The HSBC building in Canary Wharf, London. Europe's largest bank plans to lodge a second appeal with the Luxembourg Court of Appeal after the court ruled against it last Friday.Kevin Coombs/Reuters
HSBC Holdings HSBC-N said on Monday it would book a US$1.1-billion ($1.54-billion) provision in its third-quarter results after losing part of an appeal in a long-running lawsuit tied to Bernard Madoff’s Ponzi scheme, history’s biggest ever such fraud.
HSBC acted as a service provider to several funds that invested with Bernard L. Madoff Investment Securities LLC. Herald Fund SPC sued HSBC’s Luxembourg unit in 2009 seeking restitution of assets it said were lost in the fraud.
Last Friday, the Luxembourg Court of Cassation rejected an appeal by HSBC’s unit over the restitution of securities claimed by Herald, although it accepted its appeal on a separate cash restitution claim, the bank said.
Herald had alleged that HSBC failed in its duties as a custodian to protect it from the fraud, previous court documents from the case show.
The adverse ruling for HSBC dragged its shares down 1 per cent, threatened to mar its quarterly earnings due on Tuesday, and showed how banks are still vulnerable to long-running litigation, often tied to the fallout from the 2008 financial crisis.
HSBC now plans to lodge a second appeal with the Luxembourg Court of Appeal and, if unsuccessful, the bank said it would contest the amount to be paid.
It added that the eventual financial impact could differ significantly from its current estimate.
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Europe’s largest bank by assets said in July that Herald, which is in liquidation, was seeking the restitution of securities and cash worth US$2.5-billion ($3.5-billion) plus interest or damages of US$5.6-billion ($7.8-billion) plus interest.
HSBC did not immediately respond to a request for comment on the separate securities and cash amounts that Herald is seeking. The principal liquidators of Herald also did not immediately respond to a request for comment.
The bank estimated that the provision would have an impact of around 15 basis points (or 0.15 of a percentage point) on its common equity tier 1 capital ratio, meaning little lasting impact on the key measure of financial strength, which stands at 14.6 per cent.
That would come on top of a 125-basis-points impact arising from its US$13.6-billion ($19-billion) deal to take its majority-owned Hong Kong unit Hang Seng Bank private.
The charge could weigh on sentiment slightly but the impact should be limited as HSBC has already suspended share buybacks for the next three quarters due to the acquisition of Hang Seng Bank, said Lorraine Tan, director of equity research (Asia) for Morningstar.
Madoff’s fraud was estimated as much as US$64.8-billion ($90.7-billion), making it the biggest-ever Ponzi scheme, a kind of fraud whereby old investors are paid off with funds from newer ones while the organizer siphons off some of the money for themselves.
It went undiscovered for years until Madoff confessed to his sons in December, 2008, one day after his firm’s Christmas party. Madoff eventually pleaded guilty to 11 criminal counts. He died aged 82 in April, 2021, while serving a 150-year prison sentence.
HSBC in 2012 settled with Kalix Fund for an undisclosed amount, also over losses the fund had suffered during the collapse of Madoff’s financial empire. The fund had sued the bank for US$35.6-million ($49.8-million).