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Buried assets: It can take creditors years to recover money that debtors have hidden overseas

When music promoter Lou Pearlman vanished from public view more than two months ago, he left two burning questions in his wake: Where is he? And perhaps more important, where is the $500-million that investors, bankers and other creditors say he owes them?

By Helen Huntley, Times Personal Finance Editor
Published April 22, 2007


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When music promoter Lou Pearlman vanished from public view more than two months ago, he left two burning questions in his wake: Where is he? And perhaps more important, where is the $500-million that investors, bankers and other creditors say he owes them?

When last sighted, a grim-faced Pearlman was attending an awards show in Germany with his latest boy band, US5.

Since then he has not responded to lawsuits, a bankruptcy filing lenders forced on him or even FBI searches of his abandoned home and office in Orlando. Both he and what's left of his money are believed to be overseas. 

Unfortunately for Pearlman's creditors and anyone else chasing money around the globe, finding and recovering foreign assets is a convoluted, lengthy and expensive process.

"It's like putting a puzzle together," said Rick Rein, principal with the Chicago law firm Schwartz Cooper and one of a growing number of lawyers specializing in foreign-asset recovery.

Rein says for some debtors, separating other people from their money is a game. Once they've got it, "the game is now outsmarting people to hide assets."

The cat-and-mouse maneuvers are not as easy for debtors as they once were. The balance of power has swung more toward creditors since the terrorist attacks of Sept. 11, 2001. Under U.S. pressure, even noted money-laundering havens have changed their bank laws and adopted a more cooperative stance. The Financial Action Task Force on Money Laundering, which once had 15 countries on its blacklist, now has none.

However, that doesn't mean it is easy to pierce the veil of secrecy and get foreign governments and banks to turn over information or allow seizure of assets. Debtors still take advantage of corporate shells, mystery trusts and foreign legal systems that don't recognize American judgments or bankruptcy laws.

Even a relatively simple case will involve transfers among four or five countries, said Pedro Martinez-Fraga, a lawyer with Greenberg Traurig in Miami.

U.S. legal actions can provide access to U.S. bank records that show where the money went when it first left the country. However, foreign banks won't open their books based only on a U.S. court order.

Martinez-Fraga said the United States does not have even "one single treaty with one single nation that provides for reciprocal recognition and enforcement of judgments." That means pursuing creditors must take their cases to judges in each country to get access to information.

"Then you find out they transferred the money to another country and you have to start the process again," said Antonio Pereira, a forensic accountant with KPMG. "This is a long process that can take months or years if the people are very smart. Maybe in the scheme they create 1,000 companies and they have transactions back and forth between 20 different countries."

The longer the game goes on, the less there is left for creditors to collect.

"To create all these corporations and hide all this money, you have lawyers' commissions," Pereira said. "And of course they start to use the money living the good life. We worked a few cases that took almost two years to find the money and half the money had been spent."

Speed is crucial, said Miami lawyer Edward Davis Jr., an asset-recovery specialist with Astigarraga Davis.

"You're able in many countries to obtain discovery orders with proper affidavits and get a gag and a seal so the person whose information you're obtaining doesn't know it," he said. "You can sneak up on them and trap the assets."

In the end, it's not unusual for creditors to discover that the money they've been chasing overseas is back in the United States, where it sometimes is used to buy stocks or real estate.

It might seem that the best place for a debtor to hide out is a country that will keep his assets secret and that won't extradite him should he face criminal charges back home.

But that's not the case, Martinez-Fraga said.

"Where the rule of law is not observed, the perpetrator of the fraud also has difficulties," he said. "In those environments, for the perpetrator it's very expensive to exist because they have to be constantly bribing. No one's word means anything and no promise is enforceable or binding in any way."

Unfortunately for creditors, chasing money overseas is expensive.

"You always have to do a cost-benefit analysis," Davis said. "It is possible to get your money back, but it is by no means guaranteed. ... Sometimes there's an asset you can pick off early in the process and use as a war chest to fund the rest of the process.

"The one thing that's guaranteed is that if you do nothing, you'll get nothing," he said.

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

Bastions for businesses

Long-time money havens such as the Cayman Islands, British Virgin Islands, Bahamas, the English Channel islands of Guernsey and Jersey, the Isle of Man and Liechtenstein remain favorites with debtors and with all kinds of people and companies that prefer to conduct their business in private.

The British Virgin Islands (population 23,442) is home to more than 600,000 corporations, many perfectly legitimate, that don't pay taxes and whose officers and directors are not public record. Newer hot spots include areas such as the Cook Islands, Seychelles and Vanuatu . But they aren't the only places debtors go.

Cloaked in a courtroom

Simply convincing a U.S. judge to order a debtor with foreign assets to hand them over doesn't do much good if the debtor is out of the country. In fact, it may not work even if the debtor is in the courtroom.

In a Miami case, former options trader Stephan Lawrence spent six years in jail for contempt of court rather than turn over assets he had stashed in a trust in Mauritius.

Lawrence, who recently was freed, claimed in bankruptcy court that he had no access to the money, which was controlled by an uncooperative trustee. The judge didn't buy his story, but creditors didn't get the money.

[Last modified April 20, 2007, 18:43:04]


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