HSBC 2008 Annual Report Download - page 446

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Notes 42 and 43
444
Bank’s estimate of the potential financial impact is that it could be in the order of approximately £350 million
(US$510 million), as published in the Interim Report 2008. To make an estimate of the potential financial impact at
this stage with any precision is extremely difficult, owing to (among other things) the complexity of the issues, the
number of permutations of possible outcomes, and the early stage of the proceedings. In addition, the assumptions
made by HSBC Bank may prove to be incorrect.
On 11 December 2008 Bernard L Madoff (‘Madoff’) was arrested and charged in the United States District Court for
the Southern District of New York with one count of securities fraud. That same day, the US Securities and Exchange
Commission (‘SEC’) filed securities fraud charges against Madoff and his firm Bernard L Madoff Investment
Securities LLC (‘Madoff Securities’), a broker dealer and investment advisor registered with the SEC. The criminal
complaint and SEC complaint each alleged that Madoff had informed senior Madoff Securities employees, in
substance, that his investment advisory business was a fraud. On 15 December 2008, on the application of the
Securities Investor Protection Corporation, the United States District Court for the Southern District of New York
appointed a trustee for the liquidation of the business of Madoff Securities, and removed the liquidation proceeding
to the United States Bankruptcy Court for the Southern District of New York. On 9 February 2009, on Madoff’s
consent, the United States District Court for the Southern District of New York entered a partial judgement in the
SEC action, permanently enjoining Madoff from violating certain antifraud provisions of the US securities laws,
ordering Madoff to pay disgorgement, prejudgement interest and a civil penalty in amounts to be determined at a later
time, and continuing certain other relief previously imposed, including a freeze on Madoff’s assets. The relevant US
authorities are continuing their investigations into the alleged fraud. There remains significant uncertainty as to the
facts of the alleged fraud and the extent of any assets of, and remaining within, Madoff Securities.
Various non-US HSBC group companies provide custodial, administration and similar services to a number of funds
incorporated outside the United States of America whose assets were invested with Madoff Securities. Based on
information provided by Madoff Securities, as at 30 November 2008, the aggregate net asset value of these funds
(which would include principal amounts invested and unrealised gains) was US$8.4 billion.
Proceedings concerning Madoff and Madoff Securities have already been issued in various jurisdictions against
numerous defendants and HSBC expects further proceedings to be brought, including by the Madoff Securities
trustee. Various HSBC group companies have been named as defendants in suits in the United States anticipated to
seek class action status and cases in the Commercial List of the Irish courts. All of the cases where HSBC group
companies are named as a defendant are at a very early stage. HSBC considers that it has good defences to these
claims and will continue to defend them vigorously. HSBC is unable reliably to estimate the liability, if any, that
might arise as a result of such claims.
Various HSBC group companies have also received requests for information from various regulatory authorities in
connection with the alleged fraud by Madoff. HSBC group companies are co-operating with these requests for
information.
These actions apart HSBC is party to legal actions in a number of jurisdictions including the UK, Hong Kong and the
US arising out of its normal business operation. HSBC considers that none of the actions is material, and none is
expected to result in a significant adverse effect on the financial position of HSBC, either individually or in the
aggregate. Management believes that adequate provisions have been made in respect of the litigation arising out of its
normal business operations. HSBC has not disclosed any contingent liability associated with these legal actions
because it is not practical to do so.
43 Related party transactions
Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures and post-
employment benefit plans for HSBC employees, Key Management Personnel, close family members of Key
Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which
significant voting power is held, by Key Management Personnel or their close family members.
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing
and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC
Holdings.