Sunday, October 14, 2007
Photo: The San Mateo County Sherrif mugshot of former New School trustee Norman Hsu. A shorter version of this article appears in the Oct. 15 issue of The New School Free Press. By Amelia Granger and Peter Holslin, additional reporting by Pamela Di Francesco.
By all accounts, former New School trustee Norman Hsu was a nice guy. He donated $80,000 to the university, endowed a Eugene Lang College scholarship, and raised over $1 million for Hillary Clinton's campaign. He even took the concierge at his $8,000 a month condo out to drinks.
"Everybody liked him," said the concierge, who spoke to Free Press reporters on the condition that he remains anonymous, due to the current federal investigation into Hsu's suspicious business practices.
Between late August and early September the Wall Street Journal ran a series of increasingly revelatory articles about this millionaire Chinese national and prominent "Hillraiser." It turned out that the 56-year-old Hsu (pronounced "shoe") was a fugitive and an alleged con artist who piloted a multi-million dollar criminal enterprise. He apparently took advantage of campaign donors and countless personal investors, and duped an investment firm led by the promoter of the original Woodstock music festival out of more than $40 million. He is currently facing charges in federal court of wire and mail fraud and illegal campaign contributions.
The concierge voiced a common refrain. "We were all bugged out," he said.
In an interview in his office last Friday, New School President Bob Kerrey downplayed the impact of the Hsu scandal on the university.
"It's an unpleasant experience," Kerrey said. "A big hit? No. Not even a small hit."
Kerrey said that university trustees had discussed the matter but decided not to change any procedures to recruit donors and trustees. The New School University still possesses the $80,000 Hsu has donated since 2006, Kerrey said, but is waiting to see how the trial unfolds before making any decisions regarding the money.
HOOK, LINE, AND SINKER
Hsu's problems with the law date back to 1992, when he was convicted of defrauding investors in a million dollar import scheme but never showed up for his sentencing. Last month, after the Journal articles attracted the attention of California authorities, Hsu turned himself in only to flee again, at which point a more complete picture of his financial dealings emerged.
Hsu is charged with running a Ponzi scheme—named after 1920s Boston conman Charles Ponzi—that took in $60 million. In a Ponzi scheme, the perpetrator finds a small number of initial investors who invest in a bogus business venture that offers a huge return in a very short time, then pays them with money gathered from a second wave of investors. Hsu's front companies were menswear import firms based in New York and called Components Ltd. and Next Components Ltd.
Two of Hsu's targets were Yau Cheng, who worked for Hsu while he was a real estate investor in San Francisco, and Joel Rosenman, who organized the Woodstock festival. Cheng began investing in Hsu's projects in 2001, and Rosenman in 2003, according records in their civil suit against Hsu. They both made handsome profits from their initial investments. Characteristically, the Ponzi scheme snowballed when their family members and associates joined the enterprise in August of 2003.
Hsu paid out returns to Rosenman and Cheng reliably for years, gaining their trust. In 2005 they created Source Financing Investors LLC (SFI) to continue investing in Hsu's deals.
To scam Source Financing Investors LLC, Hsu told investors that he had a simple and legal process to purchase orders of men's apparel from factories in China, selling them to an American financial company called Heller Financial, which sold the products to American fashion outlets like Nordstrom, L.L. Bean, Macy's and Hugo Boss. Hsu told SFI that he needed their money to finance the transaction. According to court records, he gave SFI post-dated checks for 22% returns, and signed contractual agreements for each deal.
The investors never bothered to verify Hsu's connections with businesses and factories in China or high-end fashion labels in the United States, court records note.
All the while, Hsu recruited other investors across the country to cover SFI's returns. Some of these investors, according to federal court records, were instructed to form investment groups in their communities with investors they recruited. This scheme spanned the country, with investor-victims from New York, New Jersey, and California.
One of the heads of these funds told the FBI that Hsu told him he had to make specific campaign contributions in order to be involved in Hsu's future investment opportunities.
SFI usually reinvested the proceeds from one deal into the next. In doing so, the investment firm fell for the classic Ponzi scheme: if investors had tried to cash their returns or stopped investing, their checks would have bounced and the scheme would have collapsed.
Eventually, of course, that is exactly what happened.
FRIENDS IN HIGH PLACES
After Hsu fled his sentencing hearing in 1992, federal authorities say he moved to Hong Kong, where he ran a series of apparel companies that eventually dissolved. He filed for bankruptcy in 1998, then moved to San Francisco and began investing in real estate. By 2006, Hsu had begun to make a name for himself as a top Democratic party fundraiser and had become a regular, if still somewhat unknown, figure in New York political circles.
Hsu lived in a condo on the third floor of a new, six story building at the corner of West Houston and Wooster streets. The concierge said that Hsu lived in one of the smaller units, but still paid about $8,000 a month.
On the same day Free Press reporters visited his building, FBI agents seized and removed the contents of Hsu's apartment. The contents, according to court documents, included a extremely valuable wine collection and a saxophone autographed by Bill Clinton.
