Herald Fund Battles HSBC Over Billions Lost In Madoff Ponzi Fraud

HSBC Holdings will set aside $1.1 billion from its third-quarter revenue after a Luxembourg court ruling related to a lawsuit stemming from Bernard Madoff’s Ponzi scheme. This adds to the bank’s growing list of costly legal provisions.

The charge follows Luxembourg’s Court of Cassation rejecting an appeal by HSBC Securities Services Luxembourg concerning restitution claims filed by Herald Fund SPC. However, the court sided with the bank on a separate cash restitution issue, according to a statement issued on Monday by the London-based lender.

Herald Fund Seeks Recovery Of Billions Lost In Madoff Fraud

HSBC’s Luxembourg unit acted as custodian and administrator for funds invested with Bernard L. Madoff Investment Securities. For 26 years, Herald Fund has sought to recover assets said to have disappeared in the fraud. The total fund involved is about $2.5 billion in cash, securities, and interest, or up to $5.6 billion in damages plus interest, as HSBC revealed in its July interim announcement.

HSBC is facing a serious financial charge. However, the bank has chosen to separate this charge from its normal business results, seeing it as an unusual, one-off event. The charge will not affect the amount of money HSBC plans to pay out to its investors this year.

The Bank Plans Further Appeal As Madoff Case Costs Remain Uncertain

Although the final cost remains uncertain, HSBC plans to file another appeal with the Luxembourg Court of Appeal and negotiate the amount to be paid if the first appeal fails.

The court is refusing to act on the present case because a second appeal is still ongoing. Also, it is a difficult and uncertain process to calculate the exact amount of money that needs to be paid back; the final financial impact could be significantly unequal.

Bernard Madoff was sentenced to prison for 150 years 16 years ago for running a huge investment fraud that collapsed over two decades ago. However, financial institutions around the world are still being sued for their part in his crime. Customer statements at the time disclosed over $65 billion in fraudulent investments.

The Madoff provision increased the imposition of legal expenses across global banking. Last week, BNP Paribas shared a harsh experience after a court ruling that linked the French bank to the violation of human rights in Sudan, raising expectations of multibillion-dollar settlements.

HSBC has used the past year to slash thousands of jobs and cut down management layers to streamline costs. To preserve capital during its business operations, the bank intends to suspend share buybacks for at least three quarters.

The bank recorded $2.1 billion impairment on its stake in Bank of Communications in July. Financial experts expect HSBC to report third-quarter profit of $7.66 billion when it discloses results on Tuesday.

The Madoff case has been an old legal problem that has been in court for years after the fraud case was discovered.   Different subsidiaries of HSBC have assisted in managing the funds of those who sent their clients’ money to the Madoff Company. The firm later became the biggest money scam company in history.