HSBC 2012 Annual Report Download - page 509

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
than all claims pending resolution of disputes as to the remaining claims. Post-verdict legal challenges remain to be
addressed by the District Court.
Despite the jury verdict and the various rulings of the District Court, 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 District Court’s
final judgement, partial or otherwise. Upon final judgement, partial or otherwise, HSBC Finance will be required to
provide security for the judgement in order to suspend its execution while the appeal is on-going 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, based
upon the claims submitted and the potential application of pre-judgement interest may lie in a range from a relatively
insignificant amount to somewhere in the region of US$2.7bn (or higher should plaintiffs successfully cross-appeal
certain issues related to the validity of specific claims).
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, HSBC estimates
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 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
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. Briefing in that appeal was
completed in September 2012; oral argument is expected in early 2013.
In November and December 2012, HSBC settled two of the individual claims commenced by investors in Thema
International Fund plc against HSBC in the Irish High Court.
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