Norman Hsu: Another Capital Venture Goes South

The Wall St. Journal continues its reporting of Norman Hsu's financial dealings. The latest installment (free link): A New York capital venture firm, headed by Joel Rosenman, one of the three original Woodstock creators, has asked the District Attorney's office to investigate a $40 million investment in Hsu's firm, Components Limited.

Rosenman's partner introduced him to Hsu. Both invested personally with him and made a 40% return on their money. They then pitched the idea to Rosenman's firms' clients.

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, [Rosenman] writes, "the return of these short-term (typically 4½ months) loans has been no less than 40%."

Here's how the deal worked:


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?

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    repeat in relevant thread-- UNBELIEVABLE (none / 0) (#1)
    by Deconstructionist on Wed Sep 12, 2007 at 09:56:00 AM EST
    Norman Hsu received 40 million dollar loan from investment firm run by former Woodstock organizer. Stunningly, it seems there may be a problem collecting on the note.

      What kind of idiot loans 40 million dollars  to someone without verifying the legitimacy of the business or the background of the principal?

    I expect (none / 0) (#3)
    by Jeralyn on Wed Sep 12, 2007 at 10:05:05 AM EST
    Rosenman and his company did both.

    OBVIOUSLY (none / 0) (#4)
    by Deconstructionist on Wed Sep 12, 2007 at 10:11:01 AM EST
      they did not or they wouldn't have been swindled out of of 40 million dollars and praying that Hsu has some assets they can (a)locate and (b) establish a judgment lien ahead of other creditors to partially satisfy the default.

      The article is of course sketchy, but nowhere in it does it suggest any portion of the obligation is secured with any property that actually exists.


    Jeralyn (none / 0) (#2)
    by Deconstructionist on Wed Sep 12, 2007 at 10:03:17 AM EST
      if someone told you that he had an investment (legal) that returned 40% on a 4 month term (120% annualized) would the old saw about "if it sounds too good to be true..." not ring a bell?

      The only question I have is whether Rosenman is really as stupid as this makes him appear or if he is culpable.  Do any legitimate businessmen accept post-dated checks for huge sums of money?

    Amen to that (none / 0) (#22)
    by Abdul Abulbul Amir on Wed Sep 12, 2007 at 12:42:44 PM EST

    40% in four months stinks of crookedness.  Only Mrs. Clinton can pull in that kind jing lawfully.

    Sounds Something Like (none / 0) (#5)
    by squeaky on Wed Sep 12, 2007 at 10:11:22 AM EST
    The Factor business with a huge return. The fashion buisness couldn't function without them. Factors lend short term money to designers at a high interest rate so that they have the cash to manufacture and ship the products. The loans are based on invoices sent out to retailers like department stores and boutiques. I assume that the stores don't have to pay until 30 or 60 days after delivery.

    Without Factor money the fashion industry would come to a halt.

    Factoring (none / 0) (#6)
    by Deconstructionist on Wed Sep 12, 2007 at 10:27:08 AM EST
      involves assigning a lien in your existing inventory or accounts receivables to the lender. the lender (a) does not get anything approaching a 40% return in 4 months and (b) has secured the transaction with an interest in property that exists.

      This appears to have been a deal where the "lender" handed over astronomical sums of money based on false representations that with the money the borrower could then make purchases and then quickly resell at a huge profit.

    Not So Dissimilar (none / 0) (#7)
    by squeaky on Wed Sep 12, 2007 at 11:09:29 AM EST
    Factoring is a high interest biz. I don't know what interest Prada et al pay, but it is high. The lien doesn't mean squat though if the invoices are not paid because the goods are not delivered. That is why they charge very high interest rates and are selective as to who they deal with. The manufacturing cost, are relatively small due to slave labor, and the markup is enormous. So the super high interest, much higher than a bank, winds up being an affordable cost of doing business.

    This isn't venture capital, Jeralyn, (none / 0) (#8)
    by sarcastic unnamed one on Wed Sep 12, 2007 at 11:12:27 AM EST
    Anyone with venture capital experience want to weigh in? Are post-dated checks and a 40% return typical in these deals?
    not even close. It's more than likely a huge Ponzi scheme, very similar to his other conviction.

    As an aside, fwiw, checks are demand instruments. They are payable when presented regardless of what date is written on them.

    That's true (none / 0) (#10)
    by Deconstructionist on Wed Sep 12, 2007 at 11:26:50 AM EST
      if we remember our negotiable instruments from the bar exam one has no recourse against either the bank or holder  if the holder of a post-dated check presents it for payment prior to the date written on the check and our bank honors the draft.  On the other hand, if I recall correctly, (and I don't do this kind of crap, so I might be wrong) I seem to recall that  vis à vis the maker of a check and the holder that a post-dated check alone  is not considered an enforeceable promise to pay a sum certain.  



