Of Blimps and Boy Bands

There's plenty of serious stuff to write about today, but the fact that it's Friday has me in the mood to take a little trip down memory lane and share one of the goofier Wall Street stories from my past with you guys. It might go a little long, but I think you'll enjoy it because it highlights some of the crazy stuff that got funded back in the day. A buddy of mine from back then (who's now a hedge fund manager in California) tipped me off to the fact that CNBC did an American Greed episode about this nutjob, which is in fact scheduled to air again next Sunday night (the 16th) at 8:00 p.m. if you want to check it out.

Anyway, we did a lot of crazy deals back in the early '90s. You guys enjoyed my piece on BioTime, so here's another for your amusement, albeit a story without a happy ending (unless you consider a 25-year sentence a happy ending). I'd been in the business for three or four months when I was told the firm was doing a secondary offering on a blimp company. The announcement was met by groans from the veterans at the firm, because we'd done the IPO on the company and the blimp they bought with the money crashed and burned.

Well, that's not exactly accurate. The stock more or less crashed and burned, the blimp was merely destroyed by a tornado in Texas.

So now they were coming back to the trough for enough money to buy three more blimps. Remember, I was pretty much brand new in the business, so I still thought everyone knew more than I did. I thought it was kinda silly to be raising money to buy dirigibles in the late 20th century, and the company was losing a ton of money (but that wasn't unusual at the time), but I certainly wasn't in any position to object so I got behind the deal just like everyone else.

It was such a shaky deal that corporate structured it as a convertible preferred offering to sex it up a bit. This was in the days before sinking funds were common, so the preferred didn't pay any interest but was convertible into two shares of common stock and a warrant, if I remember correctly. The company's name was Airship International, and their cutesy stock symbol was BLMP. The new preferred shares would be listed as BLMPP.

Raising money for this secondary was tougher than we'd anticipated, as investors were as cool to the idea of blimp advertising as I was. It came down to the 11th hour, but we managed to get the deal fully subscribed. None of us felt good about it, and it was all we could do to keep the deal from tanking right after the preferred started trading.

I'm going to step outside the narrative here for a moment to explain a concept that came up in the movie Wall Street that I get asked about all the time. Do you remember the scene early in the movie where Bud Fox is explaining to his manager that a client "D-K"-ed him? As in, the client pretended he Didn't Know about the trade when it came time to pay for it? Bud was on the hook for the losses in the trade and had to borrow money from his dad to cover it.

Well, here's what happened. Back in the "old days", settlement was T+7. What that meant was that a client had seven days to pay for a trade after the trade was placed, hence Trade+7. But wait, there's more. If the check didn't arrive in seven days, the client was granted an automatic three-day extension. Remember, kiddies, we're dealing with snail mail here, so it could take three or four days for a client to even receive his trade confirmation, and another three or four for his check to make it back in the handy envelope provided with the confirm. If the trade wasn't paid for in 10 days, the broker could request an additional seven-day extension (I don't remember the regulation) by just signing his name in a register. So a client conceivably had 17 days to pay for a trade in 1993.

A lot can happen in 17 days. And when you placed a trade for a client, you were vouching for the client that the money would come in. If the stock dropped in the interim and the client refused to pay (D-K-ed you), the position would be sold at a loss and you'd have to cover the difference personally. So now you know what they're talking about in the movie. You're welcome.

I got my first sellout (D-K) on BLMPP. I'd purchased aftermarket shares for a new client and they started dropping almost immediately. I called the client daily to chase in the check, and he'd ask me where the stock was at and then promise to send the check. This went on for two weeks, with the stock going lower each day. I just couldn't accept that the guy had lied to me. For all the veterans on the floor, it was just me getting my cherry popped because it happened to all of them from time to time. I think my personal loss on the trade was over three grand, which I could ill afford at the time.

As a matter of fact, I got taken to my first and only client arbitration on that BLMPP piece of shit. One of the clients I put into the secondary got pissed that it performed so poorly and essentially sued me. Of course the arbitrator ruled in my favor because I'd done nothing wrong, but any arbitration is enough to shake you up pretty good at that stage of your career.

Before everything was all said and done, each of the new blimps crashed (literally) over the following two years, and the company ended up at 18 cents a share.

The guy behind the whole debacle was Lou Pearlman, a name some of you may recognize from the music business. You see, after setting up a massive Ponzi scheme and duping my firm into raising money for a bunch of shitty blimps, Lou went on to discover The Backstreet Boys, 'NSync, Aaron Carter, and Take5, among others.

Those who knew Lou in the 80's and early 90's probably have a hard time picturing him as a music mogul. He was this enormously fat guy with a thing for blimps. That's all. He seemed convinced that the sky would someday be filled with blimps advertising everything from soup to nuts. He was just like every other tunnel-visioned CEO we gave money to back then. He reminded me of the sad guys that play with train sets into their 50's. I'd have laughed in your face if you'd told me he was a master criminal back then.

Somewhere along the line, however, other aspects of Lou's damaged personality took over - particularly his fondness for young boys. To this day I couldn't tell you how he got involved in music. His background up to that point was all just advertising and aviation. But somehow he cobbed together The Backstreet Boys and took the music world by storm. Then he became a boy band machine.

I'm guessing he plucked Justin Timberlake right off the Disney lot in Orlando and put together 'NSync next. They of course went on to be even bigger than The Backstreet Boys. Lou assembled more boy bands and branched out to individual singers, most notably Aaron Carter, who was only 10 years old at the time.

He went on to steal millions from all of them, and hundreds of investors as well.

Through a sham airline he set up after Airship International went under, Lou embezzled hundreds of millions of dollars from the bands he signed and the investors he brought in. He fled the country when the feds started closing in, amid allegations of fraud and sexual predation upon the young boys in his employ. He was eventually busted and is currently doing 25 years in the federal pen.

I should probably give the folks over at American Greed a call. They seem pretty interested in the numbskulls I've crossed paths with over the years. Anyway, here is the promo and a couple clips from the show on Pearlman:

Probably worth checking out after the Chicago game next Sunday. Hope you enjoyed this sordid little trip down memory lane. Lord knows, I've got a million of 'em.

Have a great weekend, guys.