HSBC takes $1.1bn hit as fallout from Bernie Madoff’s Ponzi scheme lingers
- Bank makes provisions after Luxembourg court decision last week
HSBC has set aside $1.1billion (£826million) to cover potential costs arising from a lawsuit related to Bernie Madoff’s Ponzi scheme.
Madoff’s fraud, the value of which has been estimated at $64.8 billion, went undetected for many years until it was discovered in 2008.
The scheme involved Bernard L. Madoff Investment Securities fabricating accounts and promising steady, high returns regardless of market conditions, by paying earlier investors with fresh capital injected by newer investors.
HSBC’s Luxembourg-based business provided custodial and admin services to funds invested with Maddoff’s firm.
One of those funds, Herald Fund SPC, sued the bank in 2009, claiming it had failed in its duties and seeking restitution for losses.
And a Luxembourg court on Friday rejected an HSBC appeal over the restitution of securities claimed by Herald.
HSBC reports
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Herald, which is in liquidation, was seeking the restitution of securities and cash worth $2.5billion plus interest or damages of $5.6billion plus interest, HSBC said in July.
However, HSBC said the court did accept the bank’s appeal on a separate cash restitution claim.
Europe’s biggest lender, which reports its third-quarter results on Tuesday, plans to lodge a second appeal with the Luxembourg Court of Appeal.
If this appeal is unsuccessful, HSBC plans to contest the amount to be paid.
HSBC warned the total cost of the case could differ significantly from its current estimate of $1.1billion.
The current amount set aside will hit the bank’s CET1 ratio – a key measure of a bank’s financial strength - by around 15 basis points, HSBC said.
Analysts at Shore Capital wrote in a note: ‘This is not great headline and was unexpected, but the overall financial impact is not material to the group, so any impact on the share price should be small ([less than 1 per cent], all else equal).’
HSBC shares were down 1.8 per cent to 986.3p in early trading. They have added around 27 per cent since the start of the year.
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