Lou Pearlman

Louis Jay "Lou" Pearlman (born June 19, 1954) is a former impresario of the successful 1990s boy bands the Backstreet Boys, *NSYNC, Take 5 , O-Town and US5 . In 2006 it was discovered that Pearlman had perpetrated one of the largest and longest-running Ponzi schemes in American history, leaving more than $300 million in debts. After getting caught on the run, and pleading guilty to conspiracy, money laundering and making false statements during a bankruptcy proceeding, in 2008 Pearlman was convicted and sentenced to (up to) 25 years.^[3][4][5][6]

[edit] Early life and career

Lou Pearlman was born and raised in Flushing, Queens, the only child of Jewish parents Hy Pearlman, who ran a dry cleaning business, and Reenie Pearlman, a school lunchroom aide. Pearlman is the first cousin of Art Garfunkel. His home at Mitchell Gardens Apartments was located across from Flushing Airport, where he and childhood friend Alan Gross would watch blimps take off and land. According to Pearlman's autobiography, Bands, Brands, & Billions, it was during this period he used his position on his school newspaper to earn credentials and get his first ride in a blimp. (This version of events is disputed by Gross, who claims he was the school reporter, and allowed Pearlman to tag along.)^[7][8]

His cousin Garfunkel's fame and wealth helped fire Pearlman's own interest in the music business. As a teenager he managed a band, but when success in music proved elusive, he turned his attention to aviation. During his first year as a student at Queens College, Pearlman wrote a business plan for a class project based on the idea of a helicopter taxi service in New York City. By the late 1970s, he had launched the business based on his business plan, starting with one helicopter.^[9] He convinced German businessman Theodor Wüllenkemper to train him on blimps and subsequently spent some time at Wüllenkemper's facilities in Germany learning about the airships.

[edit] Suspicions of insurance fraud and pump & dump

Returning to the United States, Pearlman formed Airship Enterprises Ltd, which leased a blimp to Jordache before actually owning one. He used the funds from Jordache to construct a blimp, which promptly crashed. The two parties sued each other, and seven years later Pearlman was awarded $2.5 million in damages. On the advice of a friend, Pearlman started a new company, Airship International, taking it public to raise the $3 million he needed to purchase a blimp, claiming (falsely) that he had a partnership with Wüllenkemper. He leased the blimp to McDonald's, for advertising.^[7][8]

He then relocated Airship International to Orlando in July 1991, where he signed MetLife and Sea World as clients for his blimps. Airship International suffered when one of its clients left, and three of the aircraft crashed. The company's stock, once pumped up to $6 a share dropped to 3 cents and the company was shut down:^[10][11]

After he took his air charter company, Airship International, public in 1985, Pearlman became personally and professionally close to Jerome Rosen, a partner at small-cap trading outfit Norbay Securities. Based in Bayside, Queens, and frequently in trouble with regulators, Norbay actively traded Airship stock. This sent Airship's stock price consistently higher, enabling Pearlman to sell hundreds of thousands of shares and warrants at ever-higher prices. However, Airship was reporting little revenue, cash flow or net income. In return for keeping his penny stock liquid, Pearlman allegedly paid Rosen handsome commissions, according to a mutual friend, that reached into 'the tens of thousands of dollars' per trade.^[10]

—Roddy Boyd, New York Post

[edit] Entertainment industry career

Pearlman became fascinated with the success of the New Kids on the Block, who had made hundreds of millions of dollars in record, tour and merchandise sales. Thus he started Trans Continental Records with the intent of mimicking their boy-band business model. The label's first band, the Backstreet Boys, consisted of five unknown performers selected by Lou in a $3 million^[12] talent search. Management duties were assigned to a former New Kids on the Block manager, Johnny Wright, and his wife Donna.^[13] The Boys went on to sell 100 million albums worldwide,^[14] hitting gold and platinum in 45 different countries. Pearlman and the Wrights then repeated this formula almost exactly with the band *NSync, which sold over 56 million records globally.

