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MARCH 19, 2007
From Starmaker To Scammer? Boy band Svengali Lou Pearlman is accused of running a Ponzi scheme Louis J. Pearlmanseemed to have it all. He lived in a $12 million, Italian-style mansion in Orlando and was chauffeured around in a powder-blue Rolls-Royce. His office, part of a sprawling downtown complex he owned, was lined with the gold and platinum records he earned as creator of pop music sensations *NSYNC and the Backstreet Boys. Now, all that could go--in the words of *NSYNC--bye, bye, bye. The Florida Office of Financial Regulation has charged Pearlman, 52, with orchestrating a Ponzi-like scheme that may have bilked some 1,800 investors out of $317 million. The FBI has raided his house and office, banks have begun seizing assets, and dozens of investors have launched civil suits. Pearlman, who said in a Feb. 2 letter to the Orlando Sentinel that he was in Germany promoting his musical ensemble US5, couldn't be reached for comment. The accusations center on money- market-like investments sold by Pearlman's main company, Trans Continental Airlines Inc., a charter carrier. The accounts offered interest rates slightly higher than what its investors, many of them Florida retirees, could get at a local bank. According to the Florida complaint, Pearlman allegedly distributed brochures highlighting coverage by the Federal Deposit Insurance Corp., and he talked up insurance from American International Group Inc. (AIG ) and Lloyd's of London. Flor-ida regulators say none of that was true. Pearlman's recent legal troubles have also hit new Florida Governor Charles J. Crist Jr., who was named as a defendant in a Mar. 5 investor suit. The suit claims Crist, a Republican, didn't pursue complaints about Pearlman, a big campaign contributor, when he was Florida's attorney general. A Crist spokeswoman says the governor hasn't seen a copy of the suit and would not comment. Retirees aren't the only ones trying to get money out of Pearlman. Bank of America Corp. (BAC ) has an outstanding $25 million mortgage on Church Street Station, his downtown entertainment complex that filed for bankruptcy protection on Feb. 20. This year, Washington Mutual Inc. (WM ) won a $9.7 million judgment against him over a defaulted loan. The son of a Flushing (N.Y.) dry cleaner, Pearlman has raised red flags with his business activities before. Both the Backstreet Boys and *NSYNC sued him in the late 1990s, claiming he misappropriated money. Those suits were settled. Last year pop star Justin Timberlake, the former lead singer of *NSYNC, told Rolling Stone that he had "been monetarily raped by a Svengali," referring to Pearlman. Timberlake's publicist did not respond to a request for comment. 'EVERYTHING'S FINE' For Don Seligman, the leasing agent for Church Street Station, the first warning came last November, when Frank Vasquez, a vice-president for operations at Pearlman's company, asphyxiated himself in his garage: "I think that was the precursor. He knew what was coming." Manhattan dentist Steven Sarin was simply blindsided. Sarin's parents first invested with Pearlman in 1985 after hearing about the good returns from another resident of their Florida retirement community. Sarin's family handed over much of their life savings to Pearlman. Sarin says Pearlman met frequently with the family, even calling his parents on their birthdays and inviting everyone backstage at concerts featuring his acts. In December, over corned beef sandwiches at a deli in Queens, Sarin and his brother asked Pearlman about their investments. "He said: 'Everything's fine,'" Sarin recalls. "'The business is doing phenomenally.'" Now, Sarin says, his mother can't stop crying, and Sarin himself had to be rushed to the hospital on Feb. 27 for complications from stress. "People get blinded by the entertainment field," says Sarin, who wishes Pearlman would return his family's money. For now, there's little hope of that. Gerard A. McHale Jr., who was appointed by a Florida judge to oversee Pearlman's businesses in early February, says he has recovered just $50,000 so far. He adds, "I don't know how I'm going to get paid."  By Christopher Palmeri Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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