HSBC 2012 Annual Report Download - page 510

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
43 – Legal proceedings and regulatory matters
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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
grounds that the trustee lacks standing to assert them. In December 2011, the trustee filed a notice of appeal to the US
Court of Appeals for the Second Circuit. Briefing in that appeal was completed in April 2012, and oral argument was
held in November 2012. A decision is expected in 2013.
The District Court returned the remaining claims to the US Bankruptcy Court for further proceedings. Those claims
seek, pursuant to US bankruptcy law, recovery of unspecified amounts received by HSBC from funds invested with
Madoff, including amounts that HSBC received when it redeemed units HSBC held in the various funds. HSBC
acquired those fund units in connection with financing transactions HSBC had entered into with various clients.
The trustee’s US bankruptcy law claims also seek recovery of fees earned by HSBC for providing custodial,
administration and similar services to the funds. Between September 2011 and April 2012, the HSBC defendants and
certain other defendants moved again to withdraw the case from the Bankruptcy Court. The District Court granted
those withdrawal motions as to certain issues, and briefing and oral arguments on the merits of the withdrawn issues
are now complete. The District Court has issued rulings on two of the withdrawn issues, but decisions with respect to
all other issues are still pending and are expected in early 2013.
The trustee’s English action seeks recovery of unspecified transfers of money from Madoff Securities to or through
HSBC, on the grounds that the HSBC defendants actually or constructively knew of Madoff’s fraud. HSBC has not
been served with the trustee’s English action.
Between October 2009 and April 2012, Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda
Limited (‘Fairfield’), funds whose assets were directly or indirectly invested with Madoff Securities, commenced
multiple suits in the British Virgin Islands (‘BVI’) and the US against numerous fund shareholders, including various
HSBC companies that acted as nominees for clients of HSBC’s private banking business and other clients who
invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection
with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting
from Madoff’s fraud, and some actions also seek recovery of the share redemptions under BVI insolvency law. The
actions in the US are currently stayed in the Bankruptcy Court pending developments in related appellate litigation in
the BVI.
There are many factors which may affect the range of possible outcomes, and the resulting financial impact, of
the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple
jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in
such proceedings. For these reasons, among others, it is not practicable at this time for HSBC to estimate reliably
the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims but they could be
significant. In any event, HSBC considers that it has good defences to these claims and will continue to defend
them vigorously.
US mortgage-related investigations
In April 2011, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of
the Currency and HSBC Finance and HSBC North America Holdings Inc. (‘HNAH’) entered into a similar consent
order with the Federal Reserve Board following completion of a broad horizontal review of industry residential
mortgage foreclosure practices. These consent orders require prescribed actions to address the deficiencies noted in
the joint examination and described in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to
work with the Office of the Comptroller of the Currency and the Federal Reserve Board to align their processes with
the requirements of the consent orders and are implementing operational changes as required.
These consent orders required an independent review of foreclosures (the ‘Independent Foreclosure Review’)
pending or completed between January 2009 and December 2010 to determine if any customer was financially
injured as a result of an error in the foreclosure process. As required by the consent orders, an independent consultant
was retained to conduct that review.
On 28 February 2013, HSBC Bank USA entered into an agreement with the Office of the Comptroller of the
Currency, and HSBC Finance and HNAH entered into an agreement with the Federal Reserve Board, pursuant to
which the Independent Foreclosure Review will cease and we will make a cash payment of US$96m into a fund that
will be used to make payments to borrowers that were in active foreclosure during 2009 and 2010, and in addition,
will provide other assistance (e.g. loan modifications) to help eligible borrowers. These actions form HSBC’s portion