Did the Creator of the Backstreet Boys Take a St. Paul Bank for $28 mil?

American Bank joins two North Dakota banks in suing to recover money loaned to boy-band magnate Lou Pearlman

Two weeks ago, the man who created the Backstreet Boys and 'N Sync was indicted by a federal grand jury in Orlando, Florida, on three counts of bank fraud, and one count each of mail and wire fraud. Boy-band magnate Lou Pearlman was completing a trip around the world at the time, escorted on his homecoming by U.S. marshals. FBI agents had tracked him to a Westin Resort hotel in Bali, and took him to Guam, where he convinced a judge that he couldn't afford a lawyer.

Back in Orlando, Pearlman's various businesses—including the charter Trans Continental Airlines, a talent agency, a travel service, and record companies—had been seized, their remaining assets liquidated in bankruptcy proceedings. Hundreds of bidders had descended on an auction in his downtown headquarters, scooping up Pearlman items such as a key to the city, a boat, and collectible music memorabilia. (Best end-of-an-era curio: a clock made out of the CD single for LFO's "Summer Girls.") Though it raised an estimated $225,000 for his estate, the sale provided little more than comic relief from what one local lawsuit calls "one of the largest financial frauds in history."

According to suits filed by a dozen banks, including American Bank of St. Paul, the 53-year-old Pearlman is responsible for helping nearly $500 million to vanish. For years, Pearlman allegedly operated his businesses as a giant Ponzi scheme, even stringing along family members and friends in a con that overlapped the careers of all his boy bands. Also on the hook is the city of Orlando, which provided Pearlman with $1.5 million in tax incentives.

The former accounting student at Queens College in New York allegedly used phony financial statements from a nonexistent accounting firm to convince investors he was flush. Banks now seek more than $160 million from him, while more than 1,800 investors claim an additional estimated $317 million. (At press time, Pearlman had no attorney on file, and was "in transit" within the federal prison system.)

The scandal has reached into local finance: Having loaned Pearlman $28.5 million last year, American Bank joined the avalanche of lawsuits in January. With little hope of recovering losses in Florida, American joined two North Dakota banks on May 21 to sue the Minneapolis investment advisory firm of North American Capital Markets (NACM), and its principals, Craig Mueller and Stuart Harrington, in local civil court.

"By its own admission," the complaint alleges, "NACM had a long and close relationship with Pearlman. It is now clear that NACM's representations regarding the financial status and bona fides of Mr. Pearlman and his entities were false...and that NACM profited immensely."

Neither side would comment on the lawsuit, and the defendants have filed motions to dismiss; a hearing is scheduled for August 23. But the conflict appears to go back at least as far as early 2006, when Pearlman announced to the world that he had, in the words of an AP reporter, "nearly completed a deal to jointly produce an American version of Top of the Pops with the BBC."

The 42-year-old British television program had been a cultural totem, back when Minnesota resident Joey Molland was miming hits on the show with his British band Badfinger in the early '70s. "Top of the Pops was an early promo vehicle for the record labels, like American Bandstand," Molland says.

But by 2006, TOTP was an unusual investment prospect, to say the least. An American version had been tried in 1987 and canceled after one year. British ratings for the show had plummeted from some 15 million at the series' peak to less than four million by 2004. Pearlman, meanwhile, had been sued by his various boy bands, and even by his own lawyers in those suits, while coming under investigation by the FDIC and other agencies.

Nevertheless, American Bank went ahead with other participating banks and loaned $28.5 million to Pearlman, his Trans Continental Records, Inc., and an entity calling itself TOTP, LLC on March 27, 2006, for the express purpose of purchasing American rights to TOTP. The deal was brokered by NACM, which the complaint charges was "aware (or recklessly disregarded) that Pearlman's debt and his companies' debt were much higher than was disclosed."

Employees of American Bank were flown to Florida on "due diligence trips," according the document, visiting the millionaire at his Mediterranean mansion on Lake Butler in Windermere, in excursions designed to give a "false sense of comfort."

Meanwhile, the svengali blew smoke: In February 2006, Billboard confidently reported that Top of the Pops was "coming to the United States," and that Pearlman was shopping it to "major U.S. networks, including Fox and ABC." As late as July 1 of that year, Pearlman convinced Music Week that he had acquired the rights to the brand in America, "where he hopes to have TOTP on air this autumn."

But City Pages has learned that Pearlman never actually bought the American rights to Top of the Pops. "There were conversations, but an agreement was never signed," says a spokesperson for the BBC Worldwide, who declined to comment further. On June 20, 2006, the BBC canceled Top of the Pops, and the show's final episode aired July 30, replaying in America on VH1 Classic the following month.

By the time American Bank served a notice of default on the so-called "TOTP Loan" last December—having allegedly never received a payment—the larger house of cards had begun to crumble. In November, after a Florida state spokesman leaked news that Pearlman was under investigation, Trans Continental Companies VP Frank Vazquez died of carbon monoxide poisoning in his Porsche with the garage door closed, an apparent suicide. Investors started having trouble withdrawing their money from Pearlman's Trans Continental Savings Program, and employees began shredding documents and carting off furniture.

Sometime before February, Pearlman fled to Europe. He was last seen free on February 1, at a theater in Berlin, where he watched his latest boy band, the German group US5, receive a Goldene Kamera Pop International Band award. Soon after, the FBI, IRS, FDIC, and local agencies stormed his Orlando offices. Pearlman was traveling under the name A. Incognito Johnson when a German tourist in Indonesia tipped off the FBI.

The American Bank suit against NACM now accuses the latter local company of acting as Pearlman's agents, and pocketing "$1,855,000 in commissions...making Pearlman and his entities NACM's largest source of revenue."

The estimated total loss to the various plaintiffs in the local suit is in excess of $65 million.

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