By JOHN COTE
San Francisco Chronicle
Thursday, September 20, 2007
A New York investment group run by one of the promoters of the 1969 Woodstock festival has sued disgraced Democratic fund-raiser Norman Hsu for allegedly funneling $40 million in financing for a nonexistent clothing company into political campaign contributions and an "extravagant international lifestyle."
The lawsuit brought by Source Financing Investors LLC says Hsu fooled investors into believing they were financing an operation to supply Chinese-made clothes to U.S. retailers when in fact he was running a Ponzi scheme, in which initial investments are repaid with money from subsequent investments until the operation collapses.
Hsu, 56, was convicted in San Mateo County, Calif., of running a similar scam in the early 1990s but fled before he could be sentenced to prison. He resurfaced years later as a Democratic moneyman, turned himself in last month after his past caught up with him, and now he is about to be extradited to Redwood City from Colorado after he skipped out on $2 million bail.
Democratic politicians to whom Hsu arranged a total of about $2 million in contributions in recent years, including presidential candidate Hillary Rodham Clinton, have rushed to announce in recent days that they will return the money. The New York lawsuit, however, could complicate those plans as attorneys for the plaintiffs have asked politicians to hold onto what could be money from the allegedly bilked investors.
"We have contacted them and asked them not to give it back but hold it in escrow," attorney Ronald Minkoff said. "All I can say is we are in discussions about that."
The investors were headed by Joel Rosenman, one of the four promoters of the original Woodstock festival. Hsu promised Rosenman's Source Financing substantial returns if it fronted the cash to buy clothing made in China that would then be sold to retailers including Nordstrom, Macy's and L.L. Bean, the lawsuit says.
For two years, Hsu and his clothing company, Components Ltd., came up with money for Source Financing. Then in August, it was revealed that Hsu was a wanted felon, and on Sept. 7 he bounced a $1 million check for Source Financing, the first of several, the lawsuit says.
When the New York investors made inquiries, they discovered that none of the retailers Hsu claimed to be working with had ever heard of him, the suit says.
The investors now believe that Components Ltd. amounted to a shell company that served as a "clearinghouse for political campaign contributions," the suit says.
"While (Source Financing) thought it was investing in a legitimate clothing manufacturing enterprise, it was really providing Hsu with millions of dollars in cash to fund Hsu's pet political fund-raising projects and an extravagant international lifestyle," Minkoff wrote in the lawsuit, filed Friday in New York state court.
Source Financing provided Hsu with $40.2 million in funding and is owed $49.7 million under contracts Hsu signed, according to the lawsuit.
Hsu has defaulted on four payments totaling $5.2 million since news of his fugitive status in the San Mateo County case came to light last month, and it's unlikely that he'll pay back what he owes, the lawsuit says.
"When this musical-chairs game stopped and Hsu took off, they're out their $40 million," Minkoff said. A New York judge has signed a temporary restraining order barring Hsu from disposing of any assets, the attorney said.
Hsu's attorney could not be reached for comment late Wednesday.
The lawsuit is the latest legal chapter for a man who transformed himself in 15 years from a bankrupt divorcee facing a three-year prison term for theft in 1992 to a seemingly well-to-do New York businessman and prolific Democratic fund-raiser.
Hsu returned last month to San Mateo County to face sentencing from the 1990s case, but failed to show up for a Sept. 5 hearing in Redwood City to reduce his bail, instead boarding Amtrak's California Zephyr after landing on a charter jet in Oakland.
Hsu was taken off the train in Grand Junction, Colo., the next day after passengers reported he was disoriented and behaving erratically. He was hospitalized for several days with an undisclosed ailment.
Hsu also sent a purported suicide note to friends and charities to which he had given money, Mesa County, Colo., District Attorney Pete Hautzinger said during a hearing last week. The prosecutor said the note showed that Hsu was despondent and might hurt himself if let out on bail.
A spokesman for Hsu confirmed the existence of the note but declined to comment on the contents.
Hsu waived his right Wednesday to fight extradition to California, Hautzinger said.
(E-mail John Cote at jcote(at)sfchronicle.com.)
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