Originally Posted by VoodooRada
Check the rubber donut seal on the drive side. It sits around the freehub body, and pops into a groove in the hub shell. If the seal isn't seated properly, you'll get the kind of drag you described. I think American Classic still has service documents on their website; download the "Rear Hub Overhaul" document for a good look at how and where the donut sits...
I didn't touch that seal when I installed the cassette. I'll have a look at it. From the AC service info, I can't tell whether I can adjust this seal without actually having to take things apart.