Trustee for Lou Pearlman bankruptcy defends settlement

Six years ago, it looked like a lost cause.

When he became bankruptcy trustee for convicted Ponzi schemer Lou Pearlman's companies, Soneet Kapila wondered if he'd be able to retrieve any money for victims who lost more than $300 million in the scam, let alone pay his legal team.

At the time, Pearlman was still on the lam, hiding in Indonesia.

"We had a case with no money in it. Some hard assets, but not much meaningful," Kapila said in an interview Friday. "And this had been running as a fraud for 15 years plus. Getting the records itself was a huge challenge. We had to gather by subpoena voluminous banking transactions from numerous banks."

Payday has finally arrived.

Under a settlement plan that Kapila filed this week in the Orlando division of U.S. Bankruptcy Court, attorney fees will capture the bulk of the money: as much as $25 million of the $37 million that has been recovered through asset sales, royalty payments and lawsuit settlements.

About $10 million will go to unsecured creditors. As the Times first reported Thursday, that works out to about 4 cents on the dollar for thousands of mom-and-pop investors victimized by the Ponzi scheme.

Kapila defended the settlement. The victims, many of them seniors who lost their life savings, would likely have received nothing without the years-long litigation, he said.

He acknowledged attorney fees were "not insubstantial" but stressed many of the lawyers were working on contingency with no guarantee of being paid.

"It's been a case where myself and my professional team has been willing to hang in there and take a lot of risk on fees (being reimbursed at all) because there was no money to pay anyone," he said. "This case required quantum effort."

One of the biggest break-throughs came when the Internal Revenue Service, which was owed millions, "was kind enough" to subordinate its priority claim, Kapila said. Under the agreement, the IRS would be paid $100,000, leaving more money to go to investors.

Kapila said he's reached a settlement with many of the banks who have agreed to waive tens of millions in claims as they stand in line with other unsecured creditors. The settlement, he said, has not been filed with bankruptcy court yet.

Depending on the outcome of pending litigation with other banks, the amount funneled to unsecured creditors could increase beyond $10 million, he said.

The creditor payment plan, which already has the blessing of the unsecured creditors' committee, will be considered at a July 17 bankruptcy hearing.

Pearlman, best known as the creator of boy bands 'N Sync and the Backstreet Boys, was captured in 2007 after a German tourist saw him at an Indonesian resort and contacted the Tampa Bay Times, which passed the information to the FBI.