High pitches to high yields

Published December 17, 2006

In the entertainment world, Lou Pearlman is known as Art Garfunkel's cousin and the man who launched Orlando boy bands *NSYNC and the Backstreet Boys.

In the business world, he's known as the CEO of Trans Continental Airlines, a 31-year-old air-charter service in Orlando.

But in some corners of the investment world, Pearlman is known for something else -promises of high yields with FDIC insurance that sound great until investors try to get their money back.

"I'm sick about it," said Dorothy Richards of Holiday, who invested $142,000 17 months ago in an "Employee Investment Savings Account" sold by Trans Continental. She's been trying for the past five months to get her money back.

"I've sent registered letters. I've called their hotline. An attorney wrote a letter. I've done everything," she said. Most of the time no one called back, she said, but recently she spoke with Pearlman and is hoping her luck will change.

Arthur Elia of Palm Harbor said it took three months of relentless telephoning and four conversations with Pearlman before he got back his $80,000 investment. "I called almost every day once or twice," he said. "I just kept at it. They always had some kind of excuse. Three quarters of the time I wouldn't get through, then I got the cell phone number of one of his assistants and started calling her at home."

The Florida Office of Financial Regulation said the savings program is under investigation, but declined to give details. A key concern is whether the investment was sold illegally because it was never registered with the state.

Pearlman is no stranger to controversy. He got into the entertainment business through his charter airline. The company's Web site says the riches amassed by one of his charter customers, New Kids on the Block, impressed Pearlman and he created Trans Continental Records to cash in on the boy band craze. However, bitter splits with *NSYNC and the Backstreet Boys led to suits and countersuits over what the bands saw as unfair management contracts. He settled with both bands.

A foray into talent scouting produced about 2,000 consumer complaints against Pearlman-affiliated companies in 2002. Les Henderson published a book, Under Investigation, accusing Gov.-elect Charlie Crist of whitewashing an investigation into the Pearlman companies while serving as attorney general. No complaint was brought against the companies, some of which ended up in bankruptcy.

"The book is based on one person's opinion of a case investigated by the attorney general's economic-crimes unit," Crist spokeswoman Vivian Myrtetus said. "They found inadequate forensic evidence to file a complaint for deceptive and unfair business practices."

Pearlman sued Henderson for defamation. Pearlman also is involved in litigation over millions in debt, including a judgment of $9.1-million awarded to his former bank, Washington Mutual.

Based at Orlando's Church Street Station, Trans Continental's businesses, include a recording studio, reality TV shows, and the Pearl Steakhouse.

The investment business has been a low-key operation compared to Pearlman's other ventures. From the simple fliers the company distributed, it's difficult to tell what kind of investment he was selling. Trans Continental asked the Times to submit its questions about the program in writing, then refused to answer them.

"Trans Continental Airlines is cooperating with the Department of Financial Services, which is conducting a routine inquiry," the company said in a statement. "The company looks forward to answering any questions the department may have. Since Trans Continental Airlines is a private company, financial information is not disclosed to the general public."

The company sold its program to the public through a network of agents, many of them insurance agents, who received commissions for their sales. Some lawyers recommended the program.

Literature given to investors depicted a super-safe investment.

"Your investment is 100% insured," said one flier. "The FDIC shall cover up to $100,000," it said, adding that private insurance covered additional amounts up to $1-million.

The puzzling paradox: Many investors were offered yields that were far higher than even the highest FDIC-insured accounts were paying. George Menier of New Port Richey, who opened his account last year and is trying to get his money back, was earning 6.08 percent last year when the highest-yielding CDs in the country were paying about 4 percent. He said he was offered 7.08 percent to renew.

St. Petersburg investor David Selby, a lawyer who recommended the program to others, said in an e-mail to one prospective investor that he had been earning 8.08 percent since he opened his account four years ago. Selby, who said he wasn't paid for his endorsements, said he told family and friends about the investment the same way he would recommend car repair service based on his personal experience. He said his mother has withdrawn money from the program with no problems. "I trust that my savings are safe," he said in a subsequent e-mail to the Times.

