May 12 (Bloomberg) -- Norman Hsu’s investors were “greedy” and “dumb,” and they made political contributions on their own initiative to curry favor with the former Democratic fundraiser and money manager, his lawyer told jurors.

Hsu, 58, went on trial today in Manhattan federal court, accused of making tens of thousands of dollars in illegal campaign contributions by illegally repaying donors. The trial comes five days after Hsu pleaded guilty to cheating investors out of more than $20 million in a Ponzi scheme.

In opening statements today, Assistant U.S. Attorney Rua Kelly told jurors that Hsu used campaign donations to win accolades from prominent politicians, which he used to lure new investors into his Ponzi scheme. Defense attorney Alan Seidler said Hsu’s investors made contributions on their own to win admission into an investment pool paying 24 percent returns in 12 weeks.

“Mr. Hsu’s investors came to Mr. Hsu because they were greedy and, frankly, dumb,” Seidler said. They were seeking “to ingratiate themselves” with Hsu and were “blinded by greed,” he said.

Hsu is on trial only for four counts of campaign finance violations. He will be sentenced at a later date for the Ponzi scheme, for which Hsu may face 30 years in prison, Seidler said in an interview last week. His investment scheme ran from 1999 to 2007.

Separately, Hsu faces three years in a California state prison for theft.

Latex Gloves

Even as he admits the investment fraud, Hsu says he did nothing wrong in the campaign case. In 1991 he pleaded no contest in California and was convicted of stealing $1 million from investors in a scheme involving latex gloves. He failed to appear for sentencing.

In his 15 years as a fugitive, he raised hundreds of thousands of dollars for Democratic candidates, including then- U.S. Senator Hillary Clinton, and became one of the biggest political donors in the country.

In court today, Kelly called Hsu an “impostor” who held himself out as a savvy businessman who could turn investors’ money “into gold” with “almost no risk.” He claimed to be making bridge loans to businesses in need of cash, as well as investments in clothing and technology companies, she said.

“By spending his money so freely, Norman Hsu projected an air of success, respect and legitimacy,” Kelly said. “The deals were false, the victims were real.”

‘Conduit Contributions’

The prosecutor said Hsu employed his apparent closeness to the Clinton and Kennedy families to impress donors, and then used their money to repay earlier investors and finance a “lavish lifestyle.” Hsu pressured investors to make campaign donations and later repaid them, Kelly said, citing the so- called “conduit contributions” for which he’s now on trial.

Seidler said Kelly sought to “muddy the waters” by focusing so heavily on the Ponzi scheme. The $850,000 in contributions that Hsu made was from his own pocket, even if the money got there through fraud, he said. Dressed in a blue prison jumpsuit, Hsu sat silently at the defense table as Seidler spoke.

“Clearly the word for 2009 is Ponzi scheme,” Seidler said.

Seidler said Hsu’s investors misled prosecutors when they claimed they were repaid by Hsu. They made illegal contributions on their own so they may continue to reap the “outsized returns” that Hsu promised, he said. Several will testify in return for the government’s promise not to prosecute them, he said.

‘Three Monkeys’

Confronted by prosecutors, the campaign donors “were like the proverbial three monkeys -- hear no evil, see no evil, do no evil,” Seidler told jurors. “They knew Norman Hsu was involved in the political process.”

The trial is expected to last two weeks.

The New York case is U.S. v. Hsu, 07-cr-1066, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin at the federal court in New York at dglovin@bloomberg.net.

Last Updated: May 12, 2009 11:58 EDT