A $40 Million Shortfall
By IANTHE JEANNE DUGAN and BRODY MULLINS
Where did Norman Hsu get his money?
That has been one of the big questions hanging over the prominent Democratic fund-raiser, as reports have surfaced about hundreds of thousands of dollars he made in political donations, plus lavish parties, fancy apartments and a $2 million bond he posted to get out of jail earlier this month.
New documents reviewed by The Wall Street Journal may help point to an answer: A company controlled by Mr. Hsu recently received $40 million from a Madison Avenue investment fund run by Joel Rosenman, who was one of the creators of the Woodstock rock festival in 1969. That money, Mr. Rosenman told investors this week, is missing.
Mr. Hsu told Mr. Rosenman the money would be used to manufacture apparel in China for Gucci, Prada and other private labels, yielding a 40% profit on each deal, according to a business plan obtained by the Journal. Now the investment fund, Source Financing Investors, says Mr. Hsu's company owes it the $40 million, which represents 37 separate deals with Mr. Hsu's company. When Source Financing recently attempted to cash checks from the company, Components Ltd., the investors say they were told the account held insufficient funds.
Source Financing's arrangement with Mr. Hsu's company, according to court documents and investor accounts, echoes an older matter that came to light in recent weeks. In 1991, California officials charged Mr. Hsu with grand theft for failing to repay investors for money he raised to import latex gloves from China.
"Norman Hsu has an extraordinary ability to deceive," says Seth Rosenberg of Clayman & Rosenberg, a lawyer representing Mr. Rosenman.
Mr. Rosenman and a partner, Yau Cheng, wrote a joint letter on Monday to alert their fund's investors. "Last week, our attorneys met with representatives of the Manhattan District Attorney's office to inform them of the situation," they wrote. The district attorney is investigating, the letter says. A spokesman for the district attorney did not respond to a request for comment.
Mr. Hsu's lawyers had no immediate comment to the allegations by Source Financing.
Where Mr. Hsu got his money has been a burning question in recent weeks. He financed a web of political donations and a lavish lifestyle, despite two bankruptcies and a felony record. Telling acquaintances he was an apparel executive, he set up multiple companies, sometimes giving early investors profits, they say, so they would bring in friends. In some cases, investors in his businesses say they were so eager to please Mr. Hsu that they donated to political candidates alongside him.
See details on political donations1 from Norman Hsu and a handful of Mr. Hsu's business associates in New York
Mr. Hsu himself has donated $750,000 to Democrats and Democratic parties out of his own pocket since 2004, according to campaign-finance records.
In checks no larger than $2,300 apiece -- the legal limit for donations to single candidates for a primary or a general election -- Mr. Hsu also raised more than $850,000 for New York Sen. Hillary Rodham Clinton's presidential campaign. He co-hosted fund-raisers that brought in hundreds of thousands of dollars more, including a recent event for Mrs. Clinton at the Modern, a restaurant at the Museum of Modern Art in Manhattan.
The contributions are now haunting the Democratic party. Mrs. Clinton's campaign said on Monday it would refund all of the donations made or raised by Mr. Hsu. More Democrats announced yesterday that they would dispose of funds that Mr. Hsu gave or raised, including Rep. Kirsten Gillibrand of New York ($25,000), Sen. Edward Kennedy of Massachusetts ($35,000), Louisiana Sen. Mary Landrieu ($11,700), Montana Sen. Jon Tester ($4,750), Missouri Sen. Claire McCaskill ($20,700) and Pennsylvania Rep. Joseph Sestak ($2,500). Others have given their money to charity, including Manhattan District Attorney Robert Morgenthau, whose campaign received $2,000 in March from Mr. Hsu.
Joel Rosenman, who gained fame as one of the creators of the Woodstock festival, now runs an investment fund that put money into one of Norman Hsu's companies.
More Democrats are expected to follow. A Wall Street Journal analysis of campaign finance reform records has linked Mr. Hsu with at least $1.8 million in donations to Democrats since 2004.
Mr. Rosenberg, the attorney for Mr. Rosenman, asked politicians to hold on to the funds so that Source Financing and other investors can be made whole. "It appears that Source Financing Investors joins Hillary Clinton...and many others as his victims," Mr. Rosenberg said in an interview. "We urge candidates who received contributions from Mr. Hsu to retain those funds so that they may be returned to victims of the scheme."
According to his communication with investors, Mr. Rosenman became suspicious after press reports over the past three weeks examined Mr. Hsu's political fund raising and his business past. The first was a Wall Street Journal story in late August that called attention to similar donations by Mr. Hsu and a California family who shared one of his many addresses.
The family lives in a modest home and one member, William Paw, is a mailman. Campaign-finance records show the $55,000 in donations the family members have made to Mrs. Clinton since 2004 place them among her leading financial supporters. The family has donated about $225,000 to Democrats since 2005. The U.S. Justice Department is investigating possible campaign-finance violations.
Grand Theft Charge
Then came revelations that Mr. Hsu was wanted in California. Mr. Hsu pleaded no contest to grand theft charges in 1992 for swindling investors of $1 million in the latex-glove scheme. Facing three years in prison, he vanished before his sentencing hearing. He ultimately emerged in New York as one of America's biggest political fund-raisers.
