The Bell-cow Blues

By DAVID MOON, Moon Capital Management
March 11, 2007

In most cattle herds there's a bell-cow, the lead animal that the others follow to the water and the food. On a farm, it's easy to find the bell-cow; she wears a bell.

In the people world, the bell-cow phenomenon is just as prevalent, except the bell-cow doesn't wear a bell. But a herd does develop behind the beast, and as with cattle, the herd often follows the bell-cow to the food, the water ' and sometimes the slaughterhouse.

Investors often find comfort in knowing who else is making a particular investment decision, even if they have no idea about the logic behind the other person's decision. The herd falls in behind the bell-cow.

I see promoters whose most attractive selling point is the other people who are invested in a certain asset. 'Mr. Bigshot Celebrity is invested in this swampland. How can it go wrong?'

Easily.

A perfect example came to light a couple of weeks ago.

When the FBI raided the $12.5 million Orlando home of former music starmaker Lou Pearlman, a financial pyramid began crumbling ' one built on promises, government aid, the illusion of success and the celebrity of his client list.

The state of Florida claims that Pearlman operated an old-fashioned Ponzi scheme, defrauding investors out of more than $500 million.

Officials say his victims include municipalities, banks and thousands of individual retirement plan investors. He was able to attract such a roster of patsies because of the famous patsies he either attracted or created early in his career.

Pearlman gained prominence as the architect behind bubble-gum pop bands such as Justin Timberlake's 'N Sync and the Backstreet Boys.

His promotional materials effortlessly dropped names: Art Garfunkel, Madonna, Michael Jackson. Hank Williams Jr., Britney Spears, Kenny Rogers. P. Diddy. New Kids on the Block. Little Richard. Eminem.

How could an investment in a Pearlman program be a sham? All those famous people associated with him wouldn't do anything stupid, would they?

Now that's funny.

Tell that to the folks who lost $500 million.

Mayors of Orlando twice gave him the keys to their magic city. One of his companies owns the famous Church Street Station complex in downtown Orlando ' a series of buildings that once comprised the cornerstone of the thriving entertainment and shopping district.

Orlando considered Pearlman a development savior as he purchased these multimillion-dollar properties in 2002 with financial assistance from the city.

Hey, it's Lou Pearlman, the guy from the Backstreet Boys. It has to be a good deal. Let's give him some tax money.

Pearlman's Church Street Station company is now in Chapter 11 bankruptcy.

Pearlman has left the country and can't be located.

Add the city of Orlando and its taxpayers to the list of cows blindly walking into the trailer headed to the hamburger factory.

Think about this the next time the only compelling reason you have for investing in something is the list of other investors involved in the deal.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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