HSBC takes £826m hit after Madoff fraud ruling

Banking giant HSBC has revealed it will set aside 1.1 billion US dollars (£826 million) following a court ruling related to a long-running lawsuit brought by investors who lost money in Bernard Madoff’s investment fraud.

The British lender, which reports third quarter results on Tuesday, said the provision comes after it lost part of an appeal in a Luxembourg court ruling last Friday.

It follows a case brought by Herald Fund SPC, which in 2009 sued HSBC Securities Services Luxembourg (HSSL), claiming losses of cash and securities linked to Madoff’s Ponzi scheme, which was one of the largest financial scandals in history.

Last week, the Luxembourg Court of Cassation rejected HSSL’s appeal on Herald’s securities restitution claim, but upheld its appeal concerning the cash restitution claim.

HSSL now plans to pursue a second appeal before the Luxembourg Court of Appeal to contest the amount it may be required to pay.

Shares in HSBC fell as much as 2% in early morning trading on Monday.

Mr Madoff, who died in prison in 2021, admitted in 2009 to defrauding thousands of investors of around 65 billion US dollars (£48.8 billion).

HSBC said the provision would be made in its third quarter results and would hit its so-called common equity tier one capital ratio, a key measure of financial strength for banks, although it cautioned the final financial impact remains uncertain due to the complexity of the case and the ongoing appeals process.

The UK-headquartered group said in its interim results in July that it provided “custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities”.

It added that various HSBC companies had been named as defendants in lawsuits arising out of the Madoff fraud scandal.

Herald Fund SPC is a European fund that put money into Madoff investment funds, for which HSBC’s Luxembourg securities arm, HSSL, was the custodian.

HSBC said in July’s results that Herald, which is in liquidation, was seeking the restitution of securities and cash worth 2.5 billion US dollars (£1.9 billion) plus interest, or damages of 5.6 billion US dollars (£4.2 billion) plus interest.

The hit marks the latest blow to its financial strength after HSBC unveiled plans last month for a 13.6 billion US dollar (£10.2 billion) deal to take its troubled Hong Kong-listed business Hang Seng Bank private, which it said would knock its common equity tier one capital ratio.

HSBC also said it would suspended share buybacks for the next three quarters due to the acquisition of Hang Seng Bank to boost cash reserves needed for the deal.

This saw shares tumble after the deal was announced.

It marks the latest blow for HSBC, which in July revealed a 2.1 billion US dollar (£1.6 billion) charge to cover losses related to its stake in the Chinese Bank of Communications, as well as costs linked to exiting its businesses in Canada and Argentina.

Most analysts are expecting the banking group to report a pre-tax profit of 7.7 billion US dollars (£5.8 billion) for the third quarter, between July and September, when it publishes its latest financial results on Tuesday.

This would mark a decline from the 8.5 billion US dollars (£6.4 billion) made by the bank over the same period last year.

Russ Mould, investment director at AJ Bell, said it was “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.