HSBC makes $1.1bn provision after Madoff fraud ruling
FTSE 100 banking giant HSBC has set aside just over a billion dollars following the resolution of an investment fraud case in Luxembourg.
HSBC faced a lawsuit from Cayman Islands-based ‘feeder fund’ Herald Fund SPC in 2009, which accused the bank of claiming restitution of securities and cash that it said was lost in the Madoff fraud scandal.
A Luxembourg court has rejected HSBC’s appeal in respect of Herald’s securities claim, but did accept it in reference to cash restitution.
Following the verdict, the banking titan has said it will make a $1.1bn (£830m) provision in its third quarter results – scheduled in for 28 October.
HSBC’s Luxembourg Unit acted as a custodian and administrator to several offshore ‘feeder funds’ that invested with Bernard L. Madoff Investment securities.
The legal claims against the bank revolved around allegations that it breached its supervisory duties by failing to properly safeguard or verify the existence of the assets and thereby facilitating the continuation of the fraud.
The Madoff scandal, which marked the largest investment fraud in history, used a decades-long Ponzi Scheme starting in the 1970s and promised consistent high-returns.
But, no actual trades were being executed and instead, funds from newer investors were used to pay ‘returns’ to earlier ones.
Thousands of clients globally were frauded, with an estimated $65bn in fabricated value.
The scheme was finally unraveled in December 2008 during the global financial crisis – when Madoff could not meet the estimated $7bn in withdrawal requests.
HSBC bottom line set for another hit
Russ Mould, investment director at AJ Bell, said “testament to the bank’s scale that a provision of more than one billion US dollars is a relatively minor irritation rather than a disaster”.
“However, this latest setback, following on from a poorly received decision to put buybacks on the back burner as HSBC puts cash towards buying out minority investors in Hong Kong lender Hang Seng bank, does put the chief executive under a bit of pressure,” he added.
The third-quarter results will mark the second consecutive quarter where the lending titan’s financials have been tainted by a hefty hit.
HSBC posted a $6.3bn (£4.72bn) pre-tax profit in the second quarter, missing analyst expectations of $6.99bn. This came as the lender recorded a $2.1bn write-down for its stake in China’s Bank of Communications.
The figure trumped previous expectations of a $1.6bn loss, following the Bank of Communication’s plans to raise up to ¥120bn (£12.5bn) by issuing new shares, which would reduce HSBC’s ownership to 16 per cent from 19 per cent.
It came despite the bank’s international wealth and premier banking arm rising 13.2 per cent to over $2bn as the lender continues centre focus on private credit and wealth.
In London, the bank opened a new wealth centre earlier this year designed for Premier and private bank clients to meet with relationship managers on an invite-only basis and receive a stand-out, personalised wealth management service.