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.
After Rosenman read about Hsu's troubles in the news, he called Hsu. They spoke on Labor Day, Sept. 3.
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.
After learning two days later Hsu didn't show up for court, Rosenman told investors:
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."
Anyone with venture capital experience want to weigh in? Are post-dated checks and a 40% return typical in these deals?
