HSBC 2014 Annual Report Download - page 189

HSBC BANK PLC
Notes on the Financial Statements (continued)
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HSBC Institutional Trust Services (Bermuda) Limited and seek recovery of funds in frozen accounts held at HSBC. The
second set of actions asserts liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for
mistake, recovery of fees, and damages for breach of contract. The third set of actions seeks return of fees from HSBC
Bank Bermuda Limited and HSBC Securities Services (Bermuda). There has been little progress in these actions for several
years, although in January 2015, Thema and Hermes served notice of intent to proceed in respect of the second set of
actions referred to above.
Cayman Islands Litigation: In February 2013, Primeo Fund, a Cayman Islands-based fund invested in Madoff Securities,
brought an action against the fund administrator, Bank of Bermuda (Cayman), and the fund custodian, HSBC Securities
Services (Luxembourg) (‘HSSL’), alleging breaches of contract. Primeo Fund claims damages from defendants to
compensate it for alleged losses, including loss of profit and any liability to the Trustee. Trial has been postponed to
January 2016.
Luxembourg Litigation: In April 2009, Herald Fund SPC (‘Herald’) (in official liquidation since July 2013) commenced action
against HSSL before the Luxembourg District Court seeking restitution of all cash and securities Herald purportedly lost
because of Madoff Securities’ fraud, or in the alternative, damages in the same amount. In March 2013, the Luxembourg
District Court dismissed Herald’s restitution claim for the return of the securities. Herald’s restitution claim for return of
the cash and claim for damages were reserved. Herald appealed this judgement in May 2013. Judgement on the issue of a
judicial bond is expected to be rendered in May 2015. Proceedings on the reserved restitution claim were suspended
pending resolution of the appeal.
In October 2009, Alpha Prime sued HSSL before the Luxembourg District Court, alleging breach of contract and negligence
in the appointment of Madoff Securities as a sub-custodian of Alpha Prime’s assets. Alpha Prime was ordered to provide a
judicial bond. Alpha Prime requested a stay of the proceedings pending its negotiations with the Trustee in the US
proceedings. The matter has been temporarily suspended.
In March 2010, Herald (Lux) SICAV (‘Herald (Lux)’) (in official liquidation since April 2009) brought an action against HSSL
before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or damages in the
alternative. Herald (Lux) also requested the restitution of fees paid to HSSL as custodian and service agent of the fund. The
last preliminary hearing is scheduled to take place in March 2015.
In December 2014, Senator Fund SPC commenced an action against HSSL before the Luxembourg District Court, seeking
the restitution of securities held as of the latest net asset value statement from November 2008, or, in the alternative,
damages. The first preliminary hearing is scheduled to take place in February 2015.
HSSL has been sued in various actions by the shareholders in the Primeo Select Fund, Herald, Herald (Lux), and Hermes
funds. These actions are in different stages, most of which are dismissed suspended or postponed.
Ireland Litigation: In November 2013, Defender Limited, a fund invested with Madoff securities, commenced an action
against HSBC Institutional Trust Services (Ireland) Limited (‘HTIE’), alleging breach of the custodian agreement and
claiming damages and indemnification for claims against it for fund losses. The action also includes four non-HSBC parties,
who served as directors and investment managers to Defender Limited.
In July 2013 and December 2013, settlements were reached in respect of claims filed against HTIE in the Irish High Court
by Thema International Fund plc (‘Thema International’) and Alternative Advantage Plc (‘AA’),respectively. Five actions by
individual Thema International shareholders remain.
In December 2014, a new proceeding against HTIE and HSBC Securities Services (Ireland) Limited was brought by SPV
Optimal alleging breach of the custodian agreement and claiming damages and indemnification for fund losses.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various
Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the
proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. For these
reasons, amongst 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 claims in the various Madoff-related proceedings, but they could be
significant.
Anti-money laundering and sanctions-related investigations
In October 2010, HSBC Bank USA (‘HSBC Bank USA’) entered into a consent cease-and-desist order with the Office of the
Comptroller of the Currency (‘OCC’), and HSBC North America Holdings (‘HNAH’) entered into a consent cease-and-desist
order with the Federal Reserve Bureau (‘FRB’) (the ‘Orders’). These Orders required improvements to establish an
effective compliance risk management programme across HSBC’s US businesses, including risk management related to US
Bank Secrecy Act (the ‘BSA’) and anti-money laundering (‘AML’) compliance. Steps continue to be taken to address the
requirements of the Orders.
In December 2012, HSBC Holdings plc (‘HSBC Holdings’), HNAH and HSBC Bank USA entered into agreements with US and
UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those
agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with the US
Department of Justice (‘DoJ’), the US Attorney’s Office for the Eastern District of New York, and the US Attorney’s Office
for the Northern District of West Virginia (the ‘US DPA’); HSBC Holdings entered into a two-year deferred prosecution