HSBC 2011 Annual Report Download - page 408

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
44 – Legal proceedings and regulatory matters
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Despite the jury verdict and the 22 November 2010 ruling, HSBC continues to believe that it has meritorious grounds
for appeal of one or more of the rulings in the case, and intends to appeal the Court’s final judgement, which could
involve a substantial amount once it is entered. Upon appeal, HSBC Finance will be required to provide security for
the judgement in order to suspend its execution while the appeal is ongoing by either depositing cash in an interest-
bearing escrow account or posting an appeal bond in the amount of the judgement (including any pre-judgement
interest awarded).
Given the complexity and uncertainties associated with the actual determination of damages, including the outcome
of any appeals, there is a wide range of possible damages. HSBC believes it has meritorious grounds for appeal on
matters of both liability and damages and will argue on appeal that damages should be nil or a relatively insignificant
amount. If the Appeals Court rejects or only partially accepts HSBC’s arguments, the amount of damages, including
pre-judgement interest, could be higher, and may lie in a range from a relatively insignificant amount to somewhere
in the region of US$3.5bn.
Bernard L. Madoff Investment Securities LLC
In December 2008, Bernard L. Madoff (‘Madoff’) was arrested for running a Ponzi scheme and a trustee was
appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC (‘Madoff Securities’), an
SEC-registered broker-dealer and investment adviser. Since his appointment, the trustee has been recovering assets
and processing claims of Madoff Securities customers. Madoff subsequently pleaded guilty to various charges and is
serving a 150 year prison sentence. He has acknowledged, in essence, that while purporting to invest his customers’
money in securities and, upon request, return their profits and principal, he in fact never invested in securities and
used other customers’ money to fulfil requests for the return of profits and principal. The relevant US authorities are
continuing their investigations into his fraud, and have brought charges against others, including certain former
employees and the former auditor of Madoff Securities.
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds
incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by
Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was US$8.4bn, an amount
that includes fictitious profits reported by Madoff. Based on information available to HSBC to date, we estimate that
the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the
time that HSBC serviced the funds totalled approximately US$4bn.
Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related
proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named
as defendants in suits in the US, Ireland, Luxembourg and other jurisdictions. Certain suits (which included four US
putative class actions) allege that the HSBC defendants knew or should have known of Madoff’s fraud and breached
various duties to the funds and fund investors.
In July 2010, the US District Court Judge overseeing a putative class action in the Southern District of Florida
dismissed all claims against the HSBC defendants for lack of personal jurisdiction and on forum non conveniens
grounds. In August 2011, the US Court of Appeals for the Eleventh Circuit affirmed the dismissal.
In November 2011, the US District Court Judge overseeing three related putative class actions in the Southern
District of New York dismissed all claims against the HSBC defendants on forum non conveniens grounds, but
temporarily stayed this ruling as to one of the actions against the HSBC defendants – the claims of investors in
Thema International Fund plc – in light of a proposed amended settlement agreement pursuant to which, subject to
various conditions, the HSBC defendants had agreed to pay from US$52.5m up to a maximum of US$62.5m. In
December 2011, the court lifted this temporary stay and dismissed all remaining claims against the HSBC defendants,
and declined to consider preliminary approval of the settlement. In light of the court’s decisions, HSBC has
terminated the settlement agreement. The Thema plaintiff contests HSBC’s right to terminate. Plaintiffs in all three
actions have filed notices of appeal to the US Court of Appeals for the Second Circuit.
In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the US
Bankruptcy Court and in the English High Court. The US action (which also names certain funds, investment
managers, and other entities and individuals) sought US$9bn in damages and additional recoveries from HSBC and
the various co-defendants. It sought damages against HSBC for allegedly aiding and abetting Madoff’s fraud and
breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide
certain threshold issues, the US District Court Judge dismissed the trustee’s various common law claims on the