'Above reproach': the Norman Hsu case; This fiasco offers five important due-diligence lessons for directors and officers in staking your individual and corporate reputation on a person's character, background, and basic veracity

Directors & Boards, Spring, 2008 by James B. Mintz, James H. Rowe, John Mintz

WHEN A CORPORATION enters into a relationship with any individual, it puts its collective reputation, as well as that of its directors and officers, on the line. In the vast majority of instances, the individual is who and what he claims to be, and is thought to be. But every so often, an individual "everybody knows" to be clean, honest, admirable, and above reproach turns out to be toxic, for any number of reasons.

The recent case of Norman Hsu, the admitted felon and accused fraudster who passed himself off as a successful businessman and major "bundler" of campaign donations, is a classic example. Here's a case study on how the Hsu fiasco happened, and how Hsu's shenanigans could have been detected--partly with amateur detective work, partly with expert help. It has valuable lessons that every corporate director and senior executive would do well to heed.

The task at hand

Political candidates for federal office will spend $6 billion this year trying to get elected. The task of ensuring that none of the big donors are drug traffickers, Hamas members, or convicted pedophiles commonly falls to harried staffs of twenty-somethings hired to perform cursory checks. But when it comes to background checking, Google and basic news searches can go only so far.

Embarrassing revelations about big campaign donors can happen to any political campaign, of either party. Flawless performance is impossible in this realm. It is not feasible for campaigns to do background checks on America's hundreds of thousands of individual campaign donors. But it seems advisable to do comprehensive screening of the biggest "bundlers," or aggregators, who raise huge sums from their personal and professional networks.

Case in point: Norman Hsu, a mysterious man with a shady past and equally shady present who established himself through various wiles as a major bundler of seemingly legitimate political donations. Though he was described by the New York Observer as "an apparel magnate with a fat Rolodex," campaign finance officials apparently knew little about Hsu, other than that the money he provided looked green and clean.

In fact, Hsu was adept at running from his past, even as he vaulted himself to the pinnacle of silk-stocking political networking. He even got himself named a trustee of Manhattan's prestigious New School for Social Research.

In hindsight, it is clear that Hsu in recent years tried hard to leave as few footprints as possible on the public record, other than the Federal Election Commission records on his donations. That made it hard for anyone to realize he was the same Norman Hsu who had pled guilty in 1992 in San Mateo, Calif., to felony grand theft--and who, facing three years in prison, skipped out on his sentencing and disappeared. It also made it tough for victims of his alleged financial shenanigans of the past eight years to figure out who he was. Last fall, federal prosecutors in Manhattan brought new charges of committing a $60 million investment fraud.

Could Hsu have been smoked out by the campaign finance folks he took in? Yes. But it wouldn't have been easy.

First suspicions

For a trained investigator, the first suspicions would have been aroused within 10 minutes of launching an investigation, by the way Hsu, Cherokee warrior-style, had for years assiduously swept away his tracks behind him.

On the surface, Hsu presented an appealing immigrant story. Moving to the United States from China in the 1960s, he received a computer-science degree from U.C. Berkeley and a business degree from Wharton. In the 1980s he started importing Chinese-made clothes that he sold to boutiques, and received modest coverage in the apparel trade press. But there were hints of trouble. In 1990 he declared bankruptcy in California, and that same year a San Francisco Chronicle article said he had been kidnapped by a Chinese mob debt collector named Shrimp Boy.

[GRAPHIC OMITTED]

Shrimp Boy wasn't his only creditor. While the press did not cover it, in 1991 he was charged in San Mateo in an 18-count indictment with grand theft for allegedly luring 20 investors into a series of deals in which he bought and sold latex gloves--the only problem being that the gloves didn't exist, according to the criminal charges at the time. In February 1992 he entered a "no contest" plea to one count of felony grand theft, for which he was to receive three years in jail. Yet four months later he failed to appear for sentencing, and the judge issued an arrest warrant for him.

Hsu skipped to Hong Kong, where he quietly opened and closed a series of clothing businesses. In the late 1990s Hsu moved back to California, and obviously hoped to obscure all connection between himself and that unpleasantness in San Mateo. Lesson Number 1 for the due-diligence community: Even in this age of globalization, cross-border vanishing acts, especially extending over years, can result in effective self-laundering because of the thinness of international identity checks.

There was something different about Hsu this time around. During his earlier 20-plus years in the U.S., Hsu had intermittently used his middle names and middle initial: Norman Yung Yuen Hsu, or Norman Y. Hsu. Prosecutors in San Mateo used his full name and initial in the criminal case in the early 1990s. But once he returned to the United States from Hong Kong, he was just, and always, plain old Norman Hsu. As he must have figured, dropping his middle names and initial allowed him to melt in among the dozen or so other Norman Hsus in the United States. Lesson Number 2: People with bad pasts may try to hide in a forest of individuals with the same or similar names.