The inaugural episode of Misfortune: A Financial Crimes Podcast covers the tragic story behind boy band impresario Lou Pearlman. Our guest is Vanity Fair special correspondent Bryan Burrough, author of Mad About the Boys, the bombshell article which detailed the sexual misconduct allegations against Pearlman. Listen and subscribe via iTunes – and if you like what you hear, please rate and review as well. We appreciate it!
Louis Jay “Lou” Pearlman was born on June 19, 1954 in Flushing, New York. He had always been interested in aviation, and tells the story of how as a kid, he begged a Goodyear blimp operator for a ride. When told it was only for employees, families and press, he cleverly managed to get a ride as an elementary school newspaper reporter. (Or did he? A childhood friend disputes this, claiming that the story is actually his, and Lou started telling it as his own.)
Lou eventually purchased his first blimp with the help of an investor and made a deal with Jordache to lease it. In October 1980, the Jordache blimp lifted off into the sky for its maiden flight. No one anticipated that the blimp’s gold paint would absorb heat, causing the helium to expand unevenly. The blimp crashed shortly after take-off, as Pearlman and an FAA official watched. The blimp crash may have been a blessing in disguise, as the gold paint had turned brown after a few days in the sun, so the blimp looked more like a floating turd than an impressive marketing campaign.
Being the resourceful guy that he was, Pearlman managed to recover. It took a few years but he raised the money for a new blimp by taking his company, Airship International, public (allegedly by artificially raising stock prices/pump and dump scheme). He repeatedly pestered a McDonald’s executive until McDonalds agreed to sign on as a sponsor. Although that relationship only lasted a year, Pearlman was able to leverage the name recognition into many more high-profile deals and expand Airship. He lucked out in 1990 when he was able to purchase the assets of a blimp company that was on the verge of financial collapse for pennies on the dollar. He then relocated Airship International to Orlando, Florida in July 1991, where Sea World and Pink Floyd were among the high profile names that leased his blimps. However, blimp crashes ultimately led to the demise of the company.
Pearlman then started Trans Continental Airlines – pitched to investors as a charter plane service. Although it’s not clear how many planes Pearlman’s company actually had, it wasn’t as many as he claimed. In fact, the plane featured in the company’s brochure was actually a toy model plane. However, at one point, New Kids on the Block chartered one of his planes, which started his fascination with the boy band model.
The Boy Band Era – Self-Proclaimed “Big Poppa”
The Backstreet Boys is the best selling boy band of all time, with record sales exceed 130 million. (The Jacksons are number two, for perspective’s sake)
Pearlman started Trans Continental Records and in October 1992, placed an ad in the Orlando Sentinel to find young male vocalists. On April 20, 1993, The Backstreet Boys was finalized and Pearlman brought on NKOTB manager Johnny Wright to help manage the group.
The band signed to Jive Records in 1994, and released their first single the following year. Although their first single entered the top 5 in Germany, Switzerland, Austria, France, and the Netherlands, it didn’t get much notice in the US. For this reason their self-titled debut album was only released internationally on May 6, 1996, and the band toured Europe, Asia and Canada. Quit Playing Games with My Heart was their breakthrough single in the US, hitting No. 2 on the Billboard Top 100. The song was written by Max Martin, one of the most successful pop songwriters of all time (Baby One More Time, I Kissed A Girl, Blank Space, Can’t Feel My Face).
In August 1997, the band released their second international album (Backstreet’s Back) and their US debut album (still named Backstreet Boys) a day apart. Their US debut album peaked at #4 on the charts and has sold over 14 million copies.
The 5 members reportedly made $300,000 total for the years between 1993 to 1997 ( $12,000/year per member) while Pearlman and his company took $10 million. Not surprisingly, the group members sued Pearlman in 1998, and after the lawsuit was privately settled, Pearlman and the band parted ways.
While working with The Backstreet Boys, Pearlman and Wright began managing the boy band that would soon become BB’s biggest competitor.
Chris Kirkpatrick had auditioned for The Backstreet Boys but didn’t make the final cut. He talked to Lou Pearlman about forming a second group, which Lou agreed to provided Chris found the other members.
Chris knew Justin Timberlake from the Florida audition scene and approached him about forming the group. Justin knew JC Chasez from the Mickey Mouse Club. They brought on another friend, Joey Fatone. Lance Bass was the last member to join, he was a recommendation from JC’s former vocal coach. The band name was inspired by Justin Timberlake’s mom commenting on how “in sync” the members’ voices were.
Similar to the The Backstreet Boys, they initially found success in Germany. They signed with a German label ( BMG Ariola Munich) and their first single “I Want You Back” was released on October 7, 1996. Their self-titled debut album was released in Germany on May 26, 1997- just about one year after The Backstreet Boys’ first album was released. This album was a great success across Europe, reaching No. 1 in Germany.
An A&R rep for RCA Records saw the group perform in Budapest and signed them in 1998. Their first US album (also self-titled) was released on March 24, 1998, but sales were initially sluggish.
