The trustee in the Reed Slatkin bankruptcy doubled his estimate Monday of what victims of Slatkin's Ponzi scheme might recover, saying it could reach 40 cents for every dollar lost -- and more if investors who came out ahead in the scam would "find it in their hearts" to return some of their profits.
Hundreds of people were cheated by Slatkin, a former investment advisor from Santa Barbara who constructed an illusory empire using $593 million collected from Hollywood celebrities, Internet moguls and fellow Scientologists. He pleaded guilty to operating a financial fraud that continued for 15 years before dissolving into bankruptcy proceedings in May 2001. He is serving a federal prison term of 14 years.
The bankruptcy trustee, Todd Neilson, initially had said that the scheme's victims might expect to recover just 20 cents for every dollar lost. That estimate was cited last week in complaints by some investors who argued that the legal battle to recover funds was too expensive and taking too long.
In a memo presented at a hearing Monday before Bankruptcy Judge Robin Riblet in Santa Barbara, Neilson said the 20-cent reckoning was made at a stage of the case when "it was very difficult to estimate with any degree of reasonable accuracy possible payout percentages."
The main reason for the uncertainty was the fact that only some of Slatkin's clients were paid back more than they invested -- a common occurrence in such so-called Ponzi schemes, which use funds from later investors to pay phony profits or dividends to the earliest participants.
Neilson sued 430 of these so-called "net debtors," seeking the return of anything they received in excess of the amount they put in.
So far, 144 of those suits have been settled -- typically at about 80 cents on the dollar -- for a total of $31.8 million, most of it to be collected in payments over the next two or three years. For example, tobacco litigator John Coale and his wife, legal commentator Greta Van Susteren, agreed to return about $700,000 of the $939,000 they netted.
Suits seeking an additional $138 million are pending against other defendants, including actor Peter Coyote, who made $943,000.
If those defendants "were to simply find it within their hearts and wallets to pay the $138 million without any further litigation," Neilson wrote, it would yield a return to the creditors of 84% of their losses.
But Neilson called that scenario "highly unlikely." A "more realistic approach," according to his memo, would be to assume that 35% of the $138 million can be collected by spending an additional $7 million on litigation -- a formula that would bring the recovery to about 40% of the losses.
At the hearing Monday, Judge Riblet approved nearly all the requests for fees submitted so far by Neilson and by Gumport Reitman & Montgomery, one of the law firms representing him. An approval hearing for millions of dollars in fees submitted by another firm, Kirkland & Ellis, has been postponed until February.