With these two major successes under his belt, Pearlman had become a music mogul. Other boy bands managed by Pearlman were O-Town (created during the ABC–MTV reality TV series Making the Band), LFO, Take 5, Natural, and US5, as well as the girl group Innosense, together with Lynn Harless. Other artists on the Trans Continental label included Aaron Carter, Adams Hambüger-Hatt, Jordan Knight, Smilez & Southstar and C-Note. Pearlman also owned a large entertainment complex in Orlando, including a recording studio he called Trans Continental Studios, and a dance studio by Disney World named "O-Town".^[10]

Lou Pearlman also was an officer at TAG Entertainment.The independent film company TAG Entertainment produced some low budget yet profitable movies and DVDs. Pearlman presented himself as working to create an ethical and wholesome New Wave of Hollywood film making, along with others who actually worked on the movie projects for much less than what they would normally charge.

[edit] Band lawsuits

With the exception of US5, all of the musical acts who have worked with Pearlman have sued him in Federal Court for misrepresentation and fraud. All cases against Pearlman have either been won by those who have brought lawsuits against him, or have been settled out of court. All cases have also ended with a confidentiality agreement, meaning none of the parties are allowed to discuss Pearlman's practices in detail.^[8]

The members of Backstreet Boys were the first to file a lawsuit against Pearlman, feeling that their contract — under which Pearlman collected as both manager and producer — was unfair, since Pearlman was also paid as a sixth member of the Backstreet Boys (i.e., one-sixth of the band's own income). The band's dissatisfaction began when member Brian Littrell hired a lawyer to determine why the group had received only $300,000 for all of their work, while Pearlman and his record company had made millions. Fellow boy band *NSYNC was having similar issues with Pearlman, and its members soon followed suit.^[8]

At the age of 14, pop star Aaron Carter filed a lawsuit in 2002 that accused Pearlman and Trans Continental Records of cheating him out of hundreds of thousands of dollars and of racketeering in a deliberate pattern of criminal activity. This suit was later settled out of court.^[15]

[edit] Talent scouting scandal

In September 2002, Pearlman purchased Mark Tolner's internet-based talent company, Options Talent Group f/k/a Sector Communications (previously named Emodel and Studio 58), which would then go through several names including Trans Continental Talent, TCT, Wilhelmina Scouting Network (WSN), Web Style Network, Fashion Rock and Talent Rock. Regardless of the name, all incarnations were based on the business model used by Emodel founder Ayman el Difrawi (aka Alec Defrawy), himself a convicted conman,^[16] who played a principal role in running Options / TCT / WSN^[17] and setting up Fashion Rock. The companies received unfavorable press attention, ranging from questions about their business practices to outright declarations that they were scams.^{[18][19][20][21][22][23][24][25]}

After Hotjobs and Monster.com pulled over a thousand of the company's job ads from their boards,^[26] they were further advertised on the Difrawi-founded^[27] "Industry Magazine" website. The Better Business Bureau's opinion about Options / TCT / WSN was negative (a "pattern of complaints concerning misrepresentation in selling practices").^[28] The New York State Consumer Protection Board issued an alert, naming it the largest example they had found of a photo mill scam^[29] (in which agencies force models to shoot portfolios with photographers on their own payrolls), and a State Senator called it trying "to make a quick, dishonest dollar".^[30]

The San Francisco labor Commissioner declared it in violation of California law, and several state agencies were reported to be investigating.^[31] In Florida, around 2,000 complaints were filed with the then-Attorney General Charlie Crist and the Better Business Bureau, and an investigation was started by Assistant AG Dowd. However, no charges were filed, as the newly appointed Assistant AG MacGregor was unable to find "any substantial violations" and the company had declared bankruptcy, "leaving no deep pockets to collect damages from."^[32][33]

By June 2004, Fashion Rock, LLC had filed a civil suit for defamation against some who had criticized Pearlman's talent businesses and outed suspicions of bankruptcy fraud. The case was dismissed and closed in 2006.^[34][35][36] One of the accused, Canadian consumer-fraud expert Les Henderson, successfully pursued a libel lawsuit against Pearlman, Tolner, El-Difrawi and several others.^[37][38][39]

Fashion Rock, LLC lived on until February 2, 2007,^[40][41] when its assets were sold in Pearlman's bankruptcy proceeding.^[42][43] Mr. Difrawi currently runs Softrock.org and OMG Talent, from the same address as former TCT.

