More than six years after his $300 million Ponzi scheme
collapsed, victims of former boy band mogul Lou Pearlman's scheme are
set to receive an initial payout of just four cents on the dollar. In a
distribution plan (the "Plan") filed by the bankruptcy trustee
appointed to recover funds for Pearlman's victims, an investor with an allowed
claim of $100,000 would be entitled to $4,000, with the chance that future
distributions could eventually add to this total. Pearlman, who was arrested
in June 2007 after fleeing to Indonesia, and is currently
serving a 25-year prison
sentence in an Eastern Texas prison. He is currently scheduled to be
released on March 24, 2029.
Pearlman operated a vast array of businesses from
airlines to blimp companies to entertainment ventures. While some of his
businesses were legitimate enterprises, he used these profitable businesses to
sustain other unprofitable businesses, including TransContinental Airlines
("TCA"). Investors were solicited to invest in TCA, drawn by the
promise of above-market interest rates as well as the future possibility of an
initial public offering (IPO) that would result in exponential returns for
initial investors. Pearlman also offered investments through TCA in an alleged
"Employee Investment Savings Account," which was apparently designed
to mimic the Employee Retirement Investment Savings Account (ERISA) established
under federal law. In total, investors contributed nearly $300 million to
Pearlman's various ventures.
In addition to his legitimate ventures, Pearlman also
used the massive cash horde generated by his creation of two wildly-popular boy
bands, 'N Sync and the Backstreet Boys. While under contract, the groups
essentially financed Pearlman's other unprofitable ventures through a steady
stream of cash. However, after the groups successfully sued to escape their
contract, Pearlman was faced with mounting investor obligations while cash
inflows decreased. As a last ditch effort, Pearlman even established his own
fake accounting firm, Cohen & Siegel ("C&S"), which existed
solely to forward phones and generate bogus accounting reports and audits.
After an unsuccessful attempt to quickly liquidate assets to support the
failing scheme, Pearlman fled to Thailand in 2007. After he was spotted by a
tourist, he was arrested, extradited back to the United States, and pled guilty
in February 2008.
The bankruptcy trustee, Soneet Kapila, was appointed in
early 2007 and was tasked with unraveling Pearlman's fraud and marshaling funds
for defrauded investors. Discovering that little cash was left from Pearlman's
businesses, the trustee filed over 700 'clawback' lawsuits targeting investors
who had received distributions in excess of their principal investment. Notably,
one of these clawback lawsuits was profiled on Discovery Channel's True Crime
with Aphrodite Jones, in which the investor sued by Kapila hired a hitman to
kill him in order to allow his family to collect on a generous life insurance
policy. The hired killer was later caught and sentenced to twenty years in
Of the 700-plus clawback cases, Kapila and his team have
recovered more than $30 million, and litigation remains ongoing. However,
administrative fees due to Kapila and other professionals have reduced the
amount of cash on hand to approximately $14 million.
The Plan proposes that, after paying administrative and
priority claims totaling approximately $4 million, investors holding nearly
$260 million in unsecured claims will be entitled to a distribution amounting
to 4% of their approved claim. Because those investors will receive less than
the full amount of their claim, federal bankruptcy laws entitle them to submit
ballots voting for or against the Plan. The committee representing unsecured
creditors has urged approval of the Plan, warning that drawn-out litigation
threatens to eliminate any recovery.
A confirmation hearing on the Plan will be held on July
17, 2013 at 2:30 p.m.
A copy of the Distribution Plan is here.
For more news and analysis of Ponzi schemes, visit
Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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