Late last month, California authorities demanded Mr. Hsu turn himself in to face the 15-year-old charges. He appeared in court and was released after paying $2 million in bail. He then skipped his next court hearing before re-emerging in a Colorado hospital last week. He's under arrest there and expected to be extradited soon back to California.
Mr. Rosenman, the son of a Long Island, N.Y., orthodontist, is best known for his role in Woodstock. In 1967, Mr. Rosenman had degrees from Princeton University and Yale Law School, but was working as a guitarist at clubs on Long island and in Las Vegas.
He and a friend with a big trust fund, John Roberts, decided to pitch a situation comedy about a hapless duo who hatched a new business plan every week. Looking for material, they placed an ad in The Wall Street Journal and New York Times that said: "Young Men With Unlimited Capital looking for interesting, legitimate, investment opportunities and business propositions."
The responses -- thousands of them -- inspired them to become venture capitalists instead of screenwriters, according to a book by Messrs. Rosenman and Roberts, "Young Men With Unlimited Capital."
One of the ideas was for a three-day concert. Together with two others, the pair raised money, produced and organized Woodstock in 1969.
That same year, Mr. Hsu, who grew up in Hong Kong, received a Social Security card and enrolled in the University of California.
Woodstock's creators, meanwhile, struggled with enormous debt and bad publicity, according to the account by Messrs. Rosenman and Roberts. They opened and then sold a recording studio in Manhattan. Eventually, they opened an investment firm in New York called JR Capital. Mr. Rosenman co-produced Woodstock '94, a 25th-anniversary reprise of the first iconic event.
In an interview with the Daily Princetonian in 2001, Mr. Rosenman said he examines a handful of business projects every week. "I am still doing the same thing as in 1968," he said.
Mr. Rosenman's partner, Ms. Cheng, met Mr. Hsu while working for an Internet company in 2000. She began investing in one of his businesses and made a profit, according to someone familiar with the matter. In 2002, she joined JR Capital and introduced Mr. Rosenman to Mr. Hsu. That year, Mr. Rosenman invested and also made a profit. He began telling friends and relatives about the investment opportunity.
Mr. Rosenman described the deal in a pitch letter he provided to prospective investors for Source Financing Investors, which he launched in 2005. The investment pool would "lend to U.S. private label designers that needed interim financing to fill orders for a select group of well-known, high-end U.S. apparel retailers." Since 2001, he writes, "the return of these short-term (typically 4½ months) loans has been no less than 40%."
In a "step-by-step" outline of a typical transaction prepared for investors, Source Financing describes the way a deal worked with Mr. Hsu. Source Financing would agree to provide bridge loans for seasonal high-ticket, high-quality retail goods made in China for exclusive brand names, according to investors. Mr. Hsu told the company that he would obtain from Chinese manufacturers a price quote for apparel production. He would then add a mark-up and give the quote to a high-end buyer in the U.S.
If the U.S. buyer accepted, according to the outline, Source Financing would transfer by wire what Mr. Hsu said was 80% of the necessary loan, with Mr. Hsu saying he would provide the other 20% himself. Mr. Hsu told the investors he would then receive a letter of credit from a Chinese bank and that the manufacturer would ship the apparel to the U.S., where Mr. Hsu would deliver it to the merchant.
Mr. Hsu would give the investment firm a check, post-dated for 135 days beyond the wire transfer, for the amount of the loan plus profit. When the check matured, Source Financing would deposit it and allocate the money to investors. The company that would carry out these transactions, Mr. Hsu told investors, was Components Ltd., set up in 1997.
Some investors in Source Financing said they got involved through friends who knew Mr. Rosenman. Some did not know who Mr. Hsu was until news about him broke in late August.
On Friday, Aug. 31, Mr. Hsu appeared in court in Redwood City, Calif., to address the long-dormant grand theft charges. His case, and his $2 million bail bond, was front-page news across the country. In recent days, some media reports have raised questions about political contributions that appeared to be linked to Components Ltd. and Mr. Hsu.
On Monday, Sept. 3, Labor Day, Mr. Rosenman and Ms. Cheng talked to Mr. Hsu to find out about the status of their investments, they said in a letter to investors dated the next day.
They said that Mr. Hsu had vowed that he would deal with their orders personally, the letter said. "He expects substantial new orders this season," it read. "Because his personal schedule has become so hectic," it added, he may need up to five days beyond his promised target to finish an order. After consulting with advisers, they decided to give him time to perform.
The day after that letter was drafted, Wednesday, Sept. 5, Mr. Hsu skipped his next court hearing in California and went on the run from the law, via an eastbound Amtrak train. He was arrested the next day in a hospital in Grand Junction, Colo., where he was taken off the train after passengers reported he was ill.
In a letter this Monday, Mr. Rosenman told investors that the 37 outstanding deals with Components Ltd. are set to mature "over the next four months." But he indicated that was not likely. He said he had deposited two checks from Components that "matured Sept. 7." He was informed by the banks that there were insufficient funds.
"This development, coupled with recent revelations," he wrote, "led us to believe that payments due on our recent transactions with Components and Hsu may not be made."