    I cash my paycheck.... (none / 0) (#16)
    by kdog on Wed Sep 12, 2007 at 12:20:02 PM EST
    the day before the date on the check all the time, never have a problem except for the constant badgering from my employer's bank to open an account.

    If that means anything...


    Cash has few footprints???? (none / 0) (#20)
    by jimakaPPJ on Wed Sep 12, 2007 at 12:39:57 PM EST
    Until the IRS does a "life style audit."

    I'm scared to ask.....:) (none / 0) (#24)
    by kdog on Wed Sep 12, 2007 at 12:50:14 PM EST
    If you are declaring $35K income (none / 0) (#25)
    by jimakaPPJ on Wed Sep 12, 2007 at 01:47:27 PM EST
    and living a $500K lifestyle.... you be in trouble!

    If post dated checks worked (none / 0) (#18)
    by jimakaPPJ on Wed Sep 12, 2007 at 12:31:50 PM EST
    ... I'd be having my executive asssistant do my commenting....

    There's no real set pattern or rules besides the ones covering fraud until you go public...

    As for the 40%, in this case that wasn't for setting up a company, but for financing Hsu's deals.

    Venture capital returns on individual deals can be huge, but remember there is also a huge failure rate.


    The security (none / 0) (#9)
    by Deconstructionist on Wed Sep 12, 2007 at 11:17:58 AM EST
      interests in EXISTING accounts receivable and inventory certainly does not eliminate the risk to the lender (merely reduce it)  which is exactly why the interst rates are high and why these lenders are as you say SELECTIVE in with whom they do business.

       The point here is that it appears there was nothing at all securing the notes and the lender was not selective in choosing with whom it did business.

     That a supposedly sophisticated investor with 30 years experience would be so easily taken "to the cleaners" is extaordinary.  I imagine Mr. Rosenman and his firm will face years of litigation from justly angry investors. Best case scenario he was merely astoundingly negligent in performing his fiduciary duties. Worst case scenario it will be found that HE AND HIS FIRM made false material  representations in the prospectus given to prospective investors and those investors relied to their detriment on those false representations.

    Hsu Yes, Lichfield, No? (none / 0) (#11)
    by jgmurphy on Wed Sep 12, 2007 at 11:28:44 AM EST
    I am sure the WSJ will use up untold column inches over the course of the next year giving us the lowdown on Hsu's finances, bank statements and the color of his toilet paper (which they will definitely proof was pilfered).

    I am equally sure that the venerated Journal will tell us nothing about compromised Mitt Romney campaign strategist/fundraiser Robert Lichfield, forced to step down after being linked with an abusive teen boot camp program.

    Funny why that is.....

    probably because one class (none / 0) (#12)
    by Deconstructionist on Wed Sep 12, 2007 at 11:35:32 AM EST
     of misconduct is directly related to the campaign of the candidate and the other is not.

      There comes a time when you just have to suck it up and admit something stinks, concede mistakes were made and LEARN from them, rather than offering lame excuses, absurd rationalizations and transparent deflections.

      those tactics not only always fail they often make things look worse. I'm confident that folks, not limited to Mr. Hsu's lawyer, wish they could retract credibilty damaging pronouncements made attempting to dismiss this episode as a smear campaign against either/or clinton and asian americans.


    It does seem like factoring, and (none / 0) (#13)
    by scribe on Wed Sep 12, 2007 at 11:37:55 AM EST
    that's probably what made it more attractive than just high-interest short-term loans.  It also could almost be one of those late-night informercial get-rich quick schemes that proposes you get rich by "Buying and Selling" (what, the infomercial doesn't tell you) or that you hold notes (without mentioning the inherent risk of non-payment).  Still, it might turn out to be legit, or it might be some variant on a Ponzi scheme.  

    I suspect that, given Mr. Hsu is now in custody, even if the setup was legit, it will come crashing down because he is not there to carry it through to conclusion.  

    While some might say "the guy victimized was a bright businessman", greed fed by a good sales pitch dulls minds and discernment almost as effectively as fear.  I worked a civil case a few years back in which one of the co-victims of a stock-fraud swindler (now doing more than decade in federal custody) was a very-well-known crime novelist.  You'd have thought that if anyone would have been able to spot a scheme, it would be someone who'd made a mint off writing police procedurals.  But, there they were, out well over $500k.

    That is true. (none / 0) (#14)
    by Deconstructionist on Wed Sep 12, 2007 at 11:43:46 AM EST
      The "art" of the con man depends in large part in selecting the proper targets whose greed overwhelms prudence and common sense even when they should know better.

       On the other hand, sometimes the "victims" act believing everything is not necessarily kosher but on a false assumption as to where the illegality lies.

