think that most hackers would have done the same as
"Most hackers would have sold out their mother," Petersen
Times staff writer David Colker contributed to this story.