HSBC Faces Madoff-Linked Claims in Dublin Case Over Repayments

Oct. 15 (Bloomberg) -- HSBC Holdings Plc, Europe’s largest bank, is facing lawsuits in Ireland by investors faulting the lender for how it performed as custodian for money lost in Bernard Madoff’s $65 billion Ponzi scheme.

A Dublin court will rule today on whether investors must wait to pursue claims against HSBC until suits by mutual funds that hired the bank as a custodian are resolved. Two Irish funds suspended redemptions because of exposure to Madoff.

Custodian banks, especially those serving European Union- regulated funds that are meant to be 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 respectively, 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 the U.K. Financial Services Authority. “If there was a decision by a court that the custodian was liable, it would be devastating.”

The funds are known as Undertakings for Collective Investment in Transferable Securities, or UCITS. Custodians manage cash inflows and payments to investors.

In Ireland, Thema International Fund Plc 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 euros ($1.5 billion) to reimburse investors.

Closer to U.K.

“HSBC has custody clients who have invested with Madoff, but we don’t believe that these custodial arrangements should be a source of exposure” to the company, said Brendan McNamara, a spokesman for the bank. He declined to comment on the Irish lawsuits.

Ireland may be watched more by some of its neighbors because “it’s much, much closer jurisprudentially to a big economy, such as the U.K., than Luxembourg,” said Julian Randall, a lawyer at Barlow Lyde & Gilbert LLP in London.

HSBC is being sued in Luxembourg as custodian bank for the Herald (Lux) US Absolute Return Fund. In July, Irving Picard, the trustee liquidating Madoff’s business, sued the bank in New York, saying HSBC and Cayman Islands-based hedge fund Herald Fund Spc withdrew $578 million in “fake” profit from Madoff’s firm before its bankruptcy.

Other financial services companies, including UBS AG, have also been sued over their role as custodians for funds that invested with Bernard L. Madoff Investment Securities LLC.

Kalix Fund

Today’s case concerns a claim by Kalix Fund Ltd. against HSBC as custodian to Thema, where the fund placed about $35 million from Swiss investors. HSBC asked Judge Frank Clarke to freeze the investors’ case while Thema’s suit against HSBC proceeded, saying there would be duplication of efforts if they all went forward at once.

Madoff, 71, pleaded guilty in March and was sentenced on June 29 to 150 years in prison for using money from new clients to pay earlier investors. Prosecutors said the money manager told clients they had as much as $65 billion invested with him.

The other Irish fund affected by Madoff, AA (Alternative Advantage) Plc, has also sued HSBC over its role as custodian.

Internationally Sold Funds

Luxembourg’s financial market regulator is yet to issue a report on HSBC’s liabilities as custodian of the Herald fund, which was dissolved April 2. Decisions by Irish and Luxembourgish courts are “very important” because they are the top European countries for internationally sold funds, said Charles Muller, deputy director general of the Luxembourg Fund Industry Association.

“Luxembourg holds about 75 percent of the cross-border business, Ireland about 15 percent, so both countries are constantly watching what’s going on in each other’s territories,” said Muller by telephone. France mainly sells the funds nationally, while Luxembourg and Ireland market funds internationally, he said.

Regulators in Luxembourg and France have said custodian banks have a duty to repay investors for losses. The Irish Financial Regulator is also investigating the issue, said Nicola Faulkner, a spokeswoman for the agency.

The cases are Kalix Fund Limited v. HSBC Institutional Trust Services (Ireland) Ltd, The High Court Commercial, 2009/3152P, Thema International Fund Plc v. HSBC Institutional Trust Services (Ireland) Ltd, 2008/10983P, and Thema International Fund Plc v. HSBC Securities Services (Ireland) Ltd, 2009/608P.