Lou Pearlman, creator of the Backstreet Boys and 'N Sync, was also a Ponzi scheme fraudster.
Long before the staggering scale of Bernard Madoff's investment fraud, the biggest Ponzi scheme ever recorded, was unveiled to a shocked investment world, Louis Jay ("Lou") Pearlman had been running his own version of the scam for almost 20 years. He didn't quite scale the same heights as Madoff's $65bn ripoff, but the $300m that Pearlman is thought to have conned his victims out of is still up there with the all-time biggest.
But before turning his hand to serious investment crime, Pearlman had a varied and colourful career. Being the first cousin of Art Garfunkel, music was in Pearlman's blood from an early age. But when his teenage attempts at managing a band came to nothing, he pursued his other interest, aviation, instead.
Pump and dump
After an early failure with his first airship venture, Pearlman went on to launch Airship International, and raised the $3m needed to buy a blimp via a public offering, in which he falsely claimed he had a partnership with German businessman and airship expert Theodor Wüllenkemper.
During its short life (which ended after three of its aircraft crashed and took the company's share price down with them), Airship International's shares were actively traded by a Norbay Securities, a trading company part-owned by a friend of Pearlman's, Jerome Rosen. Over several years, the stock was pumped up to $6 a share, allowing Pearlman to sell large amounts of shares at inflated prices (for which Norbay was paid handsome commissions).
Boy bands
After this, and inspired by the start of the Boy Band boom, Pearlman turned back to the music business, formed Trans Continental Records, and launched a talent search to manufacture his first band, the Backstreet Boys. After their huge success, Pearlman repeated the same formula with 'N Sync, and subsequently went on to manage a number of other bands (none of whom this aging writer has heard of). Subsequently, all bar one of the artists that Pearlman represented have sued him for misrepresentation and fraud, and all have won their cases or accepted out-of-court settlements.
Pearlman has also faced allegations of fraud related to his talent-scouting business, but his biggest scam of them all had been going on all along.
Ponzi
Since the 1980s, two shell companies owned by Pearlman, Trans Continental Airlines and Trans Continental Airlines Travel Services, had been offering what looked like an unmissable investment opportunity, in the form of a safe high-yielding savings account, offering anything from 3% to 14% annual return, and sold via various investment and insurance agents.
To allay any suspicions, the punters' money was claimed to be insured against loss with the Federal Deposit Insurance Corporation (FDIC), a US government corporation for providing savings account deposit insurance, with any sums over the FDIC limit being covered by Lloyds and AIG. Pearlman would even show his sales agents a document, apparently from Lloyds, detailing deposit insurance to the tune of $500m.
However, when the fraud was uncovered, as late as 2007, it turned out there was no insurance, no investment, and the two companies only existed on paper. And in their place, there was just a massive Ponzi scheme. Some investors' money had been used to pay agents' commissions and to cover withdrawals made by early investors, but the bulk had simply been stolen. Part of the reason the scheme had gone on so long was that many of the victims were investing for retirement, and wouldn't have wanted their money out in a hurry.
In addition to the private investors Pearlman had scammed, he'd also managed to persuade a number of banks and other institutional investors to buy into his scheme, such was his apparent plausibility. The total found owing amounted to around $300m, and there was only about $15,000 left in the company accounts.
The game afoot
When Pearlman was rumbled, he fled the country before he could be collared. Investigators concentrated on getting the evidence together to file all relevant charges, so they could subsequently seek his extradition from wherever he might be found. But they got an unexpected turn of good luck when Pearlman was recognised by a German tourist on holiday in Indonesia, who promptly sent an email to the St Petersburg Times, who in turn passed it on to the investigators.
FBI agents from Jakarta followed it up, and got local police to arrest him, upon which Indonesia promptly expelled him as an undesirable and he was quickly on his way to a US clink.
Pearlman is currently serving a 25-year sentence, with an interesting proviso -- for every $1m he helps to recover for his victims, he'll get a month off his sentence.
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