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Victims get another small payment in Lou Pearlman fraud

The trustee overseeing the Ponzi scheme of “boy band” promoter Lou Pearlman is sending out more checks to victims, but the amount is still paltry compared to the nearly $300 million fraud case.

On Monday a second distribution of $5.6 million was released. In November, the trustee, Soneet Kapila, distributed $10.4 million. Meanwhile several victims’ families have filed notices in the case that the original victims of the fraud have died.

According to bankruptcy court filings, the recovery for victims is still only 3.3 percent. Efforts to recover more money by suing banks and professional firms met with difficulty, as evidenced by a recent settlement of litigation with Wells Fargo Bank.

According to a settlement agreement dated March 10, Kapila sued Wells Fargo for $3.5 million, and the bank filed a counterclaim for $1.5 million. The settlement states both actions will be withdrawn.

At the same time, some banks had large claims in the bankruptcy through the FDIC. U.S. Bankruptcy Judge Karen Jennemann on April 15 approved a claim of $15 million to the FDIC in the name of Integra Bank and First Choice Bank.

Kapila continues to wind down the case. He said in an email that he expects a third and final distribution later this year after all litigation is resolved in some way.

Recovery is notoriously difficult in Ponzi schemes. Lawyers and accountants generally consider 25 percent to be good for a Ponzi scheme, unless a large wealthy bank or firm can be pinned with blame.

Hundreds of lawsuits were filed in the Pearlman case. Due to the nature of a Ponzi scheme, some lawsuits actually targeted victims of the fraud because they may have received more money than other victims. Ponzi schemes are investment scams similar to a pyramid scheme, where investors receive money only when more victims invest in the scheme. Usually there is no underlying business activity at all. When they collapse, there is often no money left.

Miami-based law firm Akerman, which handled most of the litigation, recently received final approval on $5 million in fees for handling litigation. According to a judge's opinion on the fees, Akerman managed to knock out millions in claims from banks and other institutions that would have competed with payments to individual victims.

In Pearlman’s case, he had been a well-known band promoter for groups like ‘N Sync and Backstreet Boys. His scam was based on phony travel businesses including Trans Continental Airlines Inc. The fraud collapsed in 2007. Pearlman is serving a 25-year prison sentence.

Copyright © 2014, The Baltimore Sun
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