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As Lou Pearlman ran, investigators built their case

By Helen Huntley, Times Personal Finance Editor
In print: Sunday, July 13, 2008

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ADVERTISEMENT Phelan M. Ebenhack | Special to the Times (2007) Former music mogul Louis Pearlman, center, looks in the direction of his TransContinental headquarters across the street while being taken into the courthouse on July 11, 2007. Related Links Interactive map: Lou Pearlman's 2007 Odyssey Story: Lou Pearlman's last-ditch, big money world tour Special report: Who is Lou Pearlman? Blog: Get the latest at Money Talk

While Lou Pearlman flew around the world in high style last year, the investigators charged with bringing him to justice never left Central Florida. They were stuck in Tampa and Orlando, digging through boxes of bank records, trying to decipher just how a music mogul managed to put together one of the biggest financial frauds Florida has seen — and keep it going for more than two decades.

The investigators hadn't even had a chance to start looking for the globe-trotting Pearlman when a tip from a curious tourist led to his capture in Bali, where he was hiding out under the alias "A. Incognito Johnson."

You can't call it glamorous, but when it was finished, the two-year investigation produced a mountain of evidence that convinced Pearlman, at the age of 53, that he was better off agreeing to 25 years in prison than facing the facts in a courtroom.

Three investigators and one prosecutor dismantled the $300-million fraud in the biggest case of their careers. More than a third of the about 2,100 victims were from the Tampa Bay area, where Pearlman raised about $80-million. "Everyone has visions of teams of investigators working on something like this, but it wasn't that way," FBI agent Scott Skinner said.

Danielle Brooks, then an investigator with the Florida Office of Financial Regulation, worked alone for the whole first year. Her supervisor, Mike Brown, assigned her the case after a Pinellas County investor asked how Pearlman's company could be selling FDIC-insured accounts. Pearlman had deflected previous state inquiries with ease, but his strategy didn't work on Brooks.

"Pearlman thought he had a young, naive little girl on this, but what he had was a pit bull," Skinner said. Pearlman himself returned one of her calls to the company.

"I answered the phone and he said to me, 'I don't know if you know who I am,' " said Brooks, who now works for the Indiana Gaming Commission. "He tried to come off as very concerned and not knowing anything about the investment program."

For more than three months, Brooks, 30, did nothing but analyze bank records, entering transactions into a spreadsheet to follow where the money went.

"If there's one thing I wish people knew, it's that it's not like TV where you can just rush out and get somebody," she said. "I knew it was going to be something massive, but you have to be able to walk into a courtroom and lay it all out and prove it."

When she got to that point in December 2006, the state took Pearlman's company to court and he knew the game was over. Investors began demanding their money back and he fled the country the next month.

That's about when Pearlman's former attorney, Cheney Mason, went to the FBI. "Cheney was fed up with all the lies and misrepresentations," FBI agent Skinner said. "It's unusual for a defense attorney to call you, so we thought maybe we ought to look into this."

One of the first things Skinner learned was that Pearlman had two sets of financial statements. The one he gave Mason showed he was too poor to pay the $19-million judgment Mason obtained against him for unpaid legal fees. The one he gave the banks when he applied for loans showed he was wealthy.

Pearlman's operating methods were sometimes crafty and sometimes simplistic, investigators found.

"What stumped me were the fictitious people," said IRS investigator Annette Waldon. "He created people. He resurrected the dead. He did whatever it took to cover this up."

Proving Pearlman's fictional accounting firm didn't exist was a major challenge. Pearlman had gone so far as to create a fake office for Cohen & Siegel in Germany to fool visiting bankers.

"Being the great showman that he is, he did a very elaborate staging," Skinner said. "He had people in there who were knowledgeable about accounting and could answer questions. There were plaques on the walls, flags out front, carpets, nameplates."

Investigators also had a challenge trying to track down Harry Milner, whose signature appeared on a reassuring letter sent investors in December 2006. He turned out to have been a real person, but a dead one since 2003.

The investigators' first priority was filing a single charge of bank fraud, which they had sealed for secrecy. The goal was to have grounds to arrest Pearlman if he came home. However, Skinner said they wanted to have a more extensive case ready before trying to find him overseas. Many countries require all charges to be presented as part of extradition hearings.

Things didn't go according to plan, but they went better than any of them could have hoped. A German tourist spotted Pearlman at a luxury resort in Bali and e-mailed the St. Petersburg Times his whereabouts. The Times passed the tip to investigators, who doubted its legitimacy.

Skinner thought the e-mail might have been a ruse by Pearlman. Skinner replied to the tourist, acting as though he wasn't interested, then asked the FBI's legal attache in Jakarta to check out the resort. The agents found Pearlman eating breakfast in the resort's coffee shop and got local police to pick him up. Within hours, he'd been expelled from the country as an undesirable and was on his way to Guam in U.S. custody.

"Neither Scott nor I are particularly lucky, so we thought it couldn't be true," said prosecutor Roger Handberg, chief assistant U.S. attorney in Orlando. "However, we thought it should be checked out. I was surprised that it actually worked out."

Handberg, 37, said most white-collar investigations drag on for years, but "things went so fast on this case."

Skinner said Pearlman's memory, his knowledge of accounting and his intelligence were key to keeping the scheme going.

"Lou has almost total recall on just about anything and he has great attention to detail," he said. "That he didn't use a computer, yet was able to keep all those balls in the air, shows he is a very bright guy."

When Pearlman was captured, he had with him little black notebooks filled with notations about his friends' birthdays and other details in tiny handwriting.

However, Waldon said Pearlman wasn't so careful about concealing bank transactions.

"I was pretty shocked at how blatant it was," she said. "The money transferred right into Trans Continental (his company) and right out into his personal accounts. He treated it no differently than he treated his own piggy bank."

Skinner, 47, and Waldon, 46, both accountants, teamed up to interview Pearlman's agents and employees, many of whom refused to talk. That investigation is continuing.

"I'm always the good cop and Scott's always the bad cop," Waldon said. "It works great. Sometimes you need sugar and sometimes you don't."

Because Pearlman agreed to plead guilty to four counts (involving fraud, money laundering and filing a false statement in bankruptcy court), the investigators didn't get a chance to lay out all the evidence they had against him.

"If there had been an indictment, there could have been 100 charges," Waldon said.

Investigators are looking for assets Pearlman might have stashed away or transferred to someone else, but the longer it takes, the more pessimistic they become.

"The most difficult part of this," Skinner said, "is telling an investor that their life savings are probably gone and they're not going to get it back."

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230. Read more about the Lou Pearlman case at blogs.tampabay.com/money.