Victims of former boy band mogul Lou Pearlman's $300 million Ponzi scheme are set to receive a second distribution of approximately 2% of their total losses. Nearly seven years after Pearlman was arrested in June 2007, the distribution by bankruptcy trustee Soneet Kapila comes after an initial distribution in June 2013, and brings the total recovery to date by Pearlman investors to approximately 6%. Pearlman is currently serving a 25-year prison sentence in a Texas prison, and is scheduled to be released in 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 stead 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, 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.
Kapila was appointed in early 2007 and tasked with unraveling Pearlman's fraud and marshaling funds for defrauded investors. Soon after his appointment, Kapila 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 prison.
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 reduced the amount of cash on hand to approximately half of this amount.
According to the Orlando Sentinel, Kapila expects to make a third and final distribution later in 2014 as the remaining adversary proceedings are resolved.