HSBC 2008 Annual Report Download - page 144

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Other information / Legal proceedings / Footnotes
142
Legal proceedings
On 27 July 2007, the UK Office of Fair Trading
(‘OFT’) issued High Court legal proceedings against
a number of UK financial institutions, including
HSBC Bank, to determine the legal status and
enforceability of certain of the charges applied to
their personal customers in relation to unauthorised
overdrafts (the ‘charges’). Pending the resolution of
the proceedings, the Financial Services Authority
(‘FSA’) has granted firms (including HSBC Bank) a
waiver enabling them to place relevant complaints
about the charges on hold and the County Courts
have stayed all individual customer claims.
Certain preliminary issues in these proceedings
have been heard in the Commercial Division of the
High Court. This has confirmed that HSBC Bank’s
current and historic charges are capable of being
tested for fairness but are not capable of being
penalties. HSBC Bank (and all the other financial
institutions involved in the legal proceedings)
appealed the finding that the current charges are
capable of being tested for fairness. The Court of
Appeal delivered its judgement on 26 February
2009, confirming the decision of the High Court that
the charges of HSBC Bank (and all of the other
financial institutions involved in the legal
proceedings) are capable of being tested for fairness.
HSBC Bank is considering applying for leave to
appeal to the House of Lords.
The proceedings remain at an early stage and
may, allowing for appeals on the issues, take some
time to conclude. A wide range of outcomes is
possible, depending upon the outcome of any appeal
to the House of Lords and, to the extent applicable,
upon the Court’s assessment of the fairness of each
charge across the period under review. Since July
2001, there have been a variety of charges applied by
HSBC Bank across different charging periods under
the then existing contractual arrangements. HSBC
Bank considers the charges to be and to have been
valid and enforceable, and intends strongly to defend
its position.
If, contrary to HSBC Bank’s current assessment,
the Court should ultimately (after appeals) reach an
adverse decision that results in a liability, a large
number of different outcomes is possible, each of
which would have a different financial impact.
Given that there is limited authority on how an
assessment of fairness should be conducted, HSBC
Bank’s estimate of the potential financial impact is
that it could be in the order of approximately
£350 million (US$510 million), as published in the
Interim Report 2008. To make an estimate of the
potential financial impact at this stage with any
precision is extremely difficult, owing to (among
other things) the complexity of the issues, the
number of permutations of possible outcomes, and
the early stage of the proceedings. In addition, the
assumptions made by HSBC Bank may prove to be
incorrect.
On 11 December 2008 Bernard L Madoff
(‘Madoff’) was arrested and charged in the United
States District Court for the Southern District of
New York with one count of securities fraud. That
same day, the US Securities and Exchange
Commission (‘SEC’) filed securities fraud charges
against Madoff and his firm Bernard L Madoff
Investment Securities LLC (‘Madoff Securities’), a
broker dealer and investment advisor registered with
the SEC. The criminal complaint and SEC complaint
each alleged that Madoff had informed senior
Madoff Securities employees, in substance, that his
investment advisory business was a fraud. On
15 December 2008, on the application of the
Securities Investor Protection Corporation, the
United States District Court for the Southern District
of New York appointed a trustee for the liquidation
of the business of Madoff Securities, and removed
the liquidation proceeding to the United States
Bankruptcy Court for the Southern District of New
York. On 9 February 2009, on Madoff’s consent, the
United States District Court for the Southern District
of New York entered a partial judgement in the SEC
action, permanently enjoining Madoff from violating
certain antifraud provisions of the US securities
laws, ordering Madoff to pay disgorgement,
prejudgement interest and a civil penalty in amounts
to be determined at a later time, and continuing
certain other relief previously imposed, including a
freeze on Madoff’s assets. The relevant US
authorities are continuing their investigations into
the alleged fraud. There remains significant
uncertainty as to the facts of the alleged fraud and
the extent of any assets of, and remaining within,
Madoff Securities.
Various non-US HSBC group companies
provide custodial, administration and similar
services to a number of funds incorporated outside
the United States of America whose assets were
invested with Madoff Securities. Based on
information provided by Madoff Securities, as at
30 November 2008, the aggregate net asset value of
these funds (which would include principal amounts
invested and unrealised gains) was US$8.4 billion.
Proceedings concerning Madoff and Madoff
Securities have already been issued in various
jurisdictions against numerous defendants and
HSBC expects further proceedings to be brought,
including by the Madoff Securities trustee. Various