“Hsu and his company used investor funds to make significant political contributions to prominent politicians,”

"Ponzi scheme that raised $60 million from investors across the country"

"...SEC claims that Hsu’s business was a complete and total fraud..."

SEC Hits $60M Fraud That Used Pols as Props
By Aaron Seward
October 10, 2008

The SEC has charged Norman Hsu and his company Next Components with operating a Ponzi scheme that raised $60 million from investors across the country. The Commission claims that Hsu violated a bevy of federal securities laws by using investor funds for purposes other than those he promised.

Paying sales agents, making illegal political campaign contributions, paying the returns of earlier investors, and supporting a luxurious lifestyle all came before investors, according to the Commission. From 2003 to 2007, Hsu offered and sold securities through his companies Next Components and its predecessor, a company called Components.

Hsu presented himself as an international businessman with high-level contacts with overseas companies, particularly in the Chinese apparel and technology industries. In selling securities, he would tell investors that an unspecified company needed a bridge loan to finance a short-term business deal, such as an agreement to manufacture a set amount of designer clothing pieces for delivery to a retail outlet on a specific date. He went on to tell investors that their money would be pooled to finance the bridge loans and that they would receive a portion of the interest generated by the loan. Hsu said that the loans would mature in 70 to 130 days and that they would generate returns of 14% to 24%. Hsu told investors that he was responsible for arranging the terms of the loans and that his knowledge about foreign business practices allowed him to develop profitable financing deals. At no point did investors play a role in reviewing the loans or evaluating the participants in the supposed venture.

Hsu gave investors a contract drafted on Next Components letterhead that identified the amount invested and promised payment of “all the principal, profit sharing, interest and participating fee.” The contract did not mention any other uses of investor funds, such as payment of sales agents, personal expenses, or political donations.

Along with the contract, investors received a check in the amount of the principal plus the promised interest, post-dated to the time of the investment’s maturity. But time and again, Hsu convinced investors not to cash their checks and instead talked them into reinvesting their money in Next Components.

The SEC claims that Hsu’s business was a complete and total fraud. He had no connections with foreign companies and never made a bridge loan to anyone. The returns that he paid to customers were, in classic Ponzi scheme fashion, taken out of funds collected from new investors.

Instead, Hsu used investor funds to support his lavish lifestyle, which included the maintenance of two homes, one in California and one in New York, as well as travel and entertainment expenses. He also used investor money to make significant campaign contributions to prominent politicians, the fringe benefits of which he used to create a aura of good repute. For example, he took one potential investor to a fundraising event for a presidential primary candidate in Orange County, California. While there, Hsu sat next to the host of the event, a well-known local businessman, who appeared to know and respect Hsu.

“Hsu and his company used investor funds to make significant political contributions to prominent politicians,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “He allegedly then used the veneer of respectability created by his political connections to persuade his investors that the investments he offered were legitimate. This deception convinced investors to continue to invest with Hsu, even as he and his company allegedly siphoned away investor funds to pay for his own extravagant lifestyle and to finance a Ponzi scheme.”

The Commission’s suit seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties against Hsu and Next Components. Hsu is currently in custody awaiting trial on federal criminal charges of investment fraud and wire fraud in connection with his investment scheme.