Official marketing literature for the program said an investor's money would be "completely liquid" after six months, although an interest-rate reduction would apply to funds redeemed in less than a year. "Please allow 14 business days to process your redemption," the company said.

But that isn't the way things have been working for many investors this year.

Richards sent her first request in June, asking to have her money sent to her on July 13, the one-year anniversary of her investment. She's still waiting.

"I don't understand how they continue to get away with this," said Richards, 59, who worked in banking and social work before retiring because of a respiratory disability.

She said she was just looking for a safe place for money she received from her father's estate when Clearwater lawyer John Von Staden Jr. referred her to Charlotte Oliver, a representative with Golden Securities in Clearwater. She said she met with Oliver in Von Staden's office.

Von Staden said the Trans Continental account was one option among several he discussed with clients.

"It appeared to be aboveboard and it looked reasonable to us. I was told at the time this was all FDIC-insured, but from what I know so far, I don't believe that they were." He said it has become a "challenge" for investors to get their money back.

"There were many other attorneys in town that worked with them," he said.

Oliver began selling the program after she and Pearlman met personally, said her St. Petersburg attorney, Jack Kiefner. He said a mutual friend introduced them.

"He told her that the lawyers from Trans Continental had done everything necessary from the standpoint of due diligence and regulatory requirements," Kiefner said. He said Oliver was reassured by reports from many lawyers who had personal contact with Pearlman.

"She was assured this was not a security," he said. When she found out the state was investigating, she resigned as an agent for the program, he said.

Menier, 81, said he went to William Kress of Churchill Financial Group in Clearwater to buy a certificate of deposit.

"He said he could get me in with EISA, an employee-only account along with officers of the company and friends, at 6.08 percent. He said it's FDIC and I said 'fine' and gave him a check for 50 grand and we went from there." Menier later deposited an additional $40,000.

Menier said Churchill bought the Trans Continental investment for him through Tampa insurance agent Gary Leone. Neither Kress nor Leone returned calls from the Times. Menier is recuperating from a stroke suffered since he was interviewed.

Trans Continental abbreviated the name "Employee Investment Savings Account" as EISA, which looks a lot like ERISA, the acronym for the Employee Retirement Income Security Act of 1974, the federal law that sets out guidelines for pensions and employee benefit plans.

At least some investors were convinced the Trans Continental investment was an ERISA-qualified account. Lawyer Selby said in his e-mail to a prospective investor that the account fell under ERISA and could accept regular and Roth IRA money. Marketing literature said investment earnings were tax-deferred, taxable only when the money is withdrawn.

However, ERISA-qualified plans have annual limits on contributions and other requirements that were not part of the savings plan. The only ERISA-qualified plan Trans Continental reported to the U.S. Department of Labor was a 401k plan with 29 participants and assets of $833,802 at year end.

Investor Elia, 71, said he'll stick with CDs for his next investment.

"I'm just thrilled that I got my money back," he said. "Now I'll go to a regular bank and get my 5 percent."

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

Some of Lou Pearlman's business ventures

Trans Continental Airlines (charter airline)

Trans Continental Records (record company)

Trans Continental Studios (recording studio)

Talent Rock (sponsor of talent search events)

Church Street Station (Orlando retail, office and entertainment complex)

Pearl Steakhouse (Orlando restaurant)

Reality TV shows: Making the Band, Making the Band II and Big in America.

Red flags

There were warning signs that investing in the Trans Continental Airlines program could present problems. Here are some red flags to look for:

High yield at no risk. An offer of FDIC-insured accounts at a yield well above what FDIC-insured accounts pay.

"Insider" opportunities. The Trans Continental plan was presented as a way to participate in a special deal for airline employees.

Confusing similarities. The trademarked account abbreviation, EISA, is similar to ERISA, a law regulating employee benefit accounts.

Unusual sponsorships. Airlines don't usually sell savings accounts directly to the public.