HSBC 2015 Annual Report Download - page 448

Notes on the Financial Statements (continued)
40 – Legal proceedings and regulatory matters
HSBC HOLDINGS PLC
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In May 2015, the US Court of Appeals for the Seventh Circuit issued a decision reversing the partial final judgement of the
Illinois District Court and remanding the case for a new trial on loss causation, which may entail a reassessment of the
quantum of damages. On remand to the Illinois District Court, the case was reassigned to a different judge, who has issued
various rulings on certain preliminary issues and has entered a scheduling order that includes a trial date in June 2016.
The timing and ultimate resolution of this matter remains highly uncertain, and given the complexity and uncertainties
associated with a new trial on loss causation and a reassessment of the quantum of damages, there continues to be a wide
range of possible outcomes. Depending on whether and to what extent the plaintiffs are able to demonstrate loss causation,
the amount of damages, based upon the claims included in the reversed partial final judgement and the other remaining
claims, as well as the application of pre-judgement interest, may be up to or exceeding $3.6bn. A provision has been
recognised based on management’s best estimate of probable outflows, but the amount of such provision is not disclosed
as it would seriously prejudice the position of HSBC in the resolution of this matter.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff (‘Madoff’) was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. He
has acknowledged, in essence, that while purporting to invest his customers’ money in securities, he in fact never invested in
securities and used other customers’ money to fulfil requests to return investments. His firm, Bernard L. Madoff Investment
Securities LLC (‘Madoff Securities’), is being liquidated in the US by a trustee (the ‘Trustee’).
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 $8.4bn, an amount that includes fictitious profits reported
by Madoff. Based on information available to HSBC, we have estimated 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 $4bn.
Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities’ fraud.
US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the
English High Court. The Trustee’s ongoing US claims seek recovery of prepetition transfers pursuant to US bankruptcy law. The
amount of these claims has not been pleaded or determined as against HSBC. The Trustee’s English action seeks recovery of
unspecified transfers from Madoff Securities to or through HSBC. HSBC has not yet been served with the Trustee’s English
action. The Trustee’s deadline for serving the claim has been extended through the third quarter of 2016.
Alpha Prime Fund Ltd (‘Alpha Prime’) and Senator Fund SPC (‘Senator’), co-defendants in the Trustee’s US actions, have each
brought cross-claims against HSBC. These funds have also sued HSBC in Luxembourg (discussed below). In June 2015, the US
Bankruptcy Court heard HSBC’s motion to dismiss Alpha Prime and Senator’s cross-claims and a decision on that motion is
pending.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, ‘Fairfield’), funds whose assets were
invested with Madoff Securities, commenced multiple lawsuits in the US and the British Virgin Islands (‘BVI’) against fund
shareholders, including various HSBC companies that acted as nominees for HSBC clients, seeking restitution of payments
made in connection with share redemptions. Fairfield’s US actions are stayed pending the outcome of the cases in the BVI
(discussed below).
In September 2013, the US Court of Appeals for the Second Circuit affirmed the dismissal of purported class action claims
against HSBC and others brought by investors in three Madoff-invested funds on grounds of forum non conveniens. In May
2015, plaintiffs filed a motion asking the Court of Appeals to restore their class action claims on the basis of an alleged change
of law. Plaintiffs’ motion was denied by the Court of Appeals in June 2015.
In December 2014, three additional actions were filed in the US. The first is a purported class action brought in the United
States District Court for the Southern District of New York (the ‘New York District Court’) by direct investors in Madoff
Securities who were holding their investments as of December 2008, asserting various common law claims and seeking to
recover damages lost to Madoff Securities’ fraud on account of HSBC’s purported knowledge and alleged furtherance of the
fraud. HSBC moved to dismiss this action in November 2015 and a decision on that motion is pending. The other two actions
were both filed by SPV Optimal SUS Ltd (‘SPV OSUS’), the purported assignee of the Madoff-invested company, Optimal
Strategic US Equity Ltd. One of these actions was filed in New York state court and the other in New York District Court.
In January 2015, SPV OSUS dismissed its federal lawsuit against HSBC. The state court action against HSBC remains pending.
In May 2015, an action was filed in New York District Court by two investors in the Madoff-invested fund Hermes International
Fund Limited (‘Hermes’), asserting various common law claims against HSBC and seeking to recover damages lost to Madoff
Securities’ fraud. HSBC’s motion to dismiss the action was filed in January 2016 and a decision on that motion is pending.
BVI litigation: Beginning in October 2009, Fairfield commenced multiple lawsuits in the BVI 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 Fairfield. Fairfield is seeking restitution of redemption payments made by the funds to
defendants on the grounds that they were mistakenly based on inflated net asset values. In April 2014, the UK Privy Council
issued a ruling in favour of other defendants in the BVI actions, and issued its order in October 2014. The Privy Council ruling
found in effect that Fairfield should not be entitled to recover share redemptions that were calculated on a net asset value per