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Schemers' lies devised to fly under official radar

Don Saxon offered some wise words when a judge put Trans Continental Airlines into receivership a week ago, leaving investors holding the bag for $317-million.

By HELEN HUNTLEY
Published February 11, 2007

Don Saxon offered some wise words when a judge put Trans Continental Airlines into receivership a week ago, leaving investors holding the bag for $317-million.

"This case illustrates the dangers associated with making investment choices without adequately researching the legitimacy of the investment," said Saxon, commissioner of the Florida Office of Financial Regulation.

He was absolutely right. What he should have added is that this case illustrates that you can't count on the government to protect you.

Both state and federal regulators focus their attention on banks and brokerage firms, doing regular reviews to enforce a mountain of regulations.

Meanwhile schemers and scammers operate under the radar. By the time regulators step in, the money is mostly if not entirely gone.

Orlando music producer Lou Pearlman easily deflected regulators' attention from what appears to be a long-running Ponzi scheme, which dates back to the 1980s. The state says that instead of investing the money, he helped himself to cash and used money from new investors to pay off old investors in Trans Continental's "employee investment savings account."

The FDIC wrote Pearlman five years ago expressing concern about claims being made that the savings accounts were FDIC insured. The false promise of FDIC insurance-brazenly made in writing-was essential to wooing elderly investors.

Pearlman replied that only employees and shareholders participated in the plan and that they all had individual accounts with approved banking institutions. "We have not solicited anyone," he told the FDIC. The FDIC apparently never followed up.

Three years ago, the Office of Financial Regulation got a consumer complaint and asked about the savings account and a private stock placement.

"Neither of these products has been offered for sale to the public by the company since at least 2002," Trans Continental replied in January 2004. The state backed off, although it now knows the investment account took in at least $13.8-million in 2003.

After this exchange of letters, some Trans Continental agents began saying the program had been approved by the state.

"You could give us 100, 200 or 300 more investigators and we wouldn't know of every wrongdoing that may be occurring," Saxon said.

Once the state realized there was a serious problem at Trans Continental, it moved quickly, he said. Investigators worked on the case all summer and fall, then hammered out a year-end agreement with Trans Continental that stopped sales and allowed a review of the records. Five weeks later, on Feb. 2, a receiver was appointed.

"In our business, that's very expedited," Saxon said. "These are not easy cases. We don't have the luxury of being able to allege what we believe to be the case. We have to be able to go in there without any reasonable doubt and demonstrate to a tribunal that these are the facts."

Investors have a different perspective.

"Why were assets not frozen and arrest warrants not issued?" asked New York investor Adam Mesh. He and many others are fuming that Pearlman was allowed to leave the country.

However, Saxon's office has no power to freeze assets or file criminal charges. Those decisions are up to judges and prosecutors.

And while the major figures in an investment fraud sometimes are prosecuted, the sales agents often go from selling one bad investment to another. Pearlman no doubt is hoping things will turn out just as they did in his previous serious encounter with state regulators.

His Wilhelmina Scouting Network and related modeling businesses generated 2,000 consumer complaints and were the subject of an extensive investigation by the office of then-Florida Attorney General and now governor Charlie Crist. Crist's office ended the inquiry in 2004, saying it found no substantial violation of Florida law.

Canadian writer Les Henderson said he wanted people to know what happened and published a book, Under Investigation, about what he called "the largest model and talent scam in America." (More information is available on his Web site at www.crimes-of-persuasion.com.)

"Since certain individuals will routinely go from one scam to the next, unless punished, it is unlikely they will stop until their actions and methods are fully exposed," he said.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@ sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at http://blogs.tampabay.com/money

[Last modified February 9, 2007, 23:45:25]