Hsu often threw lavish parties for Democratic politicians and candidates. In 2006, according to the Wall Street Journal, he hosted a party for leading Democrats to celebrate the party's return to power in Congress. The venue was Buddakan, an exclusive spot in New York City where a private event costs $100,000, according to an event planner who spoke to the Free Press last week. According to guests, Hsu got on the D.J.'s microphone and yelled, "If you are supporters of Hillary for president in 2008, you can stay. Otherwise, get out."
The concierge told the Free Press that Hsu gushed about his political causes, the New School, Bob Kerrey, and his new position on the Board of Trustees. Hsu also loved talking about the Democrats he was raising money for.
"He wanted them to win," the concierge said.
THE SCHEME COLLAPSES
In August, when Rosenman and Cheng first read in the Wall Street Journal about Hsu's suspicious campaign contributions, Hsu assured them that there was nothing to worry about. But by early September, the Journal had delivered fourteen days of damning coverage about Hsu's mysterious past. Meanwhile, Hsu had returned to California to face trial for skipping his sentencing hearing in the 1992 fraud case.
On September 5, 2007, Hsu posted $2 million in bail and skipped town a second time, heading east on an Amtrak train called the California Zephyr. Authorities say Hsu ingested a handful of pills in a botched suicide attempt. The next day, police arrested the dazed and shirtless apparel executive near Grand Junction, Colorado. In his locked suitcase FBI agents discovered $7,000 in cash and the paper trail linking Hsu to his investors, including a handwritten ledger of campaign contributions he had instructed them to make.
Over the next few days, SFI investors discovered the extent to which they had been duped. On September 7, two deals with Hsu matured—meaning payment was due. But according to court records, when SFI associates tried to deposit the checks from Hsu, each for over $1 million and post-dated for September 5, they bounced. On September 12, SFI associates tried to deposit two more checks, both for over $1 million and post-dated September 12. Again, the checks bounced.
At the time, according to records for a $40 million civil suit recently filed by SFI against Hsu, Rosenman and Cheng's company had invested in 33 other deals with Hsu that had not yet matured, at a cost amounting to more than $35 million. When they investigated Hsu's claimed connections to the fashion industry, Rosenman and Cheng discovered that Hsu never had any, or at least none they could identify.
The doorman at 1431 Broadway, the offices of Components Ltd. and Next Components, told the Free Press that he recalled seeing Hsu there only "once or twice."
Theodore Chao was listed as Components Ltd.'s "agent," presumably the company's attorney, on Hsu's contracts with SFI. Chao supposedly occupied 510 8th Ave., Suite 508. But, as the Free Press discovered last week, there does not appear to be any such address.
"While SFI thought that it was investing in a legitimate clothing manufacturing enterprise," SFI's civil lawsuit against Hsu reads, "it was really providing Hsu with millions of dollars in cash to fund Hsu's pet political fundraising projects, and an extravagant international lifestyle."
SFI and Joel Rosenman's lawyers did not respond to phone calls from the Free Press asking for comment about developments in this case. Hsu's lawyers also declined to be interviewed for this article.
On September 14th, Hsu "admitted that the phony deals involved investments in the sale and distribution of items that did not actually exist," F.B.I. Special Agent Patricia O'Connor said in a statement in federal court. "Hsu also admitted that he made implied threats to his investors to pressure them to contribute to political candidates he supported."
BOARD MEMBER, AND CON MAN
Kerrey told the Free Press that he was introduced to Hsu by Paula Levine, a consultant who helps candidates raise money in New York City and who has worked with Kerrey on campaign issues in the past.
"She met Norman and said, 'This is a guy that you really ought to meet,'" Kerrey said. "'He's expressed some interest in being involved [in the New School].'"
Levine did not respond to phone calls from the Free Press asking for comment.
Kerrey said the board typically looks for candidates that are interested in the university, live in New York City and can attend meetings, and are willing to donate $25,000 a year.
Hsu was named to the Eugene Lang College Board of Governors in May 2006, according to Caroline Oyama, the New School communications director. The university's Board of Trustees voted Hsu onto the board on July 1 of this year, Kerrey said. Hsu resigned in late August after the first Journal articles appeared. In all, he served less than sixty days.
Since 2006, Kerrey said that Hsu had donated about $80,000 to the university, money that helped fund two major annual fundraising dinners and a Lang scholarship. Kerrey said the university has not yet decided what to do with the money.
"What we're planning on doing is just watching and seeing what happens in court," he said.
The New School does not run background checks on possible donors. Kerrey said that the Trustees, after reexamining their recruiting and voting procedures, had ultimately decided not to change that policy.
Kerrey insisted that the fallout from the Hsu scandal would not tarnish The New School's reputation. When asked by the Free Press if this incident demonstrates that the university has compromised its values to find rich trustees with political connections, Kerrey bridled.
"For God sakes, I'm a former U.S. Senator!" he said. "I don't need any friggin' help from Norman Hsu or anybody else."