Music Bond Creator Hearing Sour Notes

David Pullman is making a concerted effort to become a household name in the music industry.

The front page of Billboard magazine regularly carries an advertisement featuring the publicity-savvy investment dealer. Last month, Pullman’s face appeared on the cover of a Hollywood Reporter special issue--an ad that cost him $22,790.

His Web site trumpets an article from Time magazine last year that named him one of the top “innovators” of the 21st century for engineering a new form of bond issue that converts the royalties of rock stars into commodities.

Pullman stunned Wall Street in 1997 by turning glam-pop icon David Bowie into a marketable investment. He arranged for Bowie to receive $55 million in loans in exchange for issuing bonds backed by future revenues from his songs.

At the time, Pullman predicted the innovative financing would become a huge hit in the recording business. And he gave the process a name: “Pullman bonds.”

But in the four years since the Bowie sale, Pullman has announced the completion of only five star-powered deals. Now Pullman, 39, may have to defend his deals in court.

Two of his earliest clients at New York investment firm Fahnestock & Co. have sued Pullman, the company and two other defendants for fraud, breach of contract and violations of state securities laws.

In court papers filed July 16, songwriters Brian and Edward Holland allege that the defendants used a series of paper-shuffling maneuvers to improperly siphon $1.8 million off $22 million in proceeds from their bond sale. The Holland brothers co-wrote such Motown hits as the Supremes’ “Stop in the Name of Love” and the Four Tops’ “I Can’t Help Myself.”

The lawsuit claims the $1.8 million, combined with Fahnestock’s 610% brokerage fee, amounted to total fees that were six or seven times the standard charge for such deals. The lawsuit also contends that Fahnestock, where Pullman served as a managing director, engaged in “negligent supervision” of Pullman and other employees, saying the firm failed to “discover and prevent the diversion” of funds. Pullman left the firm to start his own company in 1998.

Pullman said the lawsuit, initially filed in Manhattan federal court in March, has no merit and that legal complaints about the 3-year-old deal are barred by a statute of limitations. He added that full details of the transaction and his brokerage fees were fully disclosed to the songwriters. Pullman also said Edward Holland has a history of filing legal claims.

A Fahnestock spokesman said the firm had no comment.

The proceeds from the bond deal allowed Brian Holland to pay off a $5-million tax liability and Edward Holland to purchase a $2-million house, Pullman said.

The Holland brothers “knew every penny that was coming in. The largest transaction of your life and you didn’t know how much money you got? It’s hard to believe,” Pullman said. He added: “They ran through the money. They want to see if they can extract additional money from us.”

The songwriters’ attorney, Tom Hargett, said, “The Hollands understood how much money they were going to receive. What they didn’t understand was how much money Pullman was going to extract. Mr. Pullman is going to have to answer a lot of questions.”

Among Pullman’s other clients are soul godfather James Brown and R&B; legend Ron Isley. Like Brian Holland, both Brown and Isley are Motown-era artists who were battling tax debts or other financial woes when they agreed to the transactions.

Wall Street analysts who have studied the deals say the music royalties from each of Pullman’s clients so far have kept up with or exceeded projections.

The claim by the Holland brothers, who along with partner Lamont Dozier penned many of the songs that made Berry Gordy’s Motown label a hit machine, raises concern among several Pullman clients.

James Brown’s camp is contemplating a lawsuit against Pullman on legal grounds similar to the Hollands’, according to two sources close to Brown who declined to be identified for fear of litigation by Pullman.

Brown had agreed to a bond deal to raise a quick sum to settle a tax debt, the sources said. Brown’s representatives didn’t learn of the extent of Pullman’s fees until just before the close of the estimated $25-million deal, the sources said.

Pullman said Brown is satisfied with the structure of the deal. In Pullman’s promotional videotape, Brown says in a television interview that he “feels good” about the deal. Brown could not be reached for comment.

An attorney for the Isley Brothers said his clients are watching the case as well. “We’re interested in it and we want to see what the evidence is,” said Craig Smith.

Legendary songwriting duo Nickolas Ashford and Valerie Simpson also are monitoring the Hollands’ lawsuit, according to their attorney.

“We don’t have all the facts yet, and, until we have them, it would be unfair to give any kind of opinion,” said attorney Alan Siegel. “If the allegations in the [Hollands’] complaint are accurate, then David’s got a real problem.”

A spokesperson for Lamont Dozier, the Hollands’ partner, said he was out of the country and unavailable for comment.

Bowie’s representatives, meanwhile, have parted ways with Pullman. The investment dealer filed a multibillion-dollar lawsuit in 1999 against Bowie’s business management firm, Rascoff/Zysblat Organization; Prudential Securities; and several other companies, saying he was cut out of a new venture to sell royalty-backed securities. A judge dismissed the lawsuit last August. Pullman has appealed and filed a new lawsuit containing additional claims.

Pullman unveiled his latest deal--the sale of bonds backed by the late Marvin Gaye’s future royalties--last September. But he has yet to announce the close of the transaction.

Time magazine reported in August 1998 that Pullman was working on bond issues for the catalogs of such acts as Pat Benatar, Joan Jett, Heart and Tupac Shakur. None of those deals was finalized.

Pullman is battling several competitors for scant business in the royalty bond market. Since 1997, rival investment dealers have announced the close of multimillion-dollar transactions for at least seven artists or record companies.

British rock band Iron Maiden chose San Francisco firm Global Entertainment Capital over Pullman to handle some aspects of its $30-million bond deal in 1999.

“He did approach us, but we didn’t need to have a middleman,” said Merck Mercuriadis, chief executive of U.S. operations for Iron Maiden’s management firm, Sanctuary. “We’re able to do this ourselves.”

In March, the Chrysalis record label issued $87 million in securities--the biggest transaction of its kind--in a deal with a Pullman rival, Rob Horowitz.

Horowitz, now head of the intellectual property team at Credit Suisse First Boston’s Asset Finance unit, said, “The market for intellectual-property-backed transactions is certainly a viable one, with likely issuers tending to be corporations and other institutions.”

But he added that the market for deals involving a single artist’s royalties “was over-hyped and over-banked, meaning there were too many people going after the same small number of deals. And typically, artists in good standing won’t need a financing of this type.”

Pullman remains confident the market for his bonds is strong. “We think there’s still a tremendous amount of opportunities,” he said.