They got a bump when The Backstreet Boys backed out a Disney Channel concert special (due to member Brian Littrell needing surgery), and was replaced with NSYNC. This special aired on July 18, 1998, and boosted their album from close to the bottom of the charts to the top 10. Their next single “Tearin’ Up My Heart” was a radio hit and they opened for Janet Jackson’s Velvet Rope tour. When NSYNC released a holiday album later that year, it reached no. 7 on the billboard charts, meaning they had 2 albums in the top 10 at the same time.
In September 1999, NSYNC announced they plan to sign a new distribution deal with Jive Records, which at the time was also home to The Backstreet Boys and Britney Spears. The following month, Pearlman and BMG Entertainment (RCA’s parent company) filed a $150M lawsuit against NSYNC and Zoomba Recording (Jive’s parent company) for breach of contract and requested a preliminary injunction, which was denied.
NSYNC filed a $25M countersuit against Pearlman and Trans Continental for fraud, breach of contract and breach of fiduciary duty. They had signed a five-record deal with Trans Continental Records and Pearlman had initially agreed to just one-sixth of the profits. However, Pearlman’s lawyer admitted that Pearlman had made at least $7 million off the group, while NSYNC members had made only $7 million collectively. In December 1999, the parties ended up settling out of court and NSYNC signed with Jive. (The Backstreet Boys were reportedly upset by this news and tried to threatened to leave Jive; shortly afterwards Jive signed a lucrative five-album deal with them.)
Both the title of NSYNC’s next album (No Strings Attached) and the first single off that album (Bye Bye Bye) were rumored to allude to Lou Pearlman and Trans Continental Records. The album was the top selling album of 2000, selling nearly 10M albums that year.
Despite the lawsuits, Pearlman wasn’t done with the boy band model just yet. In 2000, he brought the first reality show to a big-three network, “Making the Band” (ABC). O-Town was a result of this show – this band disbanded in 2003 after reaching only moderate success.
In June 2002, Aaron Carter sued Pearlman and Trans Continental Records, claiming he was owed hundreds of thousands of dollars. In October 2002, this suit ended like all the others – settled privately with confidentiality agreements.
The “EISA” Accounts
What ultimately brought down Pearlman was not defrauding boy bands, but his company’s “Employee Investment Savings Accounts.” These accounts promised 6 – 10% returns and he “generously” allowed outsiders to invest. In reality, there was no such thing as EISA accounts, but they sounded similar to ERISA accounts, which are legitimate Employee Retirement Investment Savings Accounts.
Since this wasn’t a real fund, he had forged the insurance documents and financials. Investors were promised that the fund was FDIC Insured as well as being privately insured by AIG and Lloyd’s of London.
In 1999, a broker contacted Lloyd’s of London to confirm that the company was indeed insuring this fund. Lloyd’s asked U.S. Securities and Exchange Commission to investigate. Pearlman wrote to Lloyd’s explaining that an agent had made a mistake and included a letter that he claimed to have sent to investors correcting the error.
In mid-2006, investors start having trouble withdrawing their funds and reported Pearlman. In December of 2006, Florida’s Office of Financial Regulation sues Trans Continental Airlines for operating an unregistered security. The lawsuit referenced a number of overlooked red flags including:
- In 1995 an FDIC attorney had looked into the fund and found it “troubling” and asked the Florida Division of Financial Investigations to investigate
- In 2001, the Texas Securities Board contacted the FDIC regarding this fund
- In 2004, the Florida’s Office of Financial Regulation receives yet another complaint, to which the company responded that the program was no longer being offered to the public
At about the same time as the state of Florida’s suit, bank lawsuits began to roll in. Pearlman allegedly obtained over $126.7M in bank loans using forged financial documents from a fake accounting firm. Pearlman conveniently left the country around this time, supposedly to accompany his latest boy band, US5, on a European tour. On February 1, 2007, Pearlman was in Berlin to watch the band receive an award, but soon after dropped off the radar.
Over the next few months, the FBI raided his home and offices, and the Trans Continental headquarters building was sold for $34 million. In June 2007, Pearlman was captured in Indonesia after a German tourist spotted him at a Westin Resort in Bali.
Shortly after Pearlman’s arrest, Vanity Fair published Mad About The Boys which made the first public sexual allegations, but no first-person accounts. Pearlman denied the allegations and no charges were ever filed.
In March 2008, Lou Pearlman pled guilty to conspiracy, money laundering, making false statements during bankruptcy proceeding. He was convicted and sentenced to 300 months (25 years) – one for every million allegedly stolen from investors and banks. The judge also ruled that for every $1M Pearlman recovers, he will get a month trimmed off his sentence.
In 2014, The Hollywood Reporter published an interview with Lou Pearlman in which he bragged about being smarter than Bernie Madoff. The difference between them, according to Pearlman, was that Madoff was merely redistributing his investors’ money, while the boy bands were bringing in real revenue. In fact, he was confident, that given the chance, he could make his 1700 victims whole if only prison officials would just let him continue his music business from prison.
On August 19, 2016 at the age of 62, while still serving out his prison sentence, Lou Pearlman died of cardiac arrest.