Lou Pearlman: the fraudster who made more than $300m in scams

published 2 June 2008

"He could make you believe anything. Anything at all," is how his publicist, Jay Marose, summed up the charms of the man who liked to be known as "big Poppa" in Vanity Fair. His client, 53-year-old music mogul Lou Pearlman, has just been sentenced to 25 years in prison for a two-decade scam that conned American banks and investors out of more than $300m (see below).

However, even in court he hadn't lost his touch: the presiding judge, who listed some of the ex-impresario's victims in court as "his family, close friends and people in their 70s and 80s who have lost their life savings", agreed to reduce the 25-year sentence by one month for every $1m Pearlman manages to repay.

In recent years, Pearlman has been mainly known for creating pop phenomena such as the Backstreet Boys and 'NSync, as well as guiding the early careers of countless young singers, Justin Timberlake included, and for being very rich indeed. At its peak, his personal fortune extended to a 12,000 square foot lakeside mansion in Windermere, two flats in Orlando, a house in Hollywood, a flat in Manhattan and, says Vanity Fair, "at least two Rolls-Royces".

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However, he didn't exactly come from rock royalty. He was born in 1954 in a high rise in Flushing, Queens, and his father worked in dry cleaning, while his only tentative link to a music career was "the encouragement he received from his cousin", the then unknown Art Garfunkel, says Rottentomatoes.com. Indeed, according to him, Pearlman was always more interested in aviation than singers.

It was an interest he claims made him his first $1m when, shortly after leaving Queens College, he charmed a group from Wall Street into investing in a helicopter for him, which he then leased out around New York. Then, in 1978, he upped the stakes, somehow befriending Theodore Wullenkemper, German builder of the world's best airships. Using Wullenkemper's name, he was able to raise the cash to build his own blimp the plan being to rent it out for corporate promotional flights. It crashed on its first outing. Still, undaunted, he launched a new blimp company and raised $3m in a 1985 initial public offering.

By 1991, sure of his ability to attract investors and cash, he set his sights much higher. His next venture was Trans Continental Airlines, an aircraft-leasing business co-owned with Wullenkemper and supported by wealthy friends who fell for his patter one, Joseph Chow, would end up lending him $14m. The firm quickly attracted new investors, impressed by the growing airship business: at its peak, Pearlman claimed 49 aircraft and revenues of $78m. However, the money really started rolling in when Pearlman gave up on being even vaguely legitimate and started selling dodgy stock options, to the tune of $300m. With the cash came the fancy cars, the music business and a lot of excess weight: he was, said one investor's daughter, "unbelievably fat".

Then came a group of people who couldn't be sweet talked Joseph Chow's family. When Chow died, they wanted his money back. In 2005 they began the legal proceedings that would reveal much of Pearlman's empire to be a sham, and which would lead to Pearlman's arrest in Bali and his final deal with the judge.

How Lou Pearlman did it: an old-style Ponzi scheme

Pearlman's ability to charm was never doubted, but the same can't be said for his money-raising techniques. Early on, his blimp firm raised millions of dollars selling airship stock, but his brokers, Chatfield Dean and Co, were eventually hit with $2.4m in fines from the US regulator for what Vanity Fair labels "swindling investors" by selling risky, overpriced stock.

The scam that would eventually finish him came later, when Pearlman took more than $300m from investors in Trans Continental, by selling them a so-called Employee Investment Savings Accounts. The name was chosen to confuse investors familiar with a different but legitimate "Employee Retirement Investment Savings Account", and was marketed as a government-backed, and thus 100% safe, way for outsiders to participate in the airline's employee stock-ownership plan, offering a tax-free "rock-solid annual return of 8%". This looked generous, but was cleverly "only a point above rates available elsewhere", so "people never got suspicious", as Bob Persante, a Tamper lawyer, put it.

While the scheme was a hit, in reality it was little more than a "Ponzi" fraud: old investors were paid using money from a growing army of new ones. Difficult queries were routed via inexperienced staff straight back to the reassuringly charismatic Pearlman, who, until he met the Chows, could wow even the shrewdest with a chance to rub shoulders with the stars.