HSBC says tighter rules mitigate against Madoff scam as it fights $1.5m damages case

HSBC Holdings, custodian of a fund that lost about €1.1 billion through Bernard Madoff's Ponzi scheme, said liability rules for banks in Europe weren't as strict at the time of the scandal surrounding the convicted fraudster.

The fund in question had “very specific obligations” to investors, HSBC said at the High Court in Dublin yesterday on the third day of a trial scheduled to last 14 weeks.

Thema International Fund is seeking about $1.5 billion in damages. The case is the first of dozens of disputes in Europe to focus on the liability of banks as custodians to investment funds that put money with Madoff, who was charged in December 2008.

HSBC, Europe’s largest bank, faces more than 50 complaints in Ireland over claims it failed to discover Madoff’s activities. The fraud hurt several European Union-regulated funds, or UCITS, such as Dublin-based Thema.

At least three funds have since been liquidated.

At the time "there was no strict liability" on the custodian, Paul Gallagher SC, for the bank, told Mr Justice Peter Charleton during his opening arguments. "Since the Madoff scandal," European legislators proposed new rules that "will impose a strict liability regime on the custodian".

Lawmakers in the European Parliament this month are set to vote on draft rules that would impose a tougher regime for banks. The EU unveiled the new rules in July to safeguard investment funds’ assets and to prevent another fraud similar to Madoff’s Ponzi scheme. The measures must be adopted by the assembly, and signed off by nations in the EU’s Council of Ministers, before they can take effect.

"This suit is the investors' only hope of recovery," Dermot Gleeson SC, for Thema, told the court earlier this week.

Banks argue that, as a custodian, they were responsible to manage deposits and payments to shareholders.

“This case is being presented to you as if Thema as investment manager had no role at all in this,” Mr Gallagher said. Thema is presenting a “complete abdication of its duty of care to scrutinise” Madoff and “his returns over 12 years”.

On Thema claims that HSBC should have discovered the fraud by Madoff, Gallagher said: “we didn’t and couldn’t have, and his process and his records were so sophisticated that they defied” discovery by far more resourced and powerful investigators. – Bloomberg