The following article raises the question are HSBC not also liable for acting as custodian for Allen Stanford?
HSBC Holdings Plc (HSBA), Europe’s biggest bank, agreed to pay $62.5 million to settle a group lawsuit in New York, filed by investors in a fund that lost money in Bernard Madoff’s fraud while the bank acted as custodian.
The accord, which needs court approval, applies to a class- action case against several HSBC units and other defendants by investors in the Ireland-based Thema International Fund Plc, whose assets were invested with Bernard L. Madoff Securities LLC, HSBC said in a statement today.
The settlement “shall in no way be construed” as an admission of fault, HSBC said in the statement. The London-based bank, which faces other Madoff-related lawsuits in Germany, Luxembourg and other countries, has “good defenses” against them, it said.
Thema Fund, a so-called Madoff feeder fund, was controlled by Bank Medici AG, according to a statement by the fund’s law firm, Chapin Fitzgerald Sullivan & Bottini LLP. Bank Medici with its founder Sonja Kohn is part of a $59 billion suit by the trustee liquidating Madoff’s firm.
HSBC units acted as custodian for Thema and other funds that funneled money to Madoff. Irving Picard, the trustee liquidating New York-based Bernard L. Madoff Investment Securities LLC, in December sued HSBC and a dozen feeder funds for $9 billion in U.S. Bankruptcy Court in Manhattan, saying they should have known of the fraud.
HSBC Losses
HSBC didn’t know of the fraud and lost $1 billion of its own money investing in funds that in turn put money with Madoff, the bank said last month in court papers seeking dismissal of Picard’s lawsuit.
The bank was warned twice by auditors that entrusting as much as $8 billion in client funds to Madoff opened it up to “fraud and operational risks,” according to KPMG LLP reports obtained in March by Bloomberg News. The investors claim HSBC failed to act on the warnings.
According to HSBC’s May filing, Picard, who sued HSBC saying he was doing so on behalf of Madoff investors, is competing with the feeder funds and investors that have sued HSBC, and intends to claim any money they recover from the U.K. bank to give it to other investors.
“He is attempting to steal their claims, along with the funds’ claims, and planning to provide the fruits of any recoveries to other parties,” on the principle of “robbing Peter to pay Paul,” HSBC said as it asked a judge to dismiss Picard’s suit.
Amanda Remus, a Picard spokeswoman, declined at the time to comment.
Alpha Suit
On May 27, Alpha Prime Fund Ltd. and Senator Fund SPC, two funds sued along with HSBC by the Madoff firm’s trustee, filed so-called cross claims against HSBC to try to recoup “hundreds of millions of dollars” in losses they incurred in the fraud.
HSBC in December was sued by a group of 650 mainly private German investors in Luxembourg seeking compensation for losses they suffered through Herald (Lux) US Absolute Return Fund, which placed assets with Madoff. That suit seeks about 25 million euros ($36.6 million) in damages.
Thema and another fund, AA (Alternative Advantage) Plc, sued HSBC in January 2009 in Dublin’s High Court.
HSBC is facing about 50 investor complaints in Ireland for allegedly failing in its duties as custodian for Thema, a European-Union regulated fund, and AA (Alternative Advantage) Plc. Both funds suspended redemptions after Madoff’s fraud was uncovered. Custodians are responsible for oversight of funds, and manage deposits and payments to investors.
Dublin Court
A court in Dublin in January ordered HSBC to disclose a report on the status of the Thema fund without ruling on whether HSBC had made the necessary data available. Almost all of the funds invested in Thema “are currently lost, apparently as a result of the fallout from the collapse of the Madoff empire,” Judge Frank Clarke said in the Jan. 10 order in a case filed by French investor Aforge Finance SAS, which lost about 54 million euros in Thema.
HSBC’s Luxembourg unit was also custodian for the Herald (Lux) fund, which had assets of $225.7 million as of Oct. 31, 2008, according to Bloomberg data. The fund was forced to dissolve because of Madoff-related losses.
The Luxembourg-based liquidators of the Herald Lux fund are suing HSBC for the return of lost assets. Luxembourg’s financial market regulator in November 2009 ordered HSBC Securities Services in Luxembourg to review its internal rules related to its role as custodian bank of local mutual funds.
Luxembourg Liquidators
In Luxembourg, the liquidators may be the only possibility for Herald (Lux) investors to recoup some of their lost money after a March 4 ruling by a commercial court that liquidators alone can recover capital assets.
Documents from Madoff’s company show the value of HSBC- serviced funds as of Nov. 30, 2008, was about $8.4 billion, including fake profit from Madoff’s Ponzi scheme, according to HSBC’s statement. The funds’ actual transfers to Madoff’s firm minus their actual withdrawals during the period HSBC acted as custodian, totaled about $4.3 billion, it said.
The settlement provides for a $10 million litigation fund that will allow investors to try to recover money from defendants that haven’t settled, said Thema Fund’s law firm in the statement.
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