A scheme unravels

Published February 6, 2007

Orlando entrepreneur Lou Pearlman relished the limelight, promoting *NSync and his other boy bands, jetting off to Europe and throwing lavish parties. But for dependable cash flow, he relied on retirees who trusted him with their life savings.

Now state investigators say they have found Pearlman operated little more than a classic Ponzi scheme, tapping new investors to pay off old investors, all assisted by a questionable accounting firm manipulated by the Orlando millionaire. One of the most remarkable thing about the scheme is that it lasted so long.

Dating to the 1980s, one of Pearlman's companies, Trans Continental Airlines, offered what seemed to be a fabulous investment, a super safe high-yielding savings account. More than 1,000 investors, many from the Tampa Bay area, turned over more than $100-million to him, usually on the recommendation of a lawyer or insurance agent.

Reeling them in was easy. The "employee investment savings account," as it was known, offered yields from 3 percent to 14 percent, depending on when, and from whom, you bought. The big selling point was a guarantee of FDIC insurance, with surplus insurance from Lloyd's of London and AIG for amounts over $100,000. Pearlman partied with his sales agents and when they asked about insurance coverage, he showed off a document purported to be from Lloyd's, insuring the accounts up to $500-million.

"If they hadn't said it was FDIC, I wouldn't have put a penny in there," said Bruno Baumanis of St. Pete Beach, 85, who invested $150,000. "I still have that piece of paper they gave me."

But there was no insurance. Not with the FDIC. Not with AIG and not with Lloyds.

And now there is no money. Investigators for the Florida Office of Financial Regulation say their review of Trans Continental's bank records found obligations of $96-million to 1,374 investors. A separate review of Trans Continental's records by Oscher Consulting, an independent consultant, found that the savings program had $154-million in obligations.

And how much was in the bank to cover them? Less than $15,000, the state said.

Last Friday Orange County Circuit Judge Renee Roche appointed a receiver to take over Trans Continental and two related companies to try to recover assets.

It will be a daunting task. Nearly half the money collected in the last three years was spent sustaining the program: $7-million to pay agents' sales commissions and $43-million to fund withdrawals. Pearlman claimed that banks were willing to pay large companies like Trans Continental high interest rates that the company could pass on to investors. In reality, money from new investors paid off earlier investors, which is how Ponzi schemes operate, the state said.

And the state said Pearlman helped himself to savings account money, taking out $45-million for himself and his companies, while $3.2-million went to two associates, Robert Fischetti and Michael Crudele, and their companies. Recovery of assets also is complicated by the fact that Pearlman and his companies face more than $160-million in pending lawsuits and legal judgments.

State officials say that Trans Continental told them $40-million in savings account funds are in a company called "German Savings" in Germany, but investigators have been unable to verify the money's existence.

How could Pearlman sustain his savings scheme so long?

State officials say an accounting firm played a key role. Identified as Cohen & Siegel CPAs, with offices in Coral Gables and Germany, the firm prepared audited financial statements for Trans Continental Airlines that could be shown to lenders. Those statements also were the source of Dun & Bradstreet reports that showed the company in good financial shape.

However, investigators say there is no CPA firm licensed in Florida by that name. Its address and phone number were for an answering service paid with savings account funds. Mail was forwarded to the Orlando address of a Pearlman associate, while the accounting firm's German address matched that of German Savings.

The state said the financial statements Cohen & Siegel prepared never showed the money Trans Continental owed investors or the money Pearlman and his companies owed Trans Continental after taking assets out of the company.

In fact, the state said Trans Continental was adept at hiding money. One of the last known deposits in the savings account was a $1-million investment that came in Dec. 20. By the end of the month, it had been transferred and concealed.

The state asked Orlando Judge Roche to freeze the assets of the people and companies that got money from Trans Continental and to order them to make restitution. However, neither request was granted. Instead, the judge ordered them to bring any assets taken abroad back into the United States and ordered them not to violate securities and banking laws.

Pearlman, 52, is in Germany with one of his bands, US5, a group formed on one of his reality TV shows, Big in America. In a letter published in the Orlando Sentinel this weekend, he said he and his executive team are "working hard to resolve the issues" at Trans Continental.

"The tremendous amount of attention given to my private company is largely due to the fact that although we are a local company, we have enjoyed high-profile success on an international scale," he said. "Our goal is to overcome our current challenges and maintain our multi-national success."

More information regarding the Trans Continental investigation can be found at blogs.tampabay.com/money. Helen Huntley can be reached at hhuntley@sptimes.com or 727893-8230.

Fast Facts:

Ponzi scheme: How it works

Named after Charles Ponzi, a man with a remarkable criminal career in the early 20th century. The term describes an operation intended to defraud investors in which no new wealth is produced and creditors are paid off by borrowing ever larger amounts from new investors. Such schemes, often called pyramid schemes, progress geometrically until they reach the point that the operators cannot find enough new investors to continue the payout.