HSBC HOLDINGS, Europe’s largest bank, is facing lawsuits in Ireland by investors over how it performed as custodian for money lost in Bernard Madoff’s $65 billion Ponzi scheme.
The Commercial Court may rule today on whether investors must wait to pursue claims against HSBC until suits by mutual funds that used the bank as a custodian are resolved.
Two Irish funds suspended redemptions due to exposure to Madoff.
Custodian banks, especially those serving EU-regulated funds that are typically low-risk, face scrutiny as the European Commission seeks to increase their responsibilities after the Madoff scandal.
Investors in Luxembourg and Ireland, Europe’s biggest and third-largest mutual fund markets, have sued custodians, asking courts to break legal ground by ordering them to repay billions of dollars lost in Madoff’s fraud.
“One of the biggest concerns custodians have is they could be held liable,” said Jonathan Herbst, a London regulatory lawyer and former official at Britain’s Financial Services Authority.
“If there was a decision by a court that the custodian was liable, it would be devastating.”
The regulated funds are known as Undertakings for Collective Investment in Transferable Securities or UCITS.
Custodians manage cash inflows and payments to investors.
The ruling was postponed from yesterday, according to the High Court’s website.
In Ireland, Thema International Fund and dozens of investors filed complaints against HSBC, claiming the London-based bank failed in its duty as the custodian handling the fund’s money. The cases are similar to investor claims in Luxembourg and Paris.
Dublin-based Thema is seeking about €1 billion to reimburse investors.
“All of the cases where HSBC group companies are named as a defendant are at an early stage,” said Brendan McNamara, a spokesman for the bank.
“HSBC considers that it has good defences to these claims, and will continue to defend them vigorously.”
The Commercial Court’s decision concerns a claim by Kalix Fund against HSBC as custodian to Thema, where the fund placed about $35 million from Swiss investors.
HSBC asked Judge Frank Clarke to halt the investors’ case while Thema’s suit against HSBC goes forward, saying there would be duplication of efforts if the cases were going on at once.
Madoff (71) pleaded guilty in March, and was sentenced on June 29th to 150 years in prison for using money from new clients to pay earlier investors.
Another Irish fund forced to suspend redemptions after Madoff’s fraud was exposed, AA (Alternative Advantage), has also sued HSBC over its role as custodian.
The Irish Financial Regulator is investigating the issue, said Nicola Faulkner, a spokeswoman for the agency.
Ireland may be watched more by some of its neighbours because “it’s much, much closer jurisprudentially to a big economy, such as the UK, than Luxembourg”, said Julian Randall, a lawyer at Barlow Lyde and Gilbert in London. – (Bloomberg)
