Great frauds in history: Louis Jay Pearlman

Louis Jay Pearlman conned £300m out of his victims, among them boy bands the Backstreet Boys and ‘N Sync.

Louis Jay Pearlman © Evan Agostini/Getty Images

Louis Jay Pearlman was born in 1954. His father owned a dry-cleaning business, and singer Art Garfunkel was a first cousin. After graduating in accounting, Pearlman founded a helicopter taxi service in New York, before moving into airship leasing. In the 1980s he set up a string of businesses using the Trans Continental moniker. But it was for his music label that he became most famous. Trans Continental Records launched the careers of several of America's most famous boy bands in the 1990s, including the Backstreet Boys and N Sync, featuring Justin Timberlake.

What was the scam?

The Backstreet Boys and N Sync were phenomenally popular. Yet despite their success, they only received a fraction of their earnings as pay $10,000 each in the case of N Sync in 1999, according to a new documentary. In the 1980s, Pearlman had also founded Trans Continental Airlines. The airline, however, existed in name only and Pearlman pocketed all of the cash he raised from investors. His business empire would turn out to be a Ponzi scheme, paying longer-term investors with funds raised from new ones.

What happened next?

The members of Pearlman's boy bands sued. In the court case brought by N Sync, Pearlman argued that, since he owned the name, he was contractually entitled to 90% of the earnings. The judge sided with the band members. But it was the fake airline that proved his undoing. Pearlman was arrested in 2007 and fled to Bali, where the FBI caught up with him. The following year he was sentenced to 25 years behind bars. His decades-long Ponzi scheme had defrauded investors out of an estimated $300m. He died in prison of a heart attack, aged 62, in 2016.

Lessons for investors

The brochure for Pearlman's fake airline had a picture of a toy aeroplane on the cover. That, if nothing else, should have prompted a little digging from investors, who may have discovered the airline didn't actually have any planes. At any rate, the financial reports should have been signed off by independent accountants. Pearlman's only qualification in the music business was being related to Art Garfunkel, a fact he reportedly traded on to woo young protgs in the pursuit of fame and fortune. It all looked too good to be true and it was.

Recommended

The UK stockmarket is cheap – but is it cheap for good reasons?
UK stockmarkets

The UK stockmarket is cheap – but is it cheap for good reasons?

Compared to other developed-world markets, UK stocks are remarkably cheap. But a number of factors means the discount could be well-deserved, says Max…
27 Sep 2021
Rob Arnott: Covid's hidden investment opportunities
Investment strategy

Rob Arnott: Covid's hidden investment opportunities

Merryn talks to Rob Arnott of Research Affiliates about some of the unexpected consequences of Covid and their opportunities for investors, plus the "…
24 Sep 2021
University spin-outs: where to find companies involved in cutting-edge science
Share tips

University spin-outs: where to find companies involved in cutting-edge science

Universities are innovation incubators and often launch businesses involved in fast-growing fields ranging from biotechnology to artificial intelligen…
24 Sep 2021
Investing in football clubs: how you can profit from the beautiful game
Share tips

Investing in football clubs: how you can profit from the beautiful game

Football clubs may often be money pits for oligarchs, but they are also huge global brands, says John Chambers – and investors are now starting to rec…
24 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021