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HSBC Liable for Ignoring Madoff-Linked Loss: Investors

HSBC Holdings Plc failed to keep millions in clients’ assets invested with Bernard Madoff safe “under lock and key,” investors in an Irish fund said.

Kalix Fund Ltd. invested in Thema International Fund Plc, which in turn invested with Madoff. London-based HSBC, as Thema’s custodian, didn’t act in time to protect investors’ money from fraud, even though it knew of the risks of dealing with Madoff, a lawyer for Kalix told Judge Peter Charleton in a Dublin court today. The lender also handed over custodian duties to Madoff and then tried to conceal it, the lawyer said.

“The fund was paying a custody fee to HSBC where the bank had delegated that role to somebody else who wasn’t charging,” said John O’Donnell, the lawyer for Kalix. “The obvious and most egregious mistake” by HSBC was taking “no steps from outside the Madoff organization to make sure that the assets were safe.”

HSBC, Europe’s largest lender by market value, faces more than 50 complaints in Ireland -- including from Thema, Kalix, AA (Alternative Advantage) Plc investors, and Unione di Banche Italiane ScpA -- for allegedly failing in its duties as custodian for Thema. That fund is trying to recover about 1 billion euros ($1.3 billion) in assets lost after Madoff’s arrest. The Kalix complaint is the first of them to reach trial.

HSBC said in an e-mailed statement it has good defenses to the claims made against it, wasn’t aware of the fraud prior to Madoff’s confession and also lost $1 billion of its own assets.

Exiting Relationship

Thema was a European-regulated fund, known as Undertakings for Collective Investment in Transferable Securities, or UCITS. Custodians are responsible for managing deposits and payments.

“If HSBC had done its job it would never have engaged Madoff as sub-custodian” and would have “exited the relationship” with him, said O’Donnell, adding Kalix “invested in excess of 26 million euros” with Thema in May 2005.

The European Commission in Brussels, the European Union’s executive agency, unveiled tougher rules for banks in July to safeguard investment funds’ assets in a bid to prevent another fraud similar to Madoff’s Ponzi scheme.

Under the new bloc-wide rules, banks and other institutions that act as custodians for UCITS funds will “have an incentive to pay a lot of attention to the information they provide and the services they offer,” Michel Barnier, the EU’s financial services chief, said in June.

“It’s quite a simple case: It’s about the obligation imposed upon a custodian to keep safe the assets that are entrusted to it,” said O’Donnell. “This implies security and imparts that the assets are under lock and key.”

Madoff, 74, pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history and is serving a 150-year sentence in U.S. federal prison. The fallout of the fraud included the liquidation of four UCITS funds, a type of investment vehicle targeted at retail investors that is allowed to operate across the EU.

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