'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.

• Author: Mintz, James B.
• Position: DUE DILIGENCE

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...