HSBC 2012 Annual Report Download - page 508

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
43 – Legal proceedings and regulatory matters
506
Leveraged finance transactions
Loan commitments in respect of leveraged finance transactions are accounted for as derivatives where it is HSBC’s
intention to sell the loan after origination. Further information is provided on page 190.
43 Legal proceedings and regulatory matters
HSBC is party to legal proceedings, investigations and regulatory matters in a number of jurisdictions arising out of
its normal business operations. Apart from the matters described below, HSBC considers that none of these matters is
material, either individually or in the aggregate. HSBC recognises a provision for a liability in relation to these
matters when it is probable that an outflow of economic benefits will be required to settle an obligation which has
arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation. While
the outcome of these matters is inherently uncertain, management believes that, based on the information available to
it, appropriate provisions have been made in respect of legal proceedings and regulatory matters as at 31 December
2012 (see Note 32).
Securities litigation
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). The
complaint asserted claims under the US Securities Exchange Act of 1934. Ultimately, a class was certified on behalf
of all persons who acquired and disposed of Household International common stock between 30 July 1999 and
11 October 2002. The claims alleged that the defendants knowingly or recklessly made false and misleading
statements of material fact relating to Household’s Consumer Lending operations, including collections, sales
and lending practices, some of which ultimately led to the 2002 State settlement agreement, and facts relating to
accounting practices evidenced by the restatement.
A jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs. Following post-trial
briefing, the District Court ruled that various legal challenges to the verdict, including as to loss causation and other
matters, would not be considered until after a second phase of the proceedings addressing issues of reliance and the
submission of claims by class members had been completed. The District Court ruled on 22 November 2010 that
claim forms should be mailed to class members to ascertain which class members may have claims for damages
arising from reliance on the misleading statements found by the jury. The District Court also set out a method for
calculating damages for class members who filed claims. As previously reported, lead plaintiffs, in court filings in
March 2010, estimated that damages could range ‘somewhere between US$2.4bn to US$3.2bn to class members’,
before pre-judgement interest.
In December 2011, the report of the court-appointed claims administrator to the District Court stated that the total
number of claims that generated an allowed loss was 45,921, and that the aggregate amount of these claims was
approximately US$2.23bn. Defendants filed legal challenges asserting that the presumption of reliance was defeated
as to the class and raising various objections with respect to compliance with the claims form requirements as to
certain claims.
In September 2012, the District Court rejected defendants’ arguments that the presumption of reliance generally had
been defeated either as to the class or as to particular institutional claimants. In addition, the District Court has made
various rulings with respect to the validity of specific categories of claims, and held certain categories of claims valid,
certain categories of claims invalid, and directed further proceedings before a court-appointed Special Master to
address objections regarding certain other claim submission issues. In light of those rulings and through various
agreements of the parties, currently there is approximately US$1.37bn in claims as to which there remain no
unresolved objections relating to the claims form submissions. In addition, approximately US$800m in claims remain
to be addressed before the Special Master with respect to various claims form objections, with a small portion of
those potentially subject to further trial proceedings. Therefore, based upon proceedings to date, the current range of
a possible final judgement, prior to imposition of pre-judgement interest (if any), is between approximately
US$1.37bn and US$2.17bn. With the imposition of pre-judgement interest calculated through 31 December 2012, the
top-end of a possible final judgement is approximately US$2.7bn. The District Court may wait for a resolution of all
disputes as to all claims before entering final judgement, or the District Court may enter a partial judgement on fewer