tampabay.com

Lou Pearlman saga only getting heated up

It will take years for the myriad legal and financial twists and turns to be sorted out.

By Helen Huntley, Times Personal Finance Editor
Published December 23, 2007


It was just a year ago that many investors got their first inkling that music producer Lou Pearlman's Orlando empire was a house of cards and that his life - and theirs - were about to take a dramatic turn for the worse.

Today he sits in the Orange County Jail and his victims struggle to move on, many of them bitter that no government officials came to their aid. Pearlman's former partners and employees wait to find out if they'll be indicted and investigators try to reconstruct records showing where the money went.

There once was a lot of it. Pearlman, the man behind *NSync and the Backstreet Boys, financed his businesses with a mountain of bank loans and one of the largest and longest-running Ponzi schemes in Florida history. Investors, banks and other creditors have filed $1.7-billion worth of claims in the 12 Pearlman-related cases pending in federal bankruptcy court. Duplicate claims mean the true total is something less than half that, but in the largest single case, Trans Continental Airlines, there are 1,347 claims for $509-million.

For investors, any recovery is years away. A planned movie about Pearlman's dramatic rise and fall could be on the screen and a book - tentatively titled The Hit Charade - could be in stores long before investors see a dime. If they ever do.

"I really do wish I had better news for people, but I don't," said Fort Lauderdale accountant Soneet Kapila, who is the trustee for all but one of the Pearlman-related bankruptcies. "Fraud cases take a lot of time and effort because there is nobody cooperating with you. It's not like you can go in, meet management people and start debriefing them. There were no records at all. We have assembled a lot, but we could be around for another couple of years."

Pearlman, 53, left a convoluted trail of corporations made even more confusing by the fact that he freely transferred money from one company to another.

Kapila has turned up $1.5-million that can go toward paying bankruptcy expenses and, if anything is left over, to paying off creditors. About a third of that came from two auctions of Pearlman's business and personal property, including boy band memorabilia. His other big source of cash has been refunds of deposits Pearlman made on luxury condos. The court recently approved a Kapila-negotiated deal to claim $1.6-million from a swanky development in Nassau, Bahamas. Other collection efforts are pending, including an effort to get back $610,000 in deposits at The Residences at Sandpearl Resort on Clearwater Beach.

Kapila has filed the first of what could be many suits claiming fraudulent transfers of assets out of Pearlman's companies. He is trying to recover $3.2-million from former Pearlman associate Greg McDonald. In addition, he is digging into Pearlman's affairs in Germany and the Netherlands, where Pearlman had business and family ties.

Investors won't benefit from the most significant of Pearlman's known assets, the Church Street Station property in downtown Orlando, where Pearlman had his headquarters. Orlando developer Cameron Kuhn paid $34-million for the property, but there isn't likely to be anything left over after paying off the property's mortgages and other priority expenses. All the other real estate Pearlman owned was also heavily mortgaged.

To say investors are discouraged is putting it mildly. Most of them put money into what they thought was an FDIC-insured account, expecting the government would back their investment. There was no FDIC insurance and no government help.

"I try not to think about it anymore; I was so depressed for so long that it ruined my family's life," said Misty Blackwell, 53, of Lutz. The $60,000 she lost was supposed to help pay for medical school for her daughter. Now she can't go. "The guilt kills me every time I look at her," Blackwell said. "This is a good girl who has worked a part-time job since she was 16 years old and lived at home through her undergraduate years to save that money. It seems totally unfair that there's nowhere to turn and nobody's offering any hope."

George Kysela is working full time again at age 73 after discovering the $182,000 in his Trans Continental account was gone. He says he'll keep his maintenance job until the real estate market improves enough to allow him to sell his Palm Harbor house. "It's very tough," he said. "I am waiting for some miracle."

When news of the scandal broke, Jerilyn Stein of Seminole created a Web site for victims www.scammedbypearlman.com, and encouraged them to write government officials asking for help.

"That got discouraging," she said. "You don't even get a response from half of them and the responses you do get are mostly just form letters passing the buck to someone else."

Stein, 45, who lost about $23,000, said she wanted to do something for her father and other retirees who depended on the income from their Trans Continental investments.

"It would have been nice to get them some kind of help, but you can't fight City Hall," she said. She has turned her attention to her family and a kitchen remodeling project.

Pearlman's other victims include the shareholders of banks that made loans based on phony financial statements from a fictitious CPA firm. Then there were the aspiring young artists who were left in limbo as Pearlman's companies spiraled into oblivion. Two of them, Aaron Carter and Sean van der Wilt, recently got the bankruptcy court to release them from their recording and management contracts, freeing them to pursue stalled careers.

"Lou didn't do a whole lot of anything for him," said Orlando lawyer Clay Townsend, who represents Carter. "It was a huge disappointment at a critical time in his career." He said Carter has a new manager.

Pearlman fled the country in January as his companies collapsed and travelled in Europe, Central America and Asia before settling in at a resort in Bali, Indonesia. An alert German tourist spotted him and contacted the St. Petersburg Times, which passed the tip to the FBI with his permission. Agents arrested Pearlman in June and brought him back to Orlando to face two charges of bank fraud. He is being held without bond. Because he claimed to be indigent, a federal public defender is representing him.

Additional charges related to the investment scheme are expected, which means Pearlman is not likely to keep his March trial date.

"I'm glad he's in jail," said Pinellas County investor Lenny Wilson, 56. "At least there's a little bit of justice in that. I want to see him in jail for the rest of his life."

Investors wait to see who else will be charged. No action has been taken against the agents who sold the fraudulent investments. Many are still licensed to sell insurance in Florida.

Pearlman's story has enough fascinating twists and subplots that some people think it has commercial potential. Los Angeles producer Laura Dunn said she has "big names" that she declines to identify backing a Pearlman movie, which she says is likely to be released in 2009. A Pearlman book is in the works.

"I started investigating Lou's fraud charges for a magazine-length article, and the story just kept unfolding," said Tyler Gray, a writer for Radar magazine who has a Pearlman book contract with HarperCollins. "I realized this is an international story with a mind-blowing amount of intrigue. And to top it all off, it's all set in the biggest pop music phenomenon the world has experienced since the Beatles."

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230. Read more about the Lou Pearlman case at blogs.tampabay.com/money.

What happens now

Pearlman's trial is set for March, but likely will be postponed. He also could work out a plea agreement with prosecutors.

More indictments are expected for Pearlman, some of his close associates and possibly some agents who sold the scam investments.

The search continues for assets that might be used to repay creditors.

Lawsuits will be pursued against some of the people and companies that received money Pearlman took from investors and banks.