Banks last to get money from boy band mogul Pearlman

ORLANDO, Florida (Reuters) - Banks owed money by convicted boy band mogul Lou Pearlman will be the last of his creditors to get anything if he pays back the $300 million he swindled out of investors and financial institutions, a U.S. judge ruled on Wednesday.

U.S. District Judge G. Kendall Sharp said after ordering Pearlman to pay the full $300 million in restitution to his victims that small-time investors would be given preference as creditors.

Ten banks who lent him money, including American Bank of St. Paul, Bank of America and First International Bank and Trust, "are going to be paid after," Sharp said.

"The court feels the institutions were negligent in their loaning practices," he said.

Banks are usually at the head of the line when it comes to recovering money from creditors.

Pearlman, who launched the Backstreet Boys and 'N Sync bands in the 1990s, was sentenced to 25 years in prison in May for fraud.

In a two-decade scam, Pearlman admitted in a plea agreement to enticing individuals and banks to invest millions of dollars in two companies which existed only on paper -- Transcontinental Airlines Travel Services Inc and Transcontinental Airlines Inc.

He won investors' confidence with fake financial statements created by a fictitious accounting firm.

Sharp on Wednesday declined to add interest to the $300 million in principle restitution that Pearlman should pay after prosecutors acknowledged they had recovered no money at all from him since his sentencing.

"It seems you're batting at windmills," Sharp told the prosecutors.

Sharp said he would reserve judgment on the question of interest in the event Pearlman does repay his investors in full, but said all the government had collected so far from him was "a smirk on his face."

According to court documents, the 10 banks owed $126.7 million by Pearlman are American Bank of St. Paul, Bank of America, First International Bank & Trust, HSBC, Integra Bank Corp., MB Financial Bank N.A., Northside Comunity Bank, Tatonka Capital Corp., and Washington Mutual.

Sharp included in his sentencing a provision that reduces Pearlman's incarceration by one month for every $1 million in cash that he helps the bankruptcy trustee recover for investors. Theoretically, Pearlman could cancel the entire 300-month sentence by repaying his $300 million debt.

(Editing by Alan Elsner)