    Nice work if you can get it.. (none / 0) (#15)
    by jimakaPPJ on Wed Sep 12, 2007 at 12:09:01 PM EST
    Factoring has been around for thousands of years and is essentially a third party discounting an invoice  from party A by X percent with the expectation of collecting the full, or an expected amount from party B. So it is not really a "loan" given that the Factor has purchased the invoice. Although it may be a defacto loan.

    In this case Source Financing Investments (SFI) has loaned a third party 80% of a "deal" in which Hsu claims to have added 20% to pay in advance for the product with no security beyond Hsu's word, which is what a post dated check is and (perhaps) copies of purchase orders/contracts from "clothing stores."

    Whether the money went to the Chinese Bank direct or to Hsu who then added his 20% and sent the total to the bank is not known. My guess it was the latter, and Hsu's 20% was actually a factored amount by the bank.

    i.e. US designers sell "product" to stores for $600,000. Chinese manufacture agrees to produce product for $100,000 and demands letter of credit for $100,000 before they will make/ship product. Chinese bank takes $80,000 from Hsu who is using SFI's money. Bank sends manufacturer $100,000. Goods delivered. Payment made by stores to bank escrow account of $600,000. (I don't see the bank letting Hsu get the money direct.) Bank takes $20,000 credits Hsu with $580,000 who sends SFI the amount needed to cover the post dated check amount of $112,000 (40% return) leaving Hsu $488,000 to split with the designers... say 50-50, so the designers get $229,000 and Hsu gets $229,000 (his "markup".

    All of that requires a lot belief by SFI, the designers and to a smaller degree, the Chinese bank. It is easy to see how the ability to drop a few names such as Clinton, etc., would make everyone feel better.

    I wonder if Rosenman sees the irony of being zapped by someone who appears to "get by with a little help from my friends."

    Depending on who set all of this up and how much the bank and manufaturer are out, the US Gov is the least of his worries.

    You know what I think? (none / 0) (#19)
    by sarcastic unnamed one on Wed Sep 12, 2007 at 12:37:37 PM EST
    I think that, at least sometimes (maybe a lot?) he didn't have any - or maybe anywhere near enough - real business "deals" in place from which he could make any/enough "profit" to repay his lenders, so he took loan money from lender B to repay lender A +40%. You know, like he was already convicted of once before in California.

    And I'll also bet he took some liberties with campaign money he solicited and "bundled."

    Does this sound at all familiar?

    A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business.

    The system is doomed to collapse [at some point] because there are little or no underlying earnings from the money received by the promoter [and/or the authorities are alerted].

    The scheme is named after Charles Ponzi [...] Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit lapses in judgment arising from an investor's lack of information.

    Agree (none / 0) (#21)
    by jimakaPPJ on Wed Sep 12, 2007 at 12:42:13 PM EST
    it sounds like a complete failure to (none / 0) (#17)
    by cpinva on Wed Sep 12, 2007 at 12:20:33 PM EST
    perform any kind of due diligence, on the part of mr. rosenman and his firm. at minimum, mr. hsu's past business activities should have been vetted. had they done so, surely his "difficulties" would have been discovered, since they are a matter of public record.

    while this may not have kept them from investing, it should certainly have put them on notice.

    mr. hsu's proposed business plan does sound like factoring, which is essentially buying existing receivables at a substantial discount, possibly up to 30-40%, depending on age and customer.

    mr. hsu's actual business plan sounds more like a ponzi scheme, the first thing that popped into my head, as i read the article.

    As I said the article is very sketchy (none / 0) (#23)
    by Deconstructionist on Wed Sep 12, 2007 at 12:47:17 PM EST
     but there is no mention of Rosenman's firm having any interest in any alleged goods or any alleged accounts receivable or invoices.

      That's not factoring nor is it an equity investmet. That's an unsecured loan. The part about the 40% return track record since 2001 seems (again the article is sketchy) to have been quoted from the prospectus Rosenman provided to investors and would clearly be a material representation of fact. the question becomes what basis did Rosenman have for making that representation to investors?

      Anybody who is parting with 40 million dollars of his own or other people's money who does not independently inquire and verify  as to the existence of agreements with producers, banks and customers of the alleged venture is, at the least, incredibly negligent.


    Low Risk, High Return (none / 0) (#26)
    by Peter G on Wed Sep 12, 2007 at 09:14:53 PM EST
    Yeah, right.  I have a 70-yr-old client who just started a 30-month sentence for making similar promises (no real money ever changed hands) to an undercover FBI agent who was out trolling the internet for offers of this kind.  Client's protestation, that he sincerely believed he had the contacts and the acumen to make the promises come true, was overidden (beyond the proverbial reasonable doubt) by the expert testimony of a finance and economics professor that such promises are inherently and inevitably false, and thus constitute a scheme to fraud, because extraordinary returns do not and cannot exist in a real economic transaction that has the promised minimal to non-existent risk.