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Robert Trigaux

Blowback from Ponzi schemer Pearlman wounds banks from St. Petersburg to Minneapolis




Lou Pearlman living the high life in Orlando before his enormous Ponzi scheme was discovered.

Wake up and good morning. As much as I would delight in the saga of Orlando Ponzi schemer Lou Pearlman, now in prison, to go away, the tale's not ready to end just yet. The latest angle? The naming of Florida's Mercantile Bank -- the bank that was started in St. Petersburg -- as a financial institution that at least in the eyes of a Minnesota court helped flim-flam a bunch of midwest community banks in an ongoing Pearlman fraud.

loupearlmanmugshot.jpgThe story is convoluted so I'll simplify. Pearlman, of course, was the mogul behind the musical acts Backstreet Boys and 'N Sync. He's serving a 25-year sentence in a Texas prison after pleading guilty to running a Ponzi scheme and bilking banks and investors -- many of them from the Tampa Bay area -- out of $300 million or more. But in 2006, he still looked to most like a successful business tycoon, with a fleet of aircraft in addition to his various music and entertainment ventures.

Last month, the Minneapolis Star-Tribune reported that a federal jury in Minneapolis concluded that a South Carolina bank helped the Pearlman defraud his lenders, awarding $16 million to 26 banks, many in Minnesota. That "South Carolina bank" was Mercantile, which had been founded in St. Petersburg but had been sold years earlier to The South Financial Group of Greenville, S.C., in the South Carolina bank's attempt to expand into the Florida banking market. That effort ultimately faded and South Financial was in turn absorbed by TD Bank as it is known today.

What were a dozen small banks in Minnesota doing lending to some guy in Orlando? They, along with other banks from Maine to Montana, had been wooed into lending $28.5 million to Pearlman, apparently to finance an American version of a British TV show called "Top of the Pops." Shock of shocks, Pearlman defaulted on the loan as his business operation unraveled. He was arrested in Indonesia in 2007 after fleeing authorities.

American Bank, a St. Paul, Minn. community bank on the hook for $5 million of that loan, sued Pearlman shortly before the boy bank's empire filed for bankruptcy, and he turned out to have empty pockets.

That notorious loan first sought by Pearlman had been shopped to midwest community banks like American Bank by a Minneapolis area loan brokerage called North American Capital Markets. American sued North American bu it, too, went bankrupt. American then sued Mercantile, leading to December's jury awarding $16 million to 26 banks. Why? The jury decided Mercantile Bank had discovered in 2005 that most of Pearlman's "wealth" was fictitious. Yet Mercantile did nothing to warn others. Instead, the bank and Pearlman hatched a refinancing scheme and lured other banks into the deal, the jury decided last month. Read the Star-Tribune story here.

soneetkapilaloupearlmantrustee.jpgLet's fast forward now and look at what this jury decision means in Pearlman's hometown of Orlando, where a dogged U.S. Bankruptcy Court trustee named Soneet Kapila (photo, left) is still trying to recover any assets (apparently without much success after five years) he can from the Pearlman fiasco.

As the Orlando Sentinel reports, TD Bank, which acquired Mercantile in 2010, has been ordered to pay $13.6 million to the other banks bilked in that fraudulent loan. TD Bank, which expanded into Central and North Florida through its Mercantile deal, continues to deny any wrongdoing and said recently that it plans to contest the verdict. It maintains that Mercantile, too, was defrauded by Pearlman, says the Sentinel. Read the Jan. 8 story here.

Now it's Kapila's move. The Sentinel says he has sued TD Bank/Mercantile along with Bank of America, SunTrust Banks, Wells Fargo Bank and others that loaned money to Pearlman. Kapila argues banks knew or should have known about Pearlman's fraud yet continued to take loan payments from him that, under federal bankruptcy law, are considered "fraudulent transfers." Kapila seeks $50 million from the banks. He expects the Minnesota verdict to boost his case against TD Bank/Mercantile, which received more than $13 million from Pearlman. The banks deny any knowledge of Pearlman's fraud.

"The jury in the Minnesota case found that Mercantile knew about the fraud and conspired with Pearlman to defraud creditors," Kapila told the Sentinel. "Those findings severely damage the defenses raised by Mercantile in our case."

Here's a final twist that brings us full circle. Kapila, says the Sentinel story, is even suing the community banks that won the Minnesota case against TD Bank/Mercantile in December. The trustee is seeking to claw back millions of Pearlman dollars from American Bank of St. Paul and the other institutions that were part of the fraudulent refinancing initiated by Mercantile.


What a staggering mess of finger pointing and an economic jackpot for the lawyers. Thanks so much, Lou Pearlman.


-- Robert Trigaux, Business Columnist, Tampa Bay Times

[Last modified: Tuesday, January 10, 2012 7:36am]


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