Scouting Network’s History Troubles Pearlman

Scouting Network’s History Troubles Pearlman
Ayman A. El-Difrawi aka Alex Difrawi Association

By Tim Barker
Orlando Sentinel Sentinel
October 5, 2003

When Orlando’s Lou Pearlman took control last year of a controversial model-scouting agency, he went into business with three men who have left a trail of broken companies and angry customers.

They included the architect behind a major Wall Street stock fraud, a man convicted of fraud and another whose first foray into the modeling industry prompted a lawsuit by the Federal Trade Commission in 1999, a Sentinel investigation has found.

Now Pearlman, the entrepreneur credited with starting the boy-band craze, is working to distance himself from the three men — they’ve all left the firm, Wilhelmina Scouting Network, in the past few months. He wants to bring an end to a yearlong investigation by the Florida attorney general, which is looking into allegations of misrepresentation and deceptive advertising.

Wilhelmina Scouting also is under scrutiny in New York, where the State Consumer Protection Board has labeled the company “a consumer scam.” The board last week announced a series of forums to decide whether new laws are needed to protect consumers from Wilhelmina Scouting and similar companies.

These are not Pearlman’s only troubles at the moment.

He also is under pressure from the city of Orlando to make good on a commitment to move his companies into Church Street Station by year’s end. Pearlman and Robert Kling, his partner in that venture, are asking for more time from the city, which is giving them $3 million in incentives.

Pearlman also has been sued in state Circuit Court in Orange County by SunTrust Bank, which says he still owes $192,000 on a delinquent loan.

Looking back on his decision to acquire the Orlando-based scouting network in September 2002, pop-music impresario Pearlman says he didn’t learn enough about the backgrounds of the men or about the company’s inner workings. He acknowledges, however, knowing at the time that the attorney general had opened its investigation in August 2002.

“Bottom line: I stepped into a hell hole,” Pearlman said. “But there was no turning back. We had to clean up the mess.”

Now he has new auditors untangling the company’s finances. He’s promising to fire anyone caught using questionable sales tactics. And he says he has lawyers negotiating a settlement with the attorney general, which has received 1,500 complaints from consumers across the country from May 2000 to present.

But to some critics, Pearlman’s protestations of ignorance sound like nothing more than revisionist history designed to put space between himself and the company’s problems.

“Lou Pearlman is a very successful and savvy businessman. I would find it very hard to believe that he didn’t do his due diligence,” said Ed Magedson, operator of ripoffreport.com, an independent Web site that investigates allegations of consumer fraud.

In the business world, due diligence is a practice that goes hand-in-hand with the buying of companies. Experts say it’s all about peering into the dark corners of a company, key employees and major stockholders.

Buying a company is not like buying a shirt at Wal-Mart. There are no money-back refunds, and the new owner generally takes on responsibility for any undetected blemishes.

“Now you own it. Now you own the problems, and you could be on the hook,” said Tom Taulli, a finance professor who teaches mergers and acquisitions at the University of Southern California.

Seeking bigger stake

Pearlman first cast eyes on the scouting company in June 2002 after the young firm — then called Options Talent — used a “mutual acquaintance” to propose a partnership, according to documents filed with the Securities and Exchange Commission.

The company’s leaders — documents do not specify who — wanted to know whether the music mogul would help Options expand its reach.

They wanted to build a service for aspiring musicians similar to one already offered for models. The models pay a fee, which has grown from $350 to $995 during the past three years, to be put in an Internet database. There, they can be seen and potentially offered work by a stable of registered users that includes casting directors and modeling agencies.

The solicitation came just as Pearlman was looking for new opportunities. He was launching yet another boy band, Natural, and was about to make plans for a move into downtown’s Church Street Station.

In the model-scouting network, he saw enough potential to seek out a bigger stake.

After several weeks of negotiations, he and associate Gregory McDonald — president of Pearlman’s Trans Continental Records — took control of the company in September 2002, acquiring 50.2 percent of the stock.

They promptly changed the name to Trans Continental Talent. The company now operates as the Wilhelmina Scouting Network through a March agreement with Wilhelmina Models, a well-known New York modeling agency.

It costs the company $50,000 a week for the rights to use the Wilhelmina Scouting Network name, though the agreement may end soon, with the two companies in a dispute about their contract.

Pearlman won’t say how much he paid for his stake in the scouting network. But he estimates his total investment at $3 million in cash, as well as his time, energy and name.

“I’ve got my reputation and image at stake,” said Pearlman, the man who created such groups as the Backstreet Boys and ‘N Sync.

But despite all that he was putting into the company, Pearlman apparently paid little attention to the three men who, according to SEC filings, were integral to the creation and growth of the scouting network agency.

