HSBC 2011 Annual Report Download - page 407

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
incorporating in the SPE transaction features which allow for deleveraging, a managed liquidation of the portfolio, or
other mechanisms including trade restructuring or unwinding the trade. Following the inclusion of such risk reduction
mechanisms, HSBC has, in certain circumstances, retained all or a portion of the underlying exposure in the
transaction. In these circumstances, HSBC assesses whether the exposure retained causes a requirement under IFRSs
to consolidate the SPE. When this retained exposure represents ABSs, it has been included in ‘Nature of HSBC’s
exposures’ on page 194.
Third-party sponsored SPEs
Through standby liquidity facility commitments, HSBC has exposure to third-party sponsored SIVs, conduits and
securitisations under normal banking arrangements on standard market terms. These exposures are not considered
significant to HSBC’s operations.
Additional off-balance sheet arrangements and commitments
Additional off-balance sheet commitments such as financial guarantees, letters of credit and commitments to lend are
disclosed in Note 41.
Leveraged finance transactions
Loan commitments in respect of leveraged finance transactions are accounted for as derivatives where it is HSBC’s
intention to sell the loan after origination. Further information is provided on pages 155 and 156.
44 Legal proceedings and regulatory matters
HSBC is party to legal proceedings, investigations and regulatory matters in a number of jurisdictions arising out of
its normal business operations. Apart from the matters described below, HSBC considers that none of these matters is
material, either individually or in the aggregate. HSBC recognises a provision for a liability in relation to these
matters when it is probable that an outflow of economic benefits will be required to settle an obligation which has
arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation. While
the outcome of these matters is inherently uncertain, management believes that, based on the information available to
it, appropriate provisions have been made in respect of legal proceedings and regulatory matters as at 31 December
2011 (see Note 33).
Securities litigation
As a result of an August 2002 restatement of previously reported consolidated financial statements and other
corporate events, including the 2002 settlement with 46 State Attorneys General relating to real estate lending
practices, Household International (now HSBC Finance) and certain former officers were named as defendants in a
class action law suit, Jaffe v Household International Inc, et al No 2. C 5893 (N.D.Ill, filed 19 August 2002). The
complaint asserted claims under the US Securities Exchange Act of 1934, on behalf of all persons who acquired and
disposed of Household International common stock between 30 July 1999 and 11 October 2002. The claims alleged
that the defendants knowingly or recklessly made false and misleading statements of material fact relating to
Household’s Consumer Lending operations, including collections, sales and lending practices, some of which
ultimately led to the 2002 State settlement agreement, and facts relating to accounting practices evidenced by the
restatement. Following a jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs, the
Court issued a ruling on 22 November 2010 within the second phase of the case to determine actual damages, that
claim forms should be mailed to class members, and also set out a method for calculating damages for class members
who filed claims. As previously reported, lead plaintiffs, in court filings in March 2010, estimated that damages could
range ‘somewhere between US$2.4bn to US$3.2bn to class members’, before pre-judgement interest.
On 22 December 2011, plaintiffs submitted the report of the Court-appointed claims administrator to the Court.
That report stated that the total number of claims that generated an allowed loss was 45,921, and that the aggregate
amount of these claims was approximately US$2.23bn. Now that the claims administration process is complete,
plaintiffs are expected to ask the Court to assess pre-judgement interest to be included as part of the Court’s final
judgement. On 27 January 2012, the Court held a status conference at which it set a schedule for us to provide
plaintiffs with objections to the claims and for plaintiffs to respond to such objections. The Court also indicated at
that conference that it expects to schedule a further conference in April 2012. We expect the Court’s final judgement
to be entered at some point after this conference.