Great frauds in history: Louis Jay Pearlman

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 protégés in the pursuit of fame and fortune. It all looked too good to be true – and it was.