No thorough checks

Among the company’s principal founders were Cortes Randell, who was jailed in 1975 for his role in the dramatic collapse of National Student Marketing; Ayman El-Difrawi, who earned a 46-month jail term in 1996 for conspiracy to commit bank fraud; and Ralph Edward Bell, who settled a dispute with the Federal Trade Commission in 1999 after the government objected to sales techniques allegedly used by his Virginia-based modeling school.

Pearlman said he discovered the pasts of El-Difrawi and Bell only after he had already taken the helm of the company.

“I had no idea that anybody had a prior history at all,” Pearlman said. “We found nothing improper at the time we bought the company.”

As for Randell: “I knew that he had some issues, but I didn’t know the whole story,” said Pearlman, who says he was told that Randell was little more than a company shareholder with no management duties.

Looking back on the deal, Pearlman said there is nothing more he could have done to ferret out more information — pointing out, for example, that El-Difrawi started using the name Alec Defrawy before Pearlman met him.

At the same time, he acknowledges never employing one of the tools routinely used by companies doing background checks — a records search using Social Security numbers.

“We don’t do that,” he said.

There was no reason at the time, he said, to focus on those three people out of about 200 who were involved in Options. He said none of the three was an officer or director of the firm.

However, the company’s SEC filings in late 2002, during Pearlman’s tenure, indicate the trio had the following ties:

The company gave each man a consulting contract that paid $150,000 annually along with benefits — rivaling Pearlman’s own $150,000 salary and benefits for his role as chairman. The contracts carried no expiration dates and could be terminated only with a five-year notice.

Randell served as the personal guarantor of the firm’s merchant account. Such accounts act as a middleman between a company and customers who pay with credit cards. The account processes charges made by credit and bank debit cards.

“If the Cortes Randell guarantee were withdrawn, the company would have difficulty finding another merchant account and would have difficulty continuing operations,” the company said in one filing.

The trio is closely connected to nearly 25 percent of the company’s stock. The shares are held in three trusts, controlled by El-Difrawi’s mother, Randell’s wife and by Bell.

Documents also point to the three men as being “the principals of eModel,” one of the company’s many previous names. They identify Randell as the former chairman and chief executive officer of eModel. No titles are given for Bell or El-Difrawi.

But critics and former employees say El-Difrawi (Alec Defrawy) was the heart of the scouting company, going back to its beginning.

“It’s Alec. He runs the whole thing,” said Stephen Layne, a former director of the firm’s Atlanta office.

Layne said he left the company in late 2002 to escape the negative publicity and the strain of having to constantly replace his stable of talent scouts.

Both Pearlman and El-Difrawi, however, downplay El-Difrawi’s role, with Pearlman referring to him as a “computer guy” who worked on the company’s Web site.

“My role was to build, maintain and develop the website,” El-Difrawi said in a written statement.

The roles played by the three men would have made them ideal targets for thorough vetting — including criminal-background and credit checks — during due diligence, suggest several experts in the field.

“I can’t imagine buying any kind of company without doing those kinds of checks,” said John Reddish, president of consulting firm Advent Management International. “Unless you don’t care. Or if you are buying something that is too good to be true and you don’t want to face reality.”

Cortes Randell

Cortes Randell was seen as a rising star in 1968 when, at the age of 33, he directed his young company, National Student Marketing, to a public offering that quickly snagged the attention of Wall Street investors.

Touted as a “hot stock” by several top brokerage firms, and fueled by amazing earnings growth, the company saw its share prices soar from $6 a share to $144 within two years.

It was a simple idea, with more than two dozen subsidiaries focusing on the things students buy — from refrigerators to coffee mugs to dating services to insurance.

But it was a company built on deceptive accounting practices.

In 1970 came revelations that the company was grossly inflating its profits — in one instance, for example, it claimed $3 million in income from subsidiaries it didn’t own.

Four years later, Randell pleaded guilty to stock fraud conspiracy and was sentenced to 18 months in federal prison. He served eight months.

He was in trouble again in 1981, sentenced to seven years in federal prison after the collapse of his Virginia-based National Commercial Credit Corp., a real estate investment firm. Prosecutors said Randell used fraud to obtain company loans.

“Randell is very creative when it comes to fraud,” wrote federal prosecutors, according to The Washington Post. “Randell has continually shown himself to be a person who will not hesitate to deceive investors, banks and government agencies.”

He was released from prison in 1984.

Randell, reached at his Virginia home, objected to Pearlman’s recent characterizations of the model-scouting network as being a mess. Randell said the troubles started only after Pearlman took over, bringing considerable new expenses — he would not be specific — to the firm.

Before that, he said, “people were happy. We were hiring people. We were paying our bills. And there was hope,” Randell said. “It was a fun place to work.”

Ayman El-Difrawi

In the spring and summer of 1991, Ayman El-Difrawi cobbled together a pair of companies, Shearson Management Group and the Small Business Loan Association, to help people find jobs and loans.

