HSBC 2011 Annual Report Download - page 409

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
grounds that the trustee lacks standing to assert them. In December 2011, the District Court issued an order that
allowed the trustee to immediately appeal that ruling and the trustee has filed a notice of appeal.
The District Court returned the remaining claims to the US Bankruptcy Court for further proceedings. Those claims
seek, pursuant to US bankruptcy law, recovery of unspecified amounts received by HSBC from funds invested with
Madoff, including amounts that HSBC received when it redeemed units HSBC held in the various funds. HSBC
acquired those fund units in connection with financing transactions HSBC had entered into with various clients.
The trustee’s US bankruptcy law claims also seek recovery of fees earned by HSBC for providing custodial,
administration and similar services to the funds. In September 2011, certain non-HSBC defendants moved again
to withdraw the case from the Bankruptcy Court. Those withdrawal motions are currently pending before the
District Court.
The trustee’s English action seeks recovery of unspecified transfers of money from Madoff Securities to or through
HSBC, on the grounds that the HSBC defendants actually or constructively knew of Madoff’s fraud. HSBC has not
been served.
Between October 2009 and July 2011, Fairfield Sentry Limited and Fairfield Sigma Limited (‘Fairfield’), funds
whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British
Virgin Islands (‘BVI’) and the US against numerous fund shareholders, including various HSBC companies that
acted as nominees for clients of HSBC’s private banking business and other clients who invested in the Fairfield
funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions,
on the ground that such payments were made by mistake, based on inflated values resulting from Madoff’s fraud, and
some actions also seek recovery of the share redemptions under BVI insolvency law. The actions in the US are
currently stayed in the Bankruptcy Court while plaintiffs pursue an appeal of a decision that reversed the Bankruptcy
Court’s denial of defendants’ motions to remand or abstain and pending developments in related appellate litigation
in the BVI.
There are many factors which may affect the range of possible outcomes, and the resulting financial impact, of the
various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple
jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in
such proceedings. For these reasons, among others, it is not practicable at this time for HSBC to estimate reliably
the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims but they could be
significant. In any event, HSBC considers that it has good defences to these claims and will continue to defend
them vigorously.
US mortgage-related investigations
In April 2011, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of
the Currency and HSBC Finance and HNAH entered into a similar consent order with the Federal Reserve Board
following completion of a broad horizontal review of industry residential mortgage foreclosure practices. These
consent orders require prescribed actions to address the deficiencies noted in the joint examination and described
in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the Office of the
Comptroller of the Currency and the Federal Reserve Board to align their processes with the requirements of the
consent orders and are implementing operational changes as required.
These consent orders require an independent review of foreclosures pending or completed between January 2009 and
December 2010 (the ‘Foreclosure Review Period’) to determine if any customer was financially injured as a result of
an error in the foreclosure process. Customer outreach efforts are required, including mailings to customers and
industry media advertising, to notify borrowers with foreclosures pending or completed during the Foreclosure
Review Period of the foreclosure complaint review process and their ability to request a review of their foreclosure
proceeding. The costs associated with the foreclosure review include the costs of conducting the customer outreach
plan and complaint process, and the cost of any resulting remediation.
These consent orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or
HNAH by bank regulatory, governmental or law enforcement agencies, such as the US Department of Justice (‘DoJ’)
or State Attorneys General, which could include the imposition of civil money penalties and other sanctions relating
to the activities that are the subject of the consent orders. The Federal Reserve Board has indicated in a press release
relating to the financial services industry in general that it believes monetary penalties are appropriate for the
enforcement actions and that it plans to announce such penalties. An increase in private litigation concerning these
practices is also possible.