Archive for September 2007
Anchor tears up paris hilton story
Analyzing Hsu’s Alleged Ponzi Dealings
“Norman Hsu, the Democratic fund-raiser with a habit of fleeing the law, confessed to FBI agents last week that he had pressured investors in what he now admits were phony business deals to contribute to political campaigns, prosecutors said in an indictment that was unsealed today.”
So begins the NYTimes’ story on the latest turn of this random political scandal. It all started when someone identified contributions to Hillary’s campaign from Hsu. She returned the money, Hsu turned himself in to the authorities back East, quit town after putting up bail and was later caught on a train in Colorado suffering from a bad case of trying to kill himself with sleeping pills. The new charge against Hsu is that he was defrauding investors through a ponzi scheme.
It seems that Hsu had a history of conning people; Hsu had defrauded people left and right for most of his life. The latest twist seemed to be when he learned to tap into political contributions. But the new charge against him is that he a) defrauded investors for $60 million through a Ponzi scheme (mail and wire fraud) and b) he coerced some people to submit $60,000 in campaign contributions under their names and then reimbursed them with the fraudulent funds (violating the Federal Election Campaign Act). Another issue which isn’t illegal but just shady is that Hsu was a bundler of campaign contributions amassing a total of $850,000 for Hillary alone which her team has agreed to give back.
The interesting part of Hsu’s scheme is that he used the political contributions to give him more prestige so that he could gather more funds into his fraudulent fund.
As for the fraud, here is why it qualifies as a Ponzi scheme (using the wikipedia guidelines):
- The scheme offers unusually high returns in order to attract customers. Hsu’s plan proposed to secure “short-term funds for apparel companies” – return: unspecified.
“Those schemes, the complaint said, focused on several aspects of the apparel trade, from helping obtain letters of credits for wholly imaginary manufacturers to financing the importation of “high-end” Chinese clothing that did not exist.”
2. The scheme attempts to hook a first round of investors through fast returns and then lures in successive waves.
“Mr. Rosenman [fool #1] was introduced to Mr. Hsu by a mutual friend in 2003 and made an initial investment of $50,000 with Mr. Hsu. In return, he received a check for $57,000 postdated for four and a half months later. The indictment said that when Mr. Rosenman successfully cashed the check, it helped him develop trust in Mr. Hsu, who claimed to have lined up clothing deals with big-name companies like Nordstrom, L.L. Bean and Hugo Boss.
By 2007, Mr. Rosenman had created an investment fund, Source Financing Investors, with friends and relatives that funneled more than $40 million into Mr. Hsu’s hands. [!!!]
3. Fictitious statements are provided to continue luring the investors and then when they try to cash out they find that it is all a scam.
“In August, however, when reports about Mr. Hsu’s shadowy past began to surface, Mr. Rosenman confronted Mr. Hsu, who assured him his investments were not in danger, the government said. But earlier this month, Mr. Rosenman went to cash a check in the amount of $1,031,300 that Mr. Hsu had given him and, according to the complaint, the bank refused to accept it. The civil suit filed by Source Financing Investors said that $40.2 million of its money is missing.”
What’s most incredible about this approach is that it works all the time. The wikipedia posting has a list of a multitude of such frauds all over the world. And Hsu’s just adds one more twist to the approach - by using political influence and the illusion of importance to channel more money into his fund he managed to co-opt the dirty politics of campaign financing to his advantage.
One final side note: if you look at the wikipedia article there is an interesting aside discussing whether social security is a ponzi scheme. The argument is that it is since current payments are used to pay the old investors without building a solid investment foundation. In essence it could be argued that it is a Ponzi scheme with a very large time frame – and it can be argued that it isn’t one as well. Check it out.