The only problem, prosecutors said, was that neither company actually helped anyone. All they did was collect fees — between $800,000 and $1.5 million worth of them — from their customers.

In 1994, a grand jury indicted El-Difrawi and several associates on charges of conspiracy to commit fraud, nine counts of wire fraud, and six counts of mail fraud in the schemes, according to records filed in U.S. District Court in Washington, D.C.

In November 1995, he pleaded guilty to conspiracy to commit bank fraud and was sentenced to 46 months in prison and ordered to pay $2.3 million in restitution. He was released from prison in August of 1999.

When prosecutors were laying out evidence to support their charges, they detailed five years of alleged fraud by El-Difrawi, using a variety of aliases, including Michael Chandler, Michael Jensen and David Mellon, according to court records.

From 1987 to 1989, he operated a series of companies that used salesmen to peddle advertising space in directories and brochures to local businesses in Chicago; Nashville, Tenn.; Marietta, Ga.; and Falls Church, Va. His salesmen were never paid, and the publications were never printed, prosecutors alleged in court records. No charges were filed in the case.

In early 1991, El-Difrawi and associate David Elliott joined an Orlando-based résumé- and letter-writing service and brought in a telemarketing company to place fictional job advertisements nationwide. Then they charged job seekers $300 to $500 to help them apply for those nonexistent jobs, prosecutors alleged.

During a deposition, Elliott was asked by federal prosecutors in Washington, D.C., whether the company ever had access to the jobs it was promoting.

“I’m sure in America somewhere those jobs existed, but we did not have them,” Elliott said. “Those ads were simply made up because they drew high volume calls.”

No charges were filed in the case.

El-Difrawi would not discuss his criminal history with the Sentinel.

However, he issued a statement in which he defended his decision not to tell Pearlman about it.

“I do not believe that my role in the company was significant enough to warrant any discussion of an unrelated conviction regarding an incident that occurred more than a decade ago,” El-Difrawi said.

Ralph Edward Bell

Of the three men, only Ralph Edward Bell brought any modeling-industry experience to their union.

In 1995 his Virginia-based Creative Talent Management sold classes, evaluations and workshops to aspiring models for fees ranging from $200 to $1,200.

Customers, however, complained that they were not getting all they were promised, prompting an investigation and eventual lawsuit by the Federal Trade Commission.

In 1999, he signed a consent order with the FTC, settling the lawsuit filed against Creative Talent and an unrelated firm. The agreement called for the forgiving of $3 million in consumer debt and restricted Bell from selling modeling classes again, without first posting a $500,000 bond.

In a written statement for the Sentinel, Bell downplayed the incident, saying his work with Wilhelmina Scouting focused on office and facilities planning. He said he had nothing to do with the scouting aspects.

“It is unfortunate that my FTC order has been constantly raised in connection with my work for TCT [Trans Continental Talent], as I was never found guilty of any wrong doing and have tried to learn from the situation and move forward,” Bell said.

Expressing optimism

Pearlman, too, wants to move on.

Repeatedly, he has expressed optimism over a rapid settlement with the attorney general over the complaints of misrepresentation by the scouting network.

He said new auditors soon will have the company back on track with the Securities and Exchange Commission. The firm hasn’t filed a quarterly earnings report, as required of publicly traded companies, since March. That has prompted the OTC Bulletin Board to cease quotation of the stock.

Likewise, a new name for the scouting network is expected to be revealed soon, Pearlman says. Both Pearlman and the New York modeling agency are aiming to end their relationship, with each claiming to be owed money by the other.

And now, he says, the men who generated so much negative publicity for the company have left.

Still, critics such as Magedson, the Web-site operator, question why it took so long.

According to SEC documents, Pearlman knew about the backgrounds of Bell and El-Difrawi in October 2002. It was 10 months later before the pair was gone.

As late as July, Pearlman spoke in support of both El-Difrawi — “We don’t penalize someone who’s paid his debt to society” — and Bell — “We see no problem with having him as a consultant unless we’re told not to.”

That support finally eroded in August.

Pearlman characterizes the departures of Bell and El-Difrawi as amicable, but said, “They knew I wasn’t going to stand for all the negative publicity.”

Randell apparently surrendered his consultant’s position sometime between March and July, according to SEC documents and Pearlman, who said the company has established its own merchant accounts, eliminating that reliance on Randell.

Pearlman points to these departures, as well as others, as evidence of his intent to fix the company.

“I can tell you right now that everything is under control,” he said.

Not everyone is convinced.

Judy Pepper, president of the Better Business Bureau of Central Florida, has watched the scouting network since its early days.

While she said the number of complaints against Wilhelmina Scouting has tailed off in the past month, she sees little reason to think everything is OK.

“With each new incarnation, they said it was going to be better,” Pepper said. “Of course, it’s pretty much the same issues over and over.”

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Source: LA Times News Online

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