HSBC 2010 Annual Report Download - page 84

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Other information > Legal proceedings/ Foreclosures / Data security / Footnotes to Overview and OFR
82
Legal proceedings, investigations and
regulatory matters
As a result of an August 2002 restatement of
previously reported consolidated financial statements
and other corporate events, including the 2002
settlement with 46 State Attorneys General relating
to real estate lending practices, Household
International (now HSBC Finance) and certain
former officers were named as defendants in a class
action law suit, Jaffe v Household International Inc,
et al No 2. C 5893 (N.D.Ill, filed 19 August 2002).
Following a jury trial concluded in April 2009, the
Court issued a ruling on 22 November 2010, within
the second phase of the case to determine actual
damages, that claim forms should be mailed to class
members and also set out a method for calculating
damages for class members who filed claims.
Despite the jury verdict and the November 2010
ruling, HSBC continues to believe that it has
meritorious defences and intends to seek an appeal
of the Court’s ruling. The timing and outcome of the
resolution of this matter is uncertain. Given the
complexity and uncertainties associated with the
actual determination of damages, including but not
limited to the number of class members that may file
valid claims, the number of claims that can be
substantiated by class members providing adequate
documentation, the reduction of trading losses by
any trading gains made over the relevant period, the
determination of reliance by class members on the
financial statements, and whether any given class
member was the beneficial owner of the shares,
HSBC is unable at this time to estimate reliably the
amount of any damages or range of possible
damages that could arise, but they could be
significant.
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’), a Securities and Exchange
Commission (‘SEC’) registered broker-dealer and
investment adviser. Madoff subsequently pleaded
guilty to various charges and is serving a 150-year
prison sentence. Various non-US HSBC companies
provide custodial, administration and similar
services to a number of funds incorporated outside
the US whose assets were invested with Madoff
Securities and have been named as defendants in
suits in the US, Ireland, Luxembourg and other
jurisdictions. There are many factors which may
affect the range of possible outcomes 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. The cases are at
an early stage. 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 may 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.
HSBC Bank USA entered into a consent cease
and desist order with the Office of the Comptroller of
the Currency and the indirect parent of that company,
HSBC North America, entered into a consent cease
and desist order with the Federal Reserve Board in
the first week of October 2010. These actions require
improvements for an effective compliance risk
management programme across the Group’s US
businesses, including US Bank Secrecy Act (‘BSA’)
and Anti Money Laundering (‘AML’) compliance.
Steps continue to be taken to address the
requirements of these Orders and to ensure that
compliance and effective policies and procedures are
maintained.
Various HSBC Group companies are the subject
of ongoing investigations, including Grand Jury
subpoenas and other requests for information, by US
Government agencies, including the US Attorney’s
Office, the US Department of Justice and the New
York County District Attorney’s Office. These
investigations pertain to, among other matters, HSBC
Bank USA’s bank note and foreign correspondent
banking businesses and its compliance with BSA and
AML controls, as well as various HSBC companies’
compliance with Office of Foreign Asset Control
(‘OFAC’) requirements, and adherence by certain
customers to US tax reporting requirements.
The consent cease and desist orders do not
preclude additional enforcement actions against
HSBC Bank USA or HSBC North America by bank
regulatory or law enforcement agencies, including
actions to recover civil money penalties, fines and
other financial penalties relating to activities which
were the subject of the cease and desist orders. In
addition, it is likely that there could be some form of
formal enforcement action in respect of some or all of
the ongoing investigations. Actual or threatened
enforcement actions against other financial
institutions for breaches of BSA, AML and OFAC
requirements have resulted in settlements involving
fines and penalties, some of which have been
significant depending on the individual circumstances
of each action. The ongoing investigations are at an
early stage. Based on the facts currently known, it is
not practicable at this time for HSBC to determine the
terms on which the ongoing investigations will be
resolved or the timing of such resolution or for HSBC