Four years after Bernard Madoff pleaded guilty to running the largest Ponzi scheme in history, investors are still trying to get their money back.
Thema International Fund Plc is seeking about $1.5 billion from HSBC Holdings Plc at a 14-week trial that started at the High Court in Dublin today. The case is one of dozens to focus on banks’ role as “custodians” to investment funds that deposited money with Madoff.
HSBC, Europe’s largest bank, faces more than 50 complaints in Ireland over claims it failed to discover Madoff’s activities. The fraud hurt several European Union-regulated funds, or UCITS, like Dublin-based Thema. At least three UCITS, which stands for Undertakings for Collective Investment in Transferable Securities, were liquidated because of Madoff-related losses.
“This suit is the investors’ only hope of recovery,” Dermot Gleeson, a lawyer for Thema, told Judge Peter Charleton during opening arguments. HSBC was the expert and put itself forward to be custodian, said Gleeson. “It’s a deliver it or pay-up task.”
Banks argue that as a custodian, their only responsibilities are to manage deposits and payments to shareholders.
“HSBC believes it has good defenses to the claims made against it and will vigorously defend itself,” the London-based bank said in an e-mailed statement. The bank will present its opening arguments later in the week.
Having HSBC as a custodian was “a source of assurance and consolation,” said Gleeson. Still, even after appointing Madoff as a sub-custodian, there “was never even a hint” from HSBC that Thema’s assets were at risk.
“Never once did HSBC trace through one of those transactions to a counterparty” and “never once did they see who had allegedly sold shares,” said Gleeson. The eventual discovery that the “mythical box is entirely empty” was the “most startling fact of all,” he said.
Madoff, who turned 75 yesterday, pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history, using $65 billion in real and artificial assets. He is serving a 150-year sentence in U.S. federal prison.
HSBC settled a related case last year a day after a trial started in Dublin. Kalix Fund Ltd., which had invested money with Thema, was seeking $35.6 million before reaching the confidential settlement.
HSBC, as Thema’s custodian bank, didn’t act in time to protect investors’ money, even though it knew of the risks of dealing with Madoff, Kalix lawyers in November told Charleton, who presided over both cases.
“The reason this trial is important is that it will be the first time that a fund and one of the big custodian banks have gone toe to toe in a full trial arising from the Madoff fraud,” said Paul Kennedy, a Dublin lawyer who represents Kalix.
Today’s hearing took place in part of the city’s criminal court building, which has larger rooms and was commandeered to accommodate the ranks of lawyers and their boxes of files.
Hundreds of suits were also filed in Luxembourg against UBS AG over its custodian duties to Access International Advisors LLC’s LuxAlpha Sicav-American Selection, another UCITS fund, which failed after Madoff’s activities were discovered.
LuxAlpha had invested 95 percent of its money with Madoff and had $1.4 billion in net assets a month before the former Nasdaq Stock Market chairman’s December 2008 arrest.
The EU 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 commissioner, said last year.
Lawmakers in the European Parliament are set to vote on the draft rules next month, ahead of negotiations with national governments. The final version of the measures must be adopted by the assembly, and signed off by nations in the EU’s Council of Ministers, before they can take effect.