[edit] Allegations of inappropriate sexual conduct

The November 2007 issue of Vanity Fair magazine reported claims of inappropriate sexual conduct made in interviews with several former and current boy band members, and male employees of Pearlman's. Many of the men had lived in Lou's Florida mansion, where the inappropriate conduct was alleged to have taken place, but none were willing to come forward publicly, and no charges were ever filed. Backstreet Boy Nick Carter's mother, Jane Carter, told the magazine: “Certain things happened and it almost destroyed our family. I tried to warn everyone. I tried to warn all the mothers." She said, "I tried to expose him for what he was years ago".^[8]

In a January 2009 interview on the Howard Stern show, LFO frontman Rich Cronin (now deceased) described Pearlman's alleged inappropriate sexual conduct.^[44] However, fellow LFO band member, Brad Fischetti, expressed sympathy for "his friend" Lou Pearlman in a 2007 AOL.Music interview, and doesn't mention anything about sexual inappropriateness.^[45] Nick Carter hasn't confirmed his mother's statements regarding Pearlman, and in a later interview, when asked if true (choosing his words carefully), he seemed to hint that bitterness may be a motivating factor for the sexual gossip.^[46] In an interview conducted by the Orlando Sentinel, openly gay former *NSYNC member Lance Bass, when asked about the Vanity Fair article, stated that Pearlman had never behaved inappropriately with them.^[47]

[edit] The Ponzi scheme

However, it was not the allegations of sexual conduct, but rather allegations of a Ponzi scheme that would prove to be Pearlman's downfall. In 2006 investigators discovered Pearlman had perpetrated a long running Ponzi scheme that defrauded investors out of $300 million. For more than 20 years Pearlman enticed individuals and banks to invest in Trans Continental Airlines Travel Services Inc. and Trans Continental Airlines Inc., both of which existed only on paper.^[48] Pearlman used falsified Federal Deposit Insurance Corporation, AIG and Lloyd's of London documents to win investors' confidence in his "Employee Investment Savings Account" (EISA) program and he used fake financial statements created by a fictitious accounting firm Cohen and Siegel to secure bank loans.^[8]

[edit] Investigation

In February 2007, Florida regulators announced that Pearlman's Trans Continental Savings Program was indeed a massive fraud and the state took possession of the company.^[49] Most of the at least $95 million which was collected from investors was gone. Orange County Circuit Judge Renee Roche ordered Pearlman and two of his associates, Robert Fischetti and Michael Crudelle, to bring back to the United States "any assets taken abroad which were derived from illegal transactions."^[50]

[edit] Arrest

Following a flight from officials, Pearlman was arrested in Indonesia on June 14, 2007 after being spotted by a German tourist couple.^[51] Pearlman was then indicted by a federal grand jury on June 27, 2007.^[52] Specifically Pearlman was charged with three counts of bank fraud, one count of mail fraud and one count of wire fraud.

[edit] Conviction and sentencing

On May 21, 2008, Pearlman was sentenced to 25 years in federal prison, after pleading guilty to charges of conspiracy, money laundering, and making false statements during a bankruptcy proceeding. U.S. District Judge G. Kendall Sharp gave Pearlman the chance to cut his prison time, by offering to reduce the sentence by one month for every million dollars he helps a bankruptcy trustee recover. He also ordered that individual investors are to be paid before institutions in distributing any eventual assets.^[53][54]

Pearlman is currently serving his sentence with a release date of March 24, 2029.

[edit] References

[edit] External links

• Lou Pearlman case
• Page Six Story on Pearlman
• Interview, HitQuarters Jul 2005
• CNBC "American Greed" program which describes the massive fraud and Ponzi scheme, victim outrage at the federal offer to reduce Pearlman's sentence, his proposed "Jailhouse Rock" (gag) reality series and discusses the issue of sex with underage boys.
• Lou Pearlman at the Internet Movie Database

[edit] Books

• Lou Pearlman, Wes Smith (2002). Bands, Brands and Billions: My Top 10 Rules for Making Any Business Go Platinum. McGraw-Hill. p. 261. ISBN 978-0-07-138565-7. 
• Les Henderson (2006). Under Investigation: The Inside Story of the Florida Attorney General's Investigation of Wilhelmina Scouting Network, the Largest Model and Talent Scam in America. Coyote Ridge Publishing. p. 511. ISBN 978-0-9687133-3-4. 
• Tyler Gray (2008). The Hit Charade: Lou Pearlman, Boy Bands, and the Biggest Ponzi Scheme in U.S. History. Harper Collins. p. 320. ISBN 978-